Use the information for the question(s) below.
Luther Industries needs to raise $25 million to fund a new office complex. The company plans on issuing ten-year bonds
with a face value of $1000 and a coupon rate of 7.0% (annual payments). The following table summarises the YTM for similar
ten-year corporate bonds of various credit ratings:
$\begin{array} { l c c c c c }
\hline \text { Rating } & \text { AAA } & \text { AA } & \text { A } & \text { BBB } & \text { BB } \
\hline \text { YTM } & 6.70 \% & 6.80 \% & 7.00 \% & 7.40 \% & 8.00 \% \
\hline
\end{array}$
-Suppose that when these bonds were issued, Luther received a price of $972.42 for each bond. What is the likely rating that Luther's bonds received?

Question

Use the information for the question(s) below.
Luther Industries needs to raise $25 million to fund a new office complex. The company plans on issuing ten-year bonds
with a face value of $1000 and a coupon rate of 7.0% (annual payments). The following table summarises the YTM for similar
ten-year corporate bonds of various credit ratings:
$\begin{array} { l c c c c c } 
\hline \text { Rating } & \text { AAA } & \text { AA } & \text { A } & \text { BBB } & \text { BB } \
\hline \text { YTM } & 6.70 \% & 6.80 \% & 7.00 \% & 7.40 \% & 8.00 \% \
\hline
\end{array}$
-Suppose that when these bonds were issued, Luther received a price of $972.42 for each bond. What is the likely rating that Luther's bonds received?

Quizplus · Accepted Answer

The bond price of $972.42 is less than the face value, indicating a yield higher than the coupon rate of 7%. The YTM closest to this scenario is 7.40%, which corresponds to a BBB rating.

Use the Information for the Question(s) Below -Suppose That When These Bonds Were Issued, Luther Received a to Raise