Problem:
You have won the mandate and Severn Trent PLC has asked you price a 5 year GBP par bullet bond issue for them, with Price, Coupon, Yield to Maturity and Modified Duration.
You have the following set of UK Treasury bond data (March 2013) and consultations with your Bank's Equity Analyst and Debt Analyst suggest that a yield of 2 47% incorporating a Z-spread for Severn Trent PLC of 150 bps over Treasury would be appropriate to attract investors.
UK Treasury Notes Coupon Yield to Maturity Zero coupon rate
1 Year 2.25% 0.20% 0.20%
2 Year 2.75% 0.34%
3 Year 2.00% 0.41%
4 Year 1.75% 0.63%
5 Year 5.00% 0.95%
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.
Additional Information:
This question is from Finance and it is about preparing a price for a 5 year GBP for each bullet bond issue for Severn Trent PLC with price, coupon, and yield to maturity as well as modified duration. The data pertaining to this given in the question has been employed for the preparation of price.