The following information about two independent bond issues was reported in the financial press.
1. Province of Manitoba 2.50% bonds, maturing January 1, 2020, were trading at a price of 99.9 to yield a market interest rate of 3.06%.
2. Loblaw Companies Limited 8.75% bonds, maturing November 23, 2033, were trading at a price of 144.09 to yield a market interest rate of 5.02%.
Instructions
(a) Are the Province of Manitoba bonds trading at a premium or a discount?
(b) Are the Loblaw bonds trading at a premium or a discount?
(c) If these bonds were issued today by the Province of Manitoba and Loblaw, record the issue of $100,000 of each of these two bonds.
(d) Is it likely that these bonds were issued at a value closer to their face value? If so, how does the issuer do this?
(e) What is the major reason for the change in the price of the bonds since they were issued?