The government bond has five bonds in issue. Each bond has a par value of K100.00., pays coupon interest annually and is redeemable at its par value at the end of the stated period. The table below summarizes the relevant information about each of the five government bonds

bond	maturity term	Annual coupon rate	price
bond1	1 year	3.0%	K101.25
bond 2	2 years	3.5%	K99.50
bond 3	3 years	3.75%	K98.25
bond 4	4 years	4.25%	K97.75
bond 5	5 years	4.75%	96.25

GHI plc is a stock exchange listed company . the company has issue bond A that has a coupon rate of 7% and that is redeemable at its par value of k100.00 in three years time. Coupon interest on bond is paid annually.

GHI has announced the issue of bond B, which is a four year bond. Bond B has a par value of K100.00 and will be redeemed at this par value of in four years time following the issue date. The bond will pay annual coupon interest at the rate of 6% .As a result of this bond issue, the credit rating of the company will drop from the current rating of A to a credit rating of BBB. The following credit spreads in basis points are available from a credit rating agency. they are applicable to the industry sector in which GHI PLC operates

credit spreads in basis points

credit rating	1 YEAR	2YEARS	3 YEARS	4 YEARS	5 YEARS
A	12	22	33	44	49
BBB	25	36	45	55	60
BB	40	55	66	76	98

Required

a) Calculate the goverment bond annual spot rates for years from 1 to 5 by bootstrapping the above coupon paying government bonds and state the shape of the resulting government bond yield curve.

b) calculate the percentage change in the price of GHI plcs bond A arising from the change in the companys credit rating from A to BBB and briefly explain why the bonds price is likely to change that way.

c) calculate the issue price of GHI plcs proposed bond

d) calculate the yield to maturity of GHI plcs proposed bond B and explain why the yield to maturity is less than the year 4 rate of return.