Question
Need help with this Question 1 (total of 9 marks): You are an investment banker who specializes in helping companies issue junk bonds. A client
Need help with this
Question 1 (total of 9 marks): You are an investment banker who specializes in helping companies issue junk bonds. A client comes to you and wants to issue a coupon bond that matures in 5 years and makes semi-annual coupon payments. Currently, five-year coupon Treasury bonds have a yield to maturity of 2.1%.The coupons of the Treasury bonds are also paid semi-annually. Your client is rated BB, and credit spreads on BB bonds are 300 basis points (3%).
a. If your client wishes to price the bonds at par, at what rate should you set the coupon? (2 marks)
b. Suppose a trader buys the bond at par when it is issued, holds it for six months, receives a coupon at the end of the sixth month, and then sells the bond.In so doing, the trader earns a realized return of 5%.Assuming the bond has the coupon rate you set in part a), and the yield on the benchmark coupon Treasury mentioned above is now 2.2%, what is the corporate bond's new credit spread? (Hint: first compute the new yield to maturity on the bond) (5 marks)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started