You are an intern with Ford Motor Company in its corporate finance division. The firm is planning to issues $50 million of 12% annual coupon binds with a 10-year maturity. The firm anticipates an increase in its bond rating. Your boss wants you to determine the gain in the proceeds of the new issue if it is rated above the firm's current bond rating. To prepare this information, you will have to determine For's current debt rating and the yield curve for its particular rating.

4. Return to Excel and create a timeline with the cash flows and discount rates you will need to value the new bond issue.

4.a. To create the required spot rates for Ford's issue, add the appropriate spread to the Treasury yield of the same maturity.

4.b. The yield curve and spread rates you have found do not cover every year that you will need for the new bonds. Specifically, you do not have yields or spreads for four-, six-, eight-, and nine-year maturities. Fill these in by linearly interpolating the given yields and spreads. For example, the four-year spot rate and spread will be the average of the three- and five-year rates. The six-year rate and spread will be the average of the five- and seven-year rates. For eight and nine you will have to spread the difference between years seven and ten across the two years.

4.c. To compute the spot rates for Ford's current debt rating, add the yield spread to the Treasury rate for each maturity. However, note that the spread is in basis points, which are 1/100th of a percentage point.

4.d. Compute the cash flows that would be paid to bondholders each year and add them to the timeline.

5. Use the spot rates to calculate the present value of each cash flow paid to the bondholders.

6. Compute the issue price of the bond and its initial yield to maturity.

Problem 4a

Treasury Rates

Year 1- 0.53

Year 2- 0.75

Year 3- 0.92

Year 5- 1.25

Year 7- 1.57

Year 10- 1.81

Problem 4b

Spread in %

Year 1- 0.96

Year 2- 1.11

Year 3- 1.32

Year 5- 1.53

Year 7- 1.78

Year 10- 2.53