Problem 3 (25%) Currently the firm WorkSmart has no debt. However, WorkSmart plans to take up new debt, and therefore considers issuing and selling fixed-rate corporate bonds with a maturity of 8 years. The loan will be a coupon loan. The annual coupon rate of the corporate bonds is 8%. The price of the bond is DKK 96 per DDK 100 in face value The bonds have annual terms1". Ignore taxes and fees. The rating of the bonds will be BB, cf. table 12.212. Bonds with similar maturity and corresponding amortization but having an AAA rating have a nominal annual promised yield of 0.9%13 It is assumed that the expected loss rate on the new bonds in workSmart is 35% un- der average business cycles and 60% under recessions Furthermore, it can be assumed that the nominal annual market risk premium is 6% calculated throughout average business cycles and 7.2% calculated throughout reces sions Problem 3.1 Calculate the cash flow14 (per DKK 100 in face value1) of the bonds Problem 3.2 Calculate the annual yield to maturity of the bonds. Problem 3.3 Calculate for both average business cycles and for recessions the nominal expected return of the bonds using formula 12.716 Problem 3.4 Calculate for both average business cycles and for recessions the nominal expected return of the bonds using CAPM and estimating by rating Problem 3.5 Calculate for both average business cycles and for recessions the nominal expected return of the bonds using CAPM and estimating by maturity Problem 3.6 Calculate for average business cycles the nominal spread of the bonds in WorkSmart compared to AAA rated debt using formula 12.7 Problem 3 (25%) Currently the firm WorkSmart has no debt. However, WorkSmart plans to take up new debt, and therefore considers issuing and selling fixed-rate corporate bonds with a maturity of 8 years. The loan will be a coupon loan. The annual coupon rate of the corporate bonds is 8%. The price of the bond is DKK 96 per DDK 100 in face value The bonds have annual terms1". Ignore taxes and fees. The rating of the bonds will be BB, cf. table 12.212. Bonds with similar maturity and corresponding amortization but having an AAA rating have a nominal annual promised yield of 0.9%13 It is assumed that the expected loss rate on the new bonds in workSmart is 35% un- der average business cycles and 60% under recessions Furthermore, it can be assumed that the nominal annual market risk premium is 6% calculated throughout average business cycles and 7.2% calculated throughout reces sions Problem 3.1 Calculate the cash flow14 (per DKK 100 in face value1) of the bonds Problem 3.2 Calculate the annual yield to maturity of the bonds. Problem 3.3 Calculate for both average business cycles and for recessions the nominal expected return of the bonds using formula 12.716 Problem 3.4 Calculate for both average business cycles and for recessions the nominal expected return of the bonds using CAPM and estimating by rating Problem 3.5 Calculate for both average business cycles and for recessions the nominal expected return of the bonds using CAPM and estimating by maturity Problem 3.6 Calculate for average business cycles the nominal spread of the bonds in WorkSmart compared to AAA rated debt using formula 12.7
