QUESTION ONE-BOND MARKET The new normal has aroused issuance of social - economic bonds to help curb the COVID -19 repercussions on African economies. In this regard, Africa Development Bank (AFDB) issued a three years $ 3 billion social bond that will pay an interest rate of 0.75% per annum at a face value of K 2,000 ($100). Assuming that you are the investment Director at CITI Bank Zambia and has facilitated the investment in the AFDB bond equivalent to k 8 billion ($400 million). Required: A. Determine the spot rate for the 1st year, 2nd year and 3rd year assuming that the dollar Treasury bill rate was 0.75% at the time of AFDB bond issuance. (15 marks) B. Determine your annual income generated from the expected annual coupon payment. (Hint: Use Zambian Kwacha Values] (5 marks) C. Determine the bond price based on the expected cashflows. (10 marks) D. Given that at the time of AFDB bond issuance, the dollar Treasury bill rate was 0.75%. Determine the: I. Credit spreads of the bond if traded in the secondary market at a yield of 1.90% (Time 1) and 0.90 % (Time 2) assuming the dollar Treasury bill rate remained constant at 0.75%. (6 marks) Briefly explain the implications of the credit spread at Time 2 in comparison to TIME 1 on AFDB credit risk. (4 marks) II. [TOTAL: 40 MARKS] QUESTION ONE-BOND MARKET The new normal has aroused issuance of social - economic bonds to help curb the COVID -19 repercussions on African economies. In this regard, Africa Development Bank (AFDB) issued a three years $ 3 billion social bond that will pay an interest rate of 0.75% per annum at a face value of K 2,000 ($100). Assuming that you are the investment Director at CITI Bank Zambia and has facilitated the investment in the AFDB bond equivalent to k 8 billion ($400 million). Required: A. Determine the spot rate for the 1st year, 2nd year and 3rd year assuming that the dollar Treasury bill rate was 0.75% at the time of AFDB bond issuance. (15 marks) B. Determine your annual income generated from the expected annual coupon payment. (Hint: Use Zambian Kwacha Values] (5 marks) C. Determine the bond price based on the expected cashflows. (10 marks) D. Given that at the time of AFDB bond issuance, the dollar Treasury bill rate was 0.75%. Determine the: I. Credit spreads of the bond if traded in the secondary market at a yield of 1.90% (Time 1) and 0.90 % (Time 2) assuming the dollar Treasury bill rate remained constant at 0.75%. (6 marks) Briefly explain the implications of the credit spread at Time 2 in comparison to TIME 1 on AFDB credit risk. (4 marks) II. [TOTAL: 40 MARKS]
