Question

The JG Investment Bank is about to issue a new series of
10 year bonds. The bonds will have a $1000 face value and
will be rated AA by a respected Bond Rating Agency.
Currently, the yield to maturity on AA rated bonds is
260	basis points above the yield on similar maturity
government bonds. The bonds will make annual coupon payments.
a)	If the YTM on 10 year government bonds is
	2.6%	, what coupon rate should JG choose
	if it wants the bonds to sell at par?
	(1 Mark)
b)	If JG issues 1,500 bonds, how much capital
	will they raise from the sale? (1 mark)
c)	Two years later, the YTM on 8 year gov't
	bonds has		fallen to		2.2%	. If the yield on
	AA rated bonds is still					260	basis points
	higher than a gov't bond, what is the new
	price of the bond?
	(note: round to the nearest cent) (1 Mark)
d)	JG's bonds now sell at					a Premium
	(1 Mark)					Par
Complete your rough work (if any) in the space below						a Discount

Answer 1