Five years ago, San Francisco Berhad issued $10,000,000 of corporate bonds with a 30-year maturity. The...

Five years ago, San Francisco Berhad issued $10,000,000 of corporate bonds with a 30-year maturity. The bonds have a coupon rate of 10.125% pay interest semiannually and have a par value of $1,000 per bond. The bonds are currently trading at a price of $879.625 per bond. At the same time, a 25-year Treasury bond with a 6.825% coupon rate (paid semiannually) and $1,000 par is currently selling for $975.42.

Determine the yield spread between the corporate bond and the Treasury bond.
If you are considering an investment in San Francisco Berhad’s bonds (that will be held to maturity) and required an 11% rate of return, would you purchase the bonds? Why or why not?
Alternatively, you are considering a purchase of San Francisco’s preferred stock. Assume that the preferred stock has a current market price of $42, a par value of $50, and a dividend amounting to 10% of par. Would you be willing to buy the firm’s preferred stock? Why or why not? Your required rate of return for investments of this type is 12.5%.

Expert Solution

jeff jeffy answered 1 year ago

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