Starbucks

label Business
account_circle Unassigned
schedule 1 Day
account_balance_wallet $5

Assuming interest rates are 5% for AAA Rated Corporate bonds, calculate the value of your Starbucks bond relative to this interest rate. Is your bond selling for a premium or at a discount based.

Aug 14th, 2015

Thank you for the opportunity to help you with your question!

The AAA bond rating represents the current market interest rate for the bonds which has
credit rating of AAA is 5%. The coupon rate of the bond is 5%.
Let us assume the number of years to maturity is 1year and face value to be $100:
Interest = Face value * Coupon rate
= $100*5%
= $5
Using the equation 
Price of bond = Interest/(1+Yield to maturity)1 + Face value/(1+Yield to maturity)1
= $5/(1+0.05)+$100/(1+0.05)
= $4.76+$95.24
= $100
Let us increase the time to maturity to 3 years:
In this case, one has to use PVIFA table to determine the value @5% for 3 years or using the
below formula.
PVIFA @3% for 5 years =1 - (1.05)3/0.05
= 2.7232
Price of bond = Interest * PVIFA @5% for 3 years + Face value/(1+Yield to maturity)3
= $5 * 2.7232+$100/(1+0.05)3
= $13.62+$86.38
= $100

In this case the bond is selling at par

Please let me know if you need any clarification. I'm always happy to answer your questions.
Aug 14th, 2015

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