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A firm issues two-year bonds with a coupon rate of 6.7%, paid semiannually. The credit spread for this firm's two-year debt is 0.8%. New two-year Treasury notes are being issued at par with a coupon rate of 3.1%. What should the price of the firm's outstanding two-year bonds be per $100 of face value

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thaovtp1407

Answer:

$105.34

Explanation:

Given:

  • Face value:  $100
  • Coupon rate of 6.7% semiannually = 6.7%/2 = 3.35% (semi-annually)

=> Coupon payment: $100*3.35% = $3.35

  • Nper: 2*2 =4
  • Yield to maturity is : 3.1% + 0.8% = 3.9%/2 = 1.95% (semi-annually)

Using present value formula in excel

pv=(rate,nper,pmt,fv)

pv = (1.95%, 4, 3.35,100)

pv = $105.34

The price of the firm's outstanding two-year bonds be per $100 of face value is:  $105.34

abiolataiwo2015

The price of the firm's outstanding two-year bonds be per $100 of face value is $105.34.

Using financial calculator to find the present value (PV)

Present value=?

Interest rate = (0.031 + 0.008)/2=0.0195

FV=100

PMT=(6.7%/2 ×100)=3.35

N=2×2= 4 year

Hence:

PV = [FV= 100, PMT = 3.35, N = 4, I = 0.0195]

PV = $105.34

Inconclusion  the price of the firm's outstanding two-year bonds be per $100 of face value is $105.34.

Learn more present value here:https://brainly.com/question/6368291

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