past paper 2011dec question 3 partb

The issue price to ensure they are attractive to investors must be the market value calculated as normal i.e. the present value of future expected receipts discounted at the required rate of return. Since we know the govt yield rates (and can adjust for the credit spread) for returns in 1 year, in 2 years, etc.. we need to discount the future receipts at the relevant govt yield rate (as adjusted for the credit spread).