Question
1. a. A borrower requires $1,000,000 today to pay for some inventory. A bank is prepared to provide the financing in form of a 270-day
1. a. A borrower requires $1,000,000 today to pay for some inventory. A bank is prepared to provide the financing in form of a 270-day bank accepted commercial bill at a yield of 3.95% p.a. How much would the company have to pay back in 270 days time?
- A commercial bill is an example of what is referred to as a discount security. Explain what is meant with a discount security and what are the markets into which it is issued? How does an investor make money on such securities? Identify 2 other discount securities in addition to commercial bills?
2. The Australian Office of Financial Management (AOFM) unveiled this week the Australian governments first ever launch of 30 year T-bonds. The bonds are to pay an indexed rate or, variable rate, of 1% to 1.07% over the implied return of 10 year bonds which as at the date of this report was 2.21%. The AAA-rated bond tenders are likely to attract life insurance companies from around the world keen to match their long term liabilities with well rated income securities. (AFR 11 Oct 2016)
- Outline the tender process of Australian government bonds and why perhaps life insurance and superannuation companies might seek to invest in them.
- What impact does the fact that Australia still has managed to hang on to its AAA rating have on the bonds being issued? (3 marks)
- Assuming as an investor rather then investing in T-bonds you chose to invest in T-notes, what would be the face value of a 180-day T-note given a yield of 1.66% p.a. and a purchase price of $5,000,000?
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