During your dream's summer internship at an investment bank you are assigned the task of pricing a new corporate bond issue The discount bonds have a face value of $10,000 and are to mature in 3 years Your analysis leads you to conclude that the expected payout on the bonds is $9,350 and that investors require a 1 2 risk premium to hold bonds with similar risk profiles The current YTM on 3 year Government bonds is 2 What is the maximum price you think the bonds can be sold for (Provide your answer in $ with 2 decimals of accuracy e g , $1,234 56) (Hint The expected return on the bonds should reflect the safe return plus the risk premium) At that price, what is the promised yield to maturity (Provide your answer in with 1 decimal of accuracy) At that price, what is the default premium (Provide your answer in with 1 decimal of accuracy) (Hint The default premium is the promised YTM minus the expected return ) At that price, what is the default risk premium (Provide your answer in with 1 decimal of accuracy) (Hint The default risk premium is the promised YTM minus the safe (Treasury bond) return )

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Posted on Oct 21, 2024

During your dream's summer internship at an investment bank you are assigned the task of pricing a new corporate bond issue. The discount bonds have

During your dream's summer internship at an investment bank you are assigned the task of pricing a new corporate bond issue. The discount bonds have a face value of $10,000 and are to mature in 3 years. Your analysis leads you to conclude that the expected payout on the bonds is $9,350 and that investors require a 1.2% risk premium to hold bonds with similar risk profiles. The current YTM on 3-year Government bonds is 2%.

What is the maximum price you think the bonds can be sold for? (Provide your answer in $ with 2 decimals of accuracy. e.g., $1,234.56) (Hint: The expected return on the bonds should reflect the safe return plus the risk premium)
At that price, what is the promised yield to maturity? (Provide your answer in % with 1 decimal of accuracy)
At that price, what is the default premium? (Provide your answer in % with 1 decimal of accuracy) (Hint: The default premium is the promised YTM minus the expected return.)
At that price, what is the default risk premium? (Provide your answer in % with 1 decimal of accuracy) (Hint: The default risk premium is the promised YTM minus the safe (Treasury bond) return.)