The yield curve offers important information to treasury managers who intend to borrow funds. Below are...

The yield curve offers important information to treasury managers who intend to borrow funds. Below are the current bond prices of zero-coupon AA-rated corporate bonds with par value $1,000: Bond Current bond price 1-year zero coupon bond $987.95 2-year zero coupon bond $964.00 3-year zero coupon bond $935.43

(i) Calculate the yields to maturity of each bond. [12 marks]

(ii) City Infrastructure Corporation intends to issue 3-year coupon bonds, it believe that the bond rating of this bond rated by rating agencies will be AA-rated. The coupon rate is 4% and it is paid annually. The face value is $1,000. Calculate at what price the firm should sell this bond. [20 marks]

(iii) Calculate total principal amount of these bonds that City Infrastructure must issue to raise $20 million today, assuming the bonds are AA-rated. (Since the firm cannot issue a fraction of a bond, assume that all fractions are rounded to the nearest whole number.) [15 marks]

(iv) If the firm eventually could only sell its bond at $850, calculate the yield to maturity. Moreover, explain one possible reason why the bond is sold at $850, not the bond price calculated in Part (a) (ii).

Expert Solution

jeff jeffy answered 1 year ago

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