Finally, you hear that JT is contemplating offering a new 6-year bond to the public, but the structure of payments proposed is quite unusual. For the first three years the bond will not pay any coupons. Starting in the fourth year (42 months from now) the bond will pay equal semi-annual coupons for the remainder of its life. The annual coupon rate from year 4 through 6 is expected to be set at 9.4%.

1. Would you expect the YTM on this bond to be above or below 4.0% (the yield on the first 6-year bond above) and why?
2. Why would JT be considering issuing such a step-up bond? JT will be selling each new bond at par value.
3. If the actual required return (YTM) on this bond is 4.1%, would investors find it appealing? If JT is raising 100 million in this bond offering, how much value would JT be transferring to new investors?