1. A bank recently decided that 6.5% should be added to the risk free rate to compensate it for the risk it would be taking on in lending to Mt Langi. If the 2-year Australian government bond rate is currently 4%, what would be the coupon rate at which a 2-year corporate bond for Mt Langi would be set, taking into account an appropriate cost of risk for the company? (Show as a percentage NOT a decimal.)
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2. Mt. Langi issues a two-year corporate bond on 31 December, 2012 at the coupon rate of 10.5%, with a face value of $100 and interest paid semi-annually. One year later, the 2-year government bond remained unchanged at 4%, and the risk profile of Mt Langi to add to this risk free rate as compensation has not changed, at 6.5%.
What would be the market price of the Mt Langi 2-year bond one year prior to maturity? (Roundup to two decimal places)
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