5. Sovereign Bonds (beginner). The Republic of South Africa issued $1.25 billion debenture at 97% of 100% par value with issuing cost of 65 basis points. The sovereign bond pays a coupon rate of 4.875%. The bond was rated BB+ and would be redeemed at par in 10 years.

a. The U.S. government pays a coupon of 1.50% for 10-year maturity Treasuries.

How do you explain the significantly higher interest rate paid by South Africa as compared with the U.S.? What is South Africa’s sovereign yield spread?

b. What is the yield-to-maturity to investors purchasing this South African bond?

c. What is the all-in cost of debt paid by South Africa?

d. A little less than a year after the bond issue South Africa was downgraded to BB-: what would you expect would happen to the bond’s coupon rate and to its all-in cost?