Suppose you are working on a bond issue for WeWork, a U.S. basedfirm with a BB credit rating. WeWork plans to issue 10-year parbonds with a face value of $1,000, and has not issued debt before.A competitor with a similar bond rating as WeWork issued 15-yearpar bonds 5 years ago with face value of $1,000 and an annualcoupon rate of 6.5% (paid semi-annually). These bonds are currentlytrading in the market at a price of $910.88. The 15-year USTreasury bond rate 5 years ago was 2% and the yield on 10year parUS Treasury bonds today is 3%. With this information, answer thefollowing two questions. (i) What is the yield to maturity on thebonds that WeWork’s competitor issued 5 years ago? And what wouldbe the coupon rate at which you expect WeWork could issue the10-year par bonds today? Clearly describe the inputs to yourcalculations and motivate your answer. (ii) Explain why thecorporate bonds issued by the competitor 5 years ago are tradingbelow par. Also discuss how the risk of these bonds has changedover time. Are investors today more or less concerned about theinterest rate risk and the credit risk of the competitor’s bondsthan they were 5 years ago? Explain your answer (no calculationsare needed).
