CORPORATE FINANCE

Problem Set 3

Question 1
A $1000 bond with a coupon rate of 3.1% paid annually, has eight years to maturity and a
yield to maturity of 4.2%.
a) If interest rates in the economy rise, and the yield to maturity on this bond increases to
4.9%, what will happen to the price of the bond? Will this bond trade at par, at a
premium, or a discount?
b) What would happen to the price of the bond if investors require a rate of return of
2.4%? Is this bond trading at par, at a premium, or a discount?
c) What would be the price of the bond if investors use a discount rate of 1.7%? Is this
bond trading at par, at a premium, or a discount?
d) What will happen if the company that issued the bond will suddenly change the coupon
rate of the bond to 2.1%?

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Question 2
Consider the statistics of a series of bonds issued by the Commonwealth Bank of Australia in
the figure below.
a) When will this bond mature?
b) What is the coupon rate on this bond?
c) What is the face value of this bond?
d) Which sum will the holder of this bond receive with every coupon payment?
e) At what price is this bond currently trading?
f) Is this bond trading at par, a discount or a premium?
g) What could be a possible explanation(s) for the change price between September 2021
and the day the screen shot was taken?
h) Did investors require a yield higher or lower than 1.00% for holding the CBA bond
when the screenshot was taken?

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Question 3
Consider the statistics of a series of bonds issued by Telstra in the figure below.
a) At what price was this bond trading just after the most recent coupon payment?
b) Using the bond price of part a), compute the rate of return that investors require for
holding this Telstra bond.
c) Calculate the spread on this bond. In order to calculate the spread you will need to find
the risk-free rate. For yields on Australian government bonds go to the RBA website
and look for “Capital Market Yields – Government Bonds – Monthly”).
d) If the interest rates in the economy will stay the same, what will be the bond’s price
one year later?

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Question 4
You are the CFO of a major established tech company. Last week, the board of directors has
decided to acquire a young start-up company that operates an online food delivery platform.
Your company will finance this new acquisition partly by borrowing money in the market. You
are asked to raise $800 million by issuing new bonds. Subsequently, you have instructed your
team to investigate current pricing in the bond market. After they interviewed a number of
investment bankers, your people have reported that 10-year bonds of similar tech firms, with
similar risk profiles, currently yield 4.3% p.a..
a) How much money do you expect that your firm can raise, if you decide to issue 800,000
$1000 bonds, with a coupon rate of 2.50%, annual coupon payments, and a maturity
of 10 years?
b) How many bonds do you expect that your firm has to sell, in order to raise the required
$800 mln, if you decide to issue 10-year bonds with semi-annual coupon payments,
and a coupon rate of 4.91%?
c) How many bonds would your firm have to issue in order to raise the required $800 mln,
if you would decide to issue 10-year zero coupon bonds?
d) Which coupon rate should you choose in order to raise the required $800 mln, if you
wanted to sell exactly 800,000 annual coupon bonds?

Question 5
A zero-coupon bond with a face value of $10,000 has 15 years to maturity. If investors in this
bond require a return of 6.1% p.a., what will be the price that this bond will trade at?

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