Determine how much capital will they raise from the sale

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Point 1: 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 200 basis points above the yield on similar maturity government bonds. The bonds will make annual coupon payments.

Question a) If the YTM on 10 year government bonds is 2.0%, what coupon rate should JG choose if it wants the bonds to sell at par?

Question b) If JG issues 1,500 bonds, how much capital will they raise from the sale?

Question c) Two years later, the YTM on 8 year gov't bonds has fallen to 1.6%. If the yield on AA rated bonds is still 200 basis points higher than a gov't bond, what is the new price of the bond?

Question d) JG's bonds now sell at a Premium, Par or a Discount?

Reference no: EM132485148

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