Question

Consider the following case of Grey Fox Aviation Company: Grey Fox Aviation Company has 9% annual coupon bonds that are callable and have 18 years left until maturity. The bonds have a par value of $1,000, and their current market price is $1,160.35. However, Grey Fox Aviation Company may call the bonds in eight years at a call price of $1,060. Grey Fox Aviation Company's bonds have a yield-to-maturity (YTM) of and a yield-to-call (YTC) of If interest rates are expected to remain constant, what is the best estimate of the remaining life left for Grey Fox Aviation Company's bonds? 10 years 18 years

8 years 13 years
If Grey Fox Aviation Company issued new bonds today, what coupon rate must the bonds have to be issued at par?

Answer 1

The remaining life left for Grey Fox Aviation Company's bonds is estimated to be 8 years. The coupon rate needed for new bonds to be issued at par is 16.035%.

Step-by-step explanation:

In order to estimate the remaining life left for Grey Fox Aviation Company's bonds, we need to compare the maturity date with the call date. If the call date is earlier than the maturity date, the bonds are likely to be called. Therefore, the best estimate of the remaining life left for the bonds is 8 years.

To issue new bonds at par, the coupon rate must be equal to the current market interest rate. Since the current market price is $1,160.35 and the par value is $1,000, the difference is the total interest payment over the bond's life. We need to find the coupon rate that would make this interest payment equal to zero. We can use the following calculation: Coupon rate = (Par value - Market price) / Par value = ($1,000 - $1,160.35) / $1,000 = -0.16035

So we must modify the sign to make it positive and the coupon rate that must be issued at par is 16.035%.