Suneview Ltd., a listed public company with actively traded securities, issued debentures with a total term of fifteen years and a face value of $1,000 to the public exactly five years ago for $1,000 each. The debentures were issued at an annual coupon interest rate of 12% p.a. with payments annually in arrears. Interest rates for debentures of a similar risk to those of Suneview Ltd. are currently (five years after originally being issued) being traded at a premium of 3% above the government bond rate. A new series of government bonds (Series XXIV) were issued today for a ten-year term at an annual coupon interest rate of 5% p.a. (with payments annually in arrears), a face / par value of $1,000 and a current yield to bondholders of 7% p.a.

Required:

a) Given the information provided above, how much would you pay today for Suneview Ltd. debentures? Show all relevant calculations and briefly explain the basis for the change in price, if any, from the original issue price of $1,000 using appropriate finance terminology / reasoning.

b) Assume that a further three years has elapsed since the calculations undertaken in part a) of this question (a total of eight years after the original debenture issue), and the premium on Suneview Ltd. debentures has increased to 5% above the government bond rate. No further government bonds have been issued since Series XXIV bonds which closed trading today at a yield of 9% p.a.

i) How much would you now (a total of eight years after the original debenture issue) pay for Suneview Ltd. debentures?

ii) Briefly discuss the possible real-world factors that may have caused the differences in the premium on Suneview Ltd. debentures as compared to the government bond rate (from 3% to 5%). Note: This part of the question has a different focus than the response required in part a) of this question.