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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

  1. (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.
  2. (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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