Additional Questions for Tutorial Lecture 5 Bond market

1.Explain the theories that attempt to explain the term structure of interest rates.

2.What is credit wrapping (credit enhancement) and what benefits does it have for the issuer.

3.Does an inverted yield curve predict recession?

9.13 Bond price

The International Publishing Group Pty Ltd is raising $10 million by issuing 15-year bonds with a coupon rate of 7.57 per cent and a face value of $1000. Coupon payments will be annual. Investors buying the bond currently will earn a yield to maturity of 10.00 per cent. At what price will the bonds sell in the marketplace? Explain.

9.14 Bond price

Pacific Brands Ltd issued 10-year bonds 4 years ago with a coupon rate of 9.375 per cent. At the time of issue, the bonds sold at par. Today bonds of similar risk and maturity will pay annual coupons of 6.25 per cent. Assuming semiannual coupon payments and a face value of $1000, what will be the current market price of the company's bonds?

9.18 Zero coupon bonds

Kip McGrath Education Centres Ltd wants to raise $1 million by issuing 6-year zero coupon bonds with a face value of $1000. Its investment banker states that investors would use an 11.4 per cent discount rate on such bonds. At what price would these bonds sell in the marketplace? How many bonds would the company have to issue to raise $1 million? Assume semiannual coupon payments.