Augusta plc is issuing its first bond in December 2019 at a par value of $100. A coupon of 5% is to bepaid annually and the bond is due to mature in December 2022. The first coupon will be paid inDecember 2020. Augusta plc is a specialised manufacturing company and &P has issued it a BBBrating in its Bond Offering Prospectus. You are interested in purchasing the bond and have noted the following: The U.S. yield curve is currently inverted and a the yield on a U.S. 3 year bond is currently1.65%. Pine Valley plc, a competitor of Augusta plc, currently has a 3.5 year bond outstanding with aYTM of 5.5%. S&P currently rate Pine Valley plc as CCC. Bethpage plc, another close competitor, has a 4 year bond outstanding with a yield of 4.5%Bethpage plc is rated BBB+ by S&P. 

(a) Based on the above information only, what is the maximum price you would be willing to pay for the bond to be issued by Augusta plc? How would the yields on competitor bonds influence your decision?

Answer rating: 100% (QA)

To determine the maximum price you would be willing to pay for the bond issued by Augusta plc you ne... View the full answer