6. Unicorn Inc. is considering issuing a 20-year bond for its expansion project. In order to...
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6. Unicorn Inc. is considering issuing a 20-year bond for its expansion project. In order to estimate the YTM of the new bond, the company has the following information for reference: First, the company currently has a bond issue outstanding, which pays a 10% annual coupon, currently traded at 1114.93 (with $1000 face value), and will mature in 8 years. Secondly, the relevant yield curve indicates that the YTM for a 20-year bond is higher than an 8 year-bond with the same bond rating by 1.2%. (20 marks) a. For Unicorn's currently outstanding bond, find which one of the following is its YTM: 7%, 8%, 9%, 10%, 11%, 12%. Show calculations by formula. (5 marks) b. Suppose the new bond is also to pay 10% annual coupon, calculate the issue price of the bond (with $1000 face value). (5 marks) c. Assume the market interest rate will remain unchanged. What will be the current yield and the capital gains yield of the new bond for its first year? (5 marks) d. Explain why the yield of a 20-year bond should be higher than that of a bond of the same company with 8 years to maturity, supposing no change in the rate of inflation is expected for the foreseeable future. (5 marks) 6. Unicorn Inc. is considering issuing a 20-year bond for its expansion project. In order to estimate the YTM of the new bond, the company has the following information for reference: First, the company currently has a bond issue outstanding, which pays a 10% annual coupon, currently traded at 1114.93 (with $1000 face value), and will mature in 8 years. Secondly, the relevant yield curve indicates that the YTM for a 20-year bond is higher than an 8 year-bond with the same bond rating by 1.2%. (20 marks) a. For Unicorn's currently outstanding bond, find which one of the following is its YTM: 7%, 8%, 9%, 10%, 11%, 12%. Show calculations by formula. (5 marks) b. Suppose the new bond is also to pay 10% annual coupon, calculate the issue price of the bond (with $1000 face value). (5 marks) c. Assume the market interest rate will remain unchanged. What will be the current yield and the capital gains yield of the new bond for its first year? (5 marks) d. Explain why the yield of a 20-year bond should be higher than that of a bond of the same company with 8 years to maturity, supposing no change in the rate of inflation is expected for the foreseeable future. (5 marks)
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