XYZ plc is issuing its first bond in December 2020 at a par value of $100. A coupon of 7% is to be paid annually and the bond is due to mature in December 2023. The first coupon will be paid in December 2021. Ascot plc is a specialised manufacturing company and S&P has issued it a BB rating in its Bond Offering Prospectus.

You are interested in purchasing the bond and have noted the following:

The yield on a U.S. 3 year bond is currently 0.3%

Newmarket plc, a competitor of Ascot plc, currently has a 3.5 year bond outstanding with a YTM of 6%. S&P currently rate Newmarket plc as CCC.

York plc, another close competitor, has a 4 year bond outstanding with a yield of 5%. York plc is rated BBB+ by S&P.

1. Based on the above information only, what is the maximum price you would be willing to pay for the bond to be issued by Ascot plc? How would the yields on competitor bonds influence your decision?

2 .If the bond were callable after two years would you be willing to pay more or less? Explain why?

3. The market consensus is that U.S. inflation will remain low, averaging 1% over the next 3 years. However you perceive that inflation may be higher than market estimates, averaging 2% per year. How would this affect the price you would be willing to pay for the bond?