Suppose you observed that one-year T-bills are trading with a yield to maturity (YTM) of 4.75%.  The yield spread between AAA and BB rated corporate bonds is 130 basis points.  The maturity yield differential between the one-year T-bills and three-year government bonds is 45 basis points.

a) What the market yield rate would you expect on a three-year BB rated corporate bond that pays a 7.25% annual coupon? (4 Marks)

b) How much would you pay for this three-year BB rated corporate bond if its coupon rate was 7.25% with interest paid annually?