Coupon Bond : Coupon Bonds
A. Compute the yield to maturity of Land’O’Toys bonds before the purchase announcement and use it to determine the likely bond rating.
Answer A. Compute Yield To Maturity (YTM) =
N = 20 years
Par Value (PV) =1,037.19
Payment On Monthly Time (PTM) = 32.50
Future Value (FV) = 1000
Carriage Paid To (CPT) I= 3.00%
Here, Yield To Maturity (YTM) * 2 (Adair, T.A. Jr., Cornett, M.M., Nofsinger, J., 2015) = 3.00% * 2 = 6.00%
Thus comparing the two values, that is the calculated value = 6.00% and the bond rating and yield given in the problem says that by having Bond A yield can be 6.0%. Thus by looking at this, the bond rating to be announced should be Bond A (De Spiegeleer, J., Schoutens, W., & Van Hulle, C., 2014).
B. Assume the bond’s price changes to reflect the new credit rating. What is the new price? Did the price increase or decrease?
Answer B. Here, by assuming that the bond 's price will change and the new credit rating will be reflected. The new Yield To Maturity(YTM) should be 7.3% that is yearly. Thus, the new price is as mentioned below:
N = 20 years
I = 3.65
Payment On Monthly Time (PTM) = 32.50
Future Value (FV) = 1000 therefore , Carriage Paid To (CPT) PV =…

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