- This topic has 5 replies, 3 voices, and was last updated 7 years ago by
.
- Posts
Dear Tutor,
Could you please, clarify the following question.
The answer for the part (a) states “If the spread was set too high, the debt would be issued at a premium; if it was too low then it would have to be issued at a discount as there would not be a full take-up”.
I have a small confusion for the first part:
1) If we state the high coupon income – there will be an additional income for the lender (and no other implications).
Or he means that we’ll have to add a premium to the price so that the YTM could comply with the market rates;2) At that, for the lower coupon rate it’s clear that if we state coupon rate which is too low, we’ll just have to make a discount, as otherwise we won’t get the full debt finance required.
Please clarify the first point question.
Thank you in advance.
You are right that there would be extra income for the investor – therefore the investor should be happy to pay more for the debt. There is no point in just giving the investor higher interest than we need to 🙂
Sir
for part (a) this is how my thinking went:
“since the 4 year yield curve is giving 5.1% and the spread is .9, that makes the coupon rate to be 6%.”
i was happy till i read the examiner saying:
“The coupon rate should be the same as the yield for four-year debt at 6%.”
does this sentence have anything to do with the assumption that the redemption will be at par and that’s why the coupon and the yield have to be the same?
regards
and…. good evening!!
- The topic ‘Question Airline Business December 2007 (amended by BPP)’ is closed to new replies.