Veronica needed to price three (3) Singapore dollar-denominated bonds. She emailed you and asked for help in term of valuation as well as seeking your expertise to clear some of her doubts which were:

(i) A higher coupon yield for 20-year bond as compared to that of 2-year bond from the same bond issuer, SGS.

(ii) A wide coupon yield gap between 20-year SGS and 20-year ABC’s bonds.

Attached within her emails are the term sheets for the three bonds.

(1) 2-year Singapore Government Securities (SGS) bond

Standard & Poor’s AAA rated

Coupon rate 3.125% per annum

Quarterly coupon payment

Par value is $100

(2) 20-year Singapore Government Securities (SGS) bond

Standard & Poor’s AAA rated

Coupon rate 4.1% per annum

Semi-annual coupon payment

Par value is $100

(3) 20-year Company ABC bond

Standard & Poor’s BBB rated

Coupon rate 6% per annum

Annual coupon payment

Par value is $100

Note:

The cost of borrowing is 2% per annum and the cost of borrowing curve for the Private Bank remained flat.

Create a Microsoft Excel spreadsheet capturing the bond information above and do the following:

(a) Calculate the present value for each bond using the appropriate Microsoft Excel function. 

(b) Illustrate the purpose of SGS bonds and provide answers to Veronica’s concern on: “Why there is a higher coupon yield for 20-year bond as compared to that of 2-year bond from the same bond issuer SGS”. 

(c) Explain and provide answers to Veronica’s concern on: “Why there is a wide coupon yield gap between 20-year SGS and 20-year ABC’s bonds”.