Your firm has a credit rating of a. you notice that the credit spread for five-year maturity a debt is 85 basis points (0.85%). your firm’s five-year debt has a coupon rate of 6%. you see that new five-year treasury notes are being issued at par with a coupon rate of 2.0%. what should the price of your outstanding five-year bonds be per $100 of face value?

The market price should be:$114.67

Explanation:

the risk free rate is          2.00%

this firm has a spread of 0.85%

            firm cost of debt 2.85%

The market will adjust the bond price so the yield ofthe bonds relfect this rate.

So we will calculate the present value of a coupon 100 with a 6% rate

We use the ordinary annuity for the coupon payment:

Coupon payment: 100 face value x 3% bond rate =3

time10 (5 years with 2 payment per year)

market rate:0.01425  (2.85%/2)

PV$27.7768

and lump sum present value for the maturity:

Maturity  100

time  5

rate  0.0285

PV   86.89

Last, we add them to get the market price:

PV c$27.7768

PV m  $86.8917

Total$114.6685

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