XYZ plc is planning to raise some additional finance through a bond issue. The financial management team are currently considering whether to issue a 10-year or 20-year bond. Further details are provided below on the proposed structure of the bonds:

	Coupon rate	Face value	Maturity
10-year bond	4%	1,000	10 years
20-year bond	4%	1,000	20 years

The required yield on XYZ's 10-year bonds has been estimated at 6%:

a) Calculate the issue price an investor would be willing to pay for the 10-year bond. (2 marks)

b) Explain why an investor would be unwilling to pay the same issue price as calculated in part a) for the 20-year bond. (3 marks)

Assuming the 10-year bond is issued at the price calculated in part a):

c) Calculate the current yield of the bond for year 1. (1 mark)

d) Calculate the rate of return on the bond for year 1 assuming the bond price in one years time is $860. (1 mark)

Assuming Standard and Poor's changes the rating of the 10-year bonds from an initial rating of AA to a revised rating of BB at some point in the future:

e) Explain the likely impact on the bond price of this change in rating. (3 marks)

Total 10 marks