Consider the following risk-free T-bill and coupon bonds available for sale in the bond market (annual coupons):
Maturity Price Coupon
1 942 T-bill
2 995 6.3%
3 998 7.5%
4 985.25 6.75%
a) Your company plans to issue two-year maturity bonds in year two (i.e. bonds will mature in year four). You plan to issue bonds priced at $980. At what level should you plan to set the coupon on your bond?
b) Your company does not have money to pay coupons in year 3, and thus plans rather to issue discount bonds instead of coupon bonds. At what price do you expect to sell the zero-coupon bonds?