Reference no: EM133073784

AMR is the parent company of American Airlines. In addition to its primary subsidiary, AMR also operates several airline support companies, the Management Services Group, and American Eagle (a network of 7 regional carriers that operate under a codeshare and service agreement with American).

American Airlines is currently considering the issuance of a series of $1,000 par bonds. The coupon rate offered, based on current market interest rates and the Standard & Poor's based AMR bond rating, will be 10%. The yield to maturity for such bonds is coincidentally 10% as well. Coupons will be paid semi-annually. However, American cannot decide on the maturity of the new issue. The life of the bonds will be 10, 20, or 30 years.

Please, answer each of the questions below.

• Ignoring floatation costs, what will the bonds sell for today if American decides to issue the bonds with a maturity of 10 years? What will the price be if the bonds have a maturity of 20 years? 30 years?
• If the bonds are issued with 10 years to maturity and the day after they are issued, the market interest rates increase to 12%, what will be the price of American Airline's bonds? What if interest rates drop to 8%?
• If the bonds are issued with 20 years to maturity and the day after they are issued, the market interest rates increase to 12%, what will be the price of American Airline's bonds? What if interest rates drop to 8%?
• If the bonds are issued with 30 years to maturity and the day after they are issued, the market interest rates increase to 12%, what will be the price of American Airline's bonds? What if interest rates drop to 8%?
• Based on your answers to questions 2 through 4, what is the relationship between time to maturity and the price of the bond?
• Based on your answer to question 1, what is the relationship between yield to maturity, the coupon rate, and time to maturity?I would like help with numbers 5 and 6.