Q1

The private equity firm has asked you to price a 5 year GBP bullet bond issue for them, with Price and Yield to Maturity, which might be issued in order to finance the leveraged buyout. You have the following set of zero coupon rates from UK Treasury bonds, a Z-spread for United Utilities Group PLC of 200 bps over UK Treasuries and a coupon rate of 5% would be appropriate to attract investors.

You can assume that coupon payments are annual and that you are pricing on a coupon day (no accrued interest) and you may ignore basis conventions. You should make your process and methodology clear with explanations at each stage.

Q2

Tangential is a AA+ rated company that is looking to issue bonds with a five year maturity. Their investment bank adviser has suggested that they issue a Yen 1 billion ‘high' coupon bond which will be an attractive investment for Japanese pension funds which must pay their pension obligations from income.

The investment bank has suggested that a high coupon and redemption price of 90% of the face value will be a suitable bond structure. The following information is relevant. The current average yield on a AA+ bond is 5.7%. The maximum coupon payment could be 8%.

a) Show the possible cash flows for the bond and estimate the issue price. You can assume there are no issue costs.

b) Explain and analyse what the investment bank adviser means if he says that such a bond will allow the investor to convert capital to income

c) Discuss any significant disadvantages that you would expect in issuing a high coupon bond

d) If Tangential wishes to pay US dollars and not Japanese Yen, what can the company do? Illustrate and analyse your answer with diagrams showing the cash flows.

Q3

Discuss and critically evaluate three different theories relating to the term structure of interest rates

Please read all questions and information provided carefully. Answer should be made in appropriate length keeping in view the requirement of each question and total word counts allowed.

In addition, your assignment should demonstrate the following qualities:

A critical appreciation of relevant literature and its use to support argument, substantiate calculations and other aspects of the assignment.

Taking ownership of the content, being prepared to debate and argue a personal position, and providing evidence of evaluative skills. A submission made up of extracts from published sources which is descriptive or simply just theoretical regurgitation is not acceptable. Your submission must have interpretation and consideration of the challenges and issues of taking theory into practice.

Logical flow of ideas and treatment; appropriate selection of real world factors related to the companies under scrutiny.

Evidence of additional personal research, and the ability to analyse material from a variety of appropriate relevant perspectives.

Presentation, structure, appropriateness of methodology, breaking into section headings/subheadings, tidiness.