Blue wall company has a bond which matures in 15 years time is selling for R20,500 on the market. The bond has a 10% coupon rate, a par value of R 20,000, pays R1,150 every six months, and also promises to pay back to investors the principal amount upon reaching its maturity at the end of 2037. The interest rate on South African Reserve Bank treasury bills is 7%

Required: Explaining each step, calculate the value of the bond:

a. If an investor requires a 3% risk premium on the bond to compensate for default risk. (13 marks)

b. If the required risk premium on the bond is increased to 5%. (13 marks)

c. Advise the investor on the maximum acceptable market prices at which to buy the bond under each of the two risk premium preferences at a and b. (4 marks)