Question
4A Group is issuing $320 million new bonds on a competitive bidding underwriting basis. The bids received from different bidders are shown in the table
4A Group is issuing $320 million new bonds on a competitive bidding underwriting basis. The bids received from different bidders are shown in the table below.
| Bidder | Amount(in millions) | Bid |
| A | $90 | 1.4% |
| B | $70 | 1.5% |
| C | $80 | 1.5$ |
| D | $120 | 1.6% |
| E | $80 | 1.6% |
| F | $80 | 1.7% |
How much of the bond will be allocated to bidders A, B, C, D, E and F respectively? (6 marks) State one disadvantage for 4A to use competitive bidding underwriting to issue the bonds. (4 marks) Does the issuance of the 4As bonds take place in the primary market or secondary market? Explain. (5 marks) KK Group issues Bond A and Bond B today. Their yields to maturity are as follows.
| Bond | Yield to maturity |
| A | 7% |
| B | 5% |
Bond A and Bond B are exactly the same except one has a time to maturity of 6 years and the other has a time to maturity of 7 years. Which bond has a time to maturity of 7 years? Explain your answer. (5 marks) Use the information to calculate the forward rate of the 4th year. (5 marks)
| 1-year spot rate | 7% |
| 2-year spot rate | 8% |
| 3-year spot rate | 9% |
| 4-year spot rate | 10% |
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Personal Finance
Authors: Jeff Madura
4th Edition
0136117007, 9780136117001
