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-ABC Company is planning to issue a 5-year bond. The only other debt that the company currently has outstanding is a 2.5% annual-pay bond which is currently trading at $102.50 per 100 of par and has 4 full years to maturity (there is zero accrued interest built into its current price).
The following information is provided:
- Currently there are no outstanding government bonds with 4 years to maturity.
- The yield-to-maturity on a 3-year government bond is 0.85%, while the yield-to-maturity on a 5-year government bond is 1.55%.
- The term structure of credit spreads for bonds with the same credit rating as ABC Company suggests that 5-year spreads are around 37 bps higher than 4-year spreads.
Determine the expected market discount rate on the ABC's planned 5-year bond issue
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