Congratulations, you have been hired as an analyst at the Procter and Gamble Co. (PG). Your first assignment is to estimate the appropriate rate that a new 30-year bond would need in order to be issued competitively to the public. It is April 1, 2020 (ignore actual current market rates). PG just made a coupon payment (semi-annual) on its “8% 2045” bonds that mature on April 1, 2045.
The bonds currently sell for 104 with a par value of 100. Kimberly-Clark Corp. (KMB) has a 5% 2045 bond issue with a YTM of 6.0%. The PG and KMB bonds are identical in every way, including the Moody’s and S&P ratings, maturity date, and the fact that the respective companies can call them at any time. (The bonds were issued on different dates, thus their coupon rates and current market prices are different.)
a. What is the yield to maturity on the PG bond?
b. What is the price for the KMB bond?
c. Explain the difference in the YTM for the PG and KMB bonds. Which bond provides the more accurate estimate of the rate required in the marketplace for PG at this time?
d. KMB has just issued a 5-year semi-annual bond with a 6% coupon, a par value of 100 and a 5% YTM.Which KMB bond (5 year or 25 year) has the higher price risk and which one has the higher re-investment rate risk?
(Circle 0ne) Higher Price Risk 5 Year 25 Year
(Circle 0ne) Higher Re-investment Rate Risk 5 Year 25 Year
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