Question 4 (4 Marks)

The JG Investment Bank is about to issue a new series of

10 year bonds. The bonds will have a $1000 face value and

will be rated AA by a respected Bond Rating Agency.

Currently, the yield to maturity on AA rated bonds is

250

basis points above the yield on similar maturity

government bonds. The bonds will make annual coupon payments.

a)

If the YTM on 10 year government bonds is

Enter Answer

2.9%

, what coupon rate should JG choose

if it wants the bonds to sell at par?

(1 Mark)

b)

If JG issues 1,500 bonds, how much capital

Enter Answer

will they raise from the sale? (1 mark)

c)

Two years later, the YTM on 8 year gov't

Enter Answer

bonds has

fallen to

2.5%

. If the yield on

AA rated bonds is still

250

basis points

higher than a gov't bond, what is the new

price of the bond?

Enter your Final Answer Here

(note: round to the nearest cent) (1 Mark)

d)

JG's bonds now sell at

a Premium

}

(1 Mark)

Par

Check only ONE

Complete your rough work (if any) in the space below

a Discount

Box