The JG Investment Bank is about to issue a new series of 10 year bonds. The bond

Question

The JG Investment Bank is about to issue a   new series of 10   year bonds. The bonds will have a $1000 face value and will   be rated AA by a respected Bond Rating Agency. Currently,   the yield to maturity on AA rated bonds is 250 basis points above the   yield on similar maturity government   bonds. The bonds will make annual coupon payments.

a) If   the YTM on 10 year government bonds is 2.8% , what coupon rate should   JG choose if it wants the bonds to   sell at par? (1 Mark) b) If   JG issues 1,500 bonds, how much capital will they raise from the   sale? (1 mark) c) Two   years later, the YTM on 8 year gov't bonds has risen to 3.2% . If the yield on AA rated bonds is   still 250 basis points higher than a gov't bond,   what is the new price of the bond? (note: round to the   nearest cent) (1 Mark) d) JG's   bonds now sell at a   Premium (1 Mark) Par a Discount



The JG Investment Bank is about to issue a   new series of 10   year bonds. The bonds will have a $1000 face value and will   be rated AA by a respected Bond Rating Agency. Currently,   the yield to maturity on AA rated bonds is 250 basis points above the   yield on similar maturity government   bonds. The bonds will make annual coupon payments.

a) If   the YTM on 10 year government bonds is 2.8% , what coupon rate should   JG choose if it wants the bonds to   sell at par? (1 Mark) b) If   JG issues 1,500 bonds, how much capital will they raise from the   sale? (1 mark) c) Two   years later, the YTM on 8 year gov't bonds has risen to 3.2% . If the yield on AA rated bonds is   still 250 basis points higher than a gov't bond,   what is the new price of the bond? (note: round to the   nearest cent) (1 Mark) d) JG's   bonds now sell at a   Premium (1 Mark) Par a Discount

Explanation / Answer

a) if it wants the bonds to sell at par, then coupon rate = YTM

coupon rate = 2.8%

b)Capital raised = 1500*1000 = $1500,000

c) price of the bond = 28/1.032 + 28/1.032^2 + 28/1.032^3 ......1028/1.032^8 =$972.16

d) JG's bonds now sell at a Discount

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