David N.

asked • 04/29/20

Corporate Finance

In April 2014, Greece managed to sell some €3 billion in new five-year bonds at a yield of just 4.95%.

Answer the following questions (show all calculations):

  1. Suppose a coupon of 4.75% (assume that each bond pays interest annually) and the actual yield to maturity (YTM) of 4.95%. How much is the present value (price) of a bond with €1,000 face value at the time of issue?

1 Expert Answer


Dinara K. answered • 04/30/20

4.9 (120)

Experienced financial analyst with 5+ years experience in Big 4

David N.

So in this instance why will an investor buy Greece's sovereign debt?


John L.

Reason #1, the market yield on 5-year sovereign bond is trading at a higher level than the coupon rate, so the investor can buy it at discount, hold it to maturity and get paid a par. Reason #2, the investor expect the credit spread on Greece sovereign to compress in the future. Since the yield compresses off pure interest and credit components, a compression in Greece credit spread will lower the market required yield on Greece bond. Investor stands to benefit on a mark to market basis on the bond it holds if that happens.


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