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The current term structure is shown here: Time to Maturity (Year): 0, 1, 2, 3, 4, 5 Interest Rate (%): 1, 2, 3, 4, 5,
The current term structure is shown here:
Time to Maturity (Year): 0, 1, 2, 3, 4, 5
Interest Rate (%): 1, 2, 3, 4, 5, 6
- (7 marks) Calculate the current price of a government bond with a face value of $1000 and a coupon rate of 7%. It is an annual coupon bond that matures in 3 years.
- (13 marks) Calculate the current price of a bond issued by XYZ corporation if it has a face value of $1000 and a coupon rate of 7%. It matures in 3 years. Use the following table to find the default risk premium. (Assume the default risk is not a function of maturity)
Bond
Rating
Required rate of interest
XYZ Co.
7%
3 years from now
AA
?
ABC Co.
8%
3 years from now
B
8.5%
NP Co.
10%
5 years from now
AA
7.2%
XT Co.
3%
5 years from now
AA
7.7%
BB Co.
10%
3 years from now
A
6.85%
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