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What is the price of the bond on issue date

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Reference no: EM133116579

Company 123 is about to issue a €100,000,000 bond rated BBB/Baa2 with a five year maturity. The investment bank underwriting the bond informs them that the market rate of interest that will be required is 200 bp above comparable maturity government securities that is trading at a YTM of 3%.

A) What is the price of the bond on Issue Date?

One year has gone by. Company 123 has gotten financially stronger and is now rated BBB+/A3 (so split-rated). Market credit spreads over comparable maturity government securities are 120 bp. Assume the underlying government security for four-year maturity trades at 2.6%.

B) What is the estimated price in the secondary market for the Company 123 bond?

By the end of Year 2, the country's economic performance was suffering due to significant inflation associated with various imports and commodity prices. As a result, the three-year government is now trading at a YTM of 4.0%. Company 123 has been adversely affected by this development and their bonds have been downgraded to BBB-/Baa3. Spreads over comparable governments are now 250 bp.

C) What is the estimated price in the secondary market for the Company 123 bond?

Reference no: EM133116579

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