Due to the recent market instability surrounding the COVID19 pandemic, MQG intends to recapitalize through the issuance of $1 billion in corporate bonds into the Australian market. The bonds will have a term to maturity of 5 years and a coupon rate of 6% p.a., with coupons paid semi- annually. Standard & Poor"s Rating of MQG is BBB+/Stable (Long term) and A-2* (Short term)

Required: As a financial analyst of MQG, you are asked to;

a) Calculate the cost (in %) to MQG of the debt issue. Show all working.

b) Calculate the reduction in cost that could be achieved if the credit rating of MQG for the bond issue was improved by one level. Compare your answer with that from part (a) and explain why the costs are reduced. Show all working.

c) Suppose MQG issued the bond at yield as in part (a), and that immediately after yields then change to those in part (b). What impact would this have on the price of the bond? (Hint: use duration). How accurate is this price change estimate?