1. ABC Company is planning to issue a 5-year bond. The only other debt that the company currently has outstanding is a 2.5% annual-pay bond which is currently trading at $102.50 per 100 of par and has 4 full years to maturity (there is zero accrued interest built into its current price).

The following information is provided:

-Currently there are no outstanding government bonds with 4 years to maturity.

-The yield-to-maturity on a 3-year government bond is 0.85%, while the yield-to-maturity on a 5-year government bond is 1.55%.

-The term structure of credit spreads for bonds with the same credit rating as ABC Company suggests that 5-year spreads are around 37 bps higher than 4-year spreads.

Determine the expected market discount rate on the ABC's planned 5-year bond issue