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(a) The yield curve offers important information to treasury managers who intend to borrow funds. Below are the current bond prices of zero-coupon AA-rated corporate
(a) The yield curve offers important information to treasury managers who intend to borrow funds. Below are the current bond prices of zero-coupon AA-rated corporate bonds with par value $1,000: Bond Current bond price 1-year zero coupon bond $987.95 2-year zero coupon bond $964.00 3-year zero coupon bond $935.43 (1) Calculate the yields to maturity of each bond. [12 marks] City Infrastructure Corporation intends to issue 3-year coupon bonds, it believe that the bond rating of this bond rated by rating agencies will be AA-rated. The coupon rate is 4% and it is paid annually. The face value is $1,000. Calculate at what price the firm should sell this bond. [20 marks] Calculate total principal amount of these bonds that City Infrastructure must issue to raise $20 million today, assuming the bonds are AA-rated. (Since the firm cannot issue a fraction of a bond, assume that all fractions are rounded to the nearest whole number.) [15 marks) (iv) If the firm eventually could only sell its bond at $850, calculate the yield to maturity. Moreover, explain one possible reason why the bond is sold at $850, not the bond price calculated in Part (a)(ii). [15 marks] (b) 'As stocks usually offer higher returns than bonds, I should only invest in stocks. From the viewpoint of investors, critically discuss this statement. [Word Limit: 1200 words)
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