HMK Enterprises would like to raise $ 10.0 million to invest in capital expenditures. The...
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HMK Enterprises would like to raise $ 10.0 million to invest in capital expenditures. The company plans to issue five-year bonds with a face value of $ 1000 and a coupon rate of 6.51 % (annual payments). The following table summarizes the yield to maturity for five-year (annual-payment) coupon corporate bonds of various ratings:
Rating
AAA
AA
A
BBB
BB
YTM
6.13%
6.36%
6.51%
6.94%
7.53%
a. Assuming the bonds will be rated AA, what will be the price of the bonds?
b. How much of the total principal amount of these bonds must HMK issue to raise $ 10.0 million today, assuming the bonds are AA rated? (Because HMK cannot issue a fraction of a bond, assume that all fractions are rounded to the nearest whole number.)
c. What must be the rating of the bonds for them to sell at par?
d. Suppose that when the bonds are issued, the price of each bond is $958.76. What is the likely rating of the bonds? Are they junk bonds?
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