QUESTION 4: Bond valuation (20 points) This should take you 40 minutes.

Company Coupon rate (APR2) Maturity Quote

OBC 5.2% Feb 1st , 2032 101.55

We are February 1st, 2018.

Here are the details regarding bonds with 1,000$ face value that we issued on Feb 1st, 2012.

OBC will announce during a press conference in three months that it has acquired a new business whose activities are a tad
riskier than its own. To finance the deal, the company intends to issue 20 million dollars of bonds at par with a $1,000 face
value. These bonds will pay interest semi-annually and will mature 20 years later. Because the new bonds are junior to the
existing bonds, their yield to maturity is equal to that of the existing bonds plus 1.5%.

Draw your timeline (I’m serious), write all formulas (I’m really serious), provide all details of your calculations (this is a strong
recommendation), and round your interest rates to the 4th decimal (this is a threat).
1. How many new bonds does OBC need to issue? (2 points)
2. Assuming no changes in interest rates, what will be the price of the existing bond in three months? (10 points)
3. What must be the new bonds’ semi-annual coupon for it to sell at par? (5 points)
4. What if OBC decided to issue zero coupon bonds; would their price be higher, lower or equal to the price of the
regular coupon bonds? Justify your answer, no calculation necessary. (3 points)