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).

Solutions

Expert Solution

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Suppose we have the yield and maturity information on treasury securities from a current yield curve....

Suppose we have the yield and maturity information on treasury securities from a current yield curve. A 1-year T-bond currently yields 4.50% and a 3-year T-bond yields 9.80%. Assuming the pure expectations theory is correct, what is the market's forecast for interest rates on a 2-year treasury security, 1 year from now? a. 11.16% b. 13.44% c. 14.49% d. 26.67% e. 12.55%

The Treasury yield curve plots the yields on Treasury notes and bonds relative to the ____...

The Treasury yield curve plots the yields on Treasury notes and bonds relative to the ____ of those securities. face value par value maturity coupon rate Victoria Tennis is trying to decide which one of two projects it should accept. Both projects have the same start-up costs. Project 1 will produce annual cash flows of $52,000 a year for six years. Project 2 will produce cash flows of $48,000 a year for eight years. The company requires a 15 percent...

Find the current Daily Yield Curve Rates published by the Treasury. Plot the Yield curve using...

Find the current Daily Yield Curve Rates published by the Treasury. Plot the Yield curve using a line chart in Excel. Be sure to label both axes. Based upon your plot, what do you believe likely to happen to interest rates in the future?

Examine yield curve shapes using daily yield curve rates provided by U.S. department of treasury ....

Examine yield curve shapes using daily yield curve rates provided by U.S. department of treasury . a) Report treasure yield rates (1 month, 3 month, 6 month, 1 year, 2 year, 3 year, 5 year, 7 year, 10 year, 20 year, 30 year) on Jan. 02, 2014, Jan. 02, 2015, Jan. 04, 2016, Jan. 03, 2017, Jan. 02, 2018, Jan. 02, 2019, and Sep. 02, 2019. b) Compute each term spreads for seven term structures. c) Plot seven yield curves...

Imagine that the yield curve is currently flat. The Treasury announces that they will no longer...

Imagine that the yield curve is currently flat. The Treasury announces that they will no longer issue securities with maturities longer than two years. As a result, long-term government bonds will be refinanced using only relatively short-term debt. If the "market segmentation theory" of the yield curve is correct, what will happen to the slope of the yield curve as a result of this policy change? Explain briefly. Explain the impact of the new policy on the yield curve, therefore...

A classic example of a discount loan is If the US Treasury Yield Curve is upward...

A classic example of a discount loan is If the US Treasury Yield Curve is upward sloping then it is indicating a A. downturn in the economy B. upturn in the economy C. no change to the economy (i.e. the economy is in transition phase) D. The US Treasury Yield Curve yield does not signal the direction of the economy. E. The US Treasury Yield Curve maps out corporate borrowing levels Using the Fischer Equation what is the nominal rate...

When the yield curve is upward sloping, for profitability reasons bank managers;

When the yield curve is upward sloping, for profitability reasons bank managers;O fund and lend at the middle of the curveO none of the aboveO fund at the long end and lend at the short end of the curveO fund at the short end and lend at the long end of the curve

In Figure 6.7, we saw a plot of the yield curve on stripped Treasury bonds and...

In Figure 6.7, we saw a plot of the yield curve on stripped Treasury bonds and pointed out that bonds of different maturities may sell at different yields to maturity. In principle, when we are valuing a stream of cash flows, each cash flow should be discounted by the yield appropriate to its particular maturity. Suppose the yield curve on (zero-coupon) Treasury strips is as follows: Years to Maturity Yield to Maturity 1 4.0 % 2 5.0 3–5 5.5 6–10...

Suppose currently 10-year Treasury note offers 2.8% yield and the average yield on investment grade 10-year...

Suppose currently 10-year Treasury note offers 2.8% yield and the average yield on investment grade 10-year corporate bonds is 4.4%. Calculate the risk spread. Predict what will happen to the yields of corporate and treasury bonds as well as the risk spread if the federal government guarantees today that it will pay to bondholders if the corporations go bankrupt in the future.

Purchased a one year treasury bill that offers an effective annual yield of 12 percent. You...

Purchased a one year treasury bill that offers an effective annual yield of 12 percent. You are confident that there will be 6 percent rate inflation. The tax rate is 33.33 percent, i.e, the tax rate is exactly one-third. What after tax real return are you expecting?

Subjects