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Calculate price at which FOB may expect to issue its bonds

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Question - FOB plans to issue new bonds with a maturity of 7 years and would offer an annual coupon rate of 3% paid quarterly. Given the level of risk of FOB and its sector of activity, investors require an effective annual risk premium of 2.5%.

A Canadian government bond, considered risk-free, with the same maturity and coupon rate as the FOB corporate bond, is currently traded at par. The face value of the bond is $1,000.

Required -

1) Calculate the annual effective annual return on the Canadian government bond?

2) Calculate the actual annual return on the FOB company bond?

3) Calculate the price at which FOB may expect to issue its bonds?

Reference no: EM133135369

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