During your dream's summer internship at an investment bank you are assigned the task of...
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Accounting
During your dream's summer internship at an investment bank you are assigned the task of pricing a new corporate bond issue. The discount bonds have a face value of $10,000 and are to mature in 3 years. Your analysis leads you to conclude that the expected payout on the bonds is $9,350 and that investors require a 1.2% risk premium to hold bonds with similar risk profiles. The current YTM on 3-year Government bonds is 2%.
What is the maximum price you think the bonds can be sold for? (Provide your answer in $ with 2 decimals of accuracy. e.g., $1,234.56) (Hint: The expected return on the bonds should reflect the safe return plus the risk premium)
At that price, what is the promised yield to maturity? (Provide your answer in % with 1 decimal of accuracy)
At that price, what is the default premium? (Provide your answer in % with 1 decimal of accuracy) (Hint: The default premium is the promised YTM minus the expected return.)
At that price, what is the default risk premium? (Provide your answer in % with 1 decimal of accuracy) (Hint: The default risk premium is the promised YTM minus the safe (Treasury bond) return.)
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