Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

a)Blackmores needs to borrow money for the purpose of purchasing a long -term asset.Given the fact that the cost of borrowing is usually cheaper in

a)Blackmores needs to borrow money for the purpose of purchasing a long -term asset.Given the fact that the cost of borrowing is usually cheaper in the money market than the bond market, please advise the company where it should raise the required fund, in the money market or the bond market and why?(In your answer, distinguish between the two debt markets and discuss the potential risk of choosing the inappropriate market to raise the funds)[6 marks]

b)Blackmores decides to issue a bond with a Face Value of $1,000. The coupon rate of the bond is 12% p.a. and the coupons are paid semi-annually. The bond has a term to maturity of 5 years and the yield-to-maturity is 8% p.a. What is the implied price of this bond?[3 marks]

c)Assume that the market interest rate decreases by 0.5%. Without calculation, predict and explain whether the price of the bond will increase or decrease.[2 marks]

d)If an investor bought the bond at the implied price calculated in part b) and held it for 1.5 years, and then sold it for $1100. What was his holding period yield p.a.?[4 marks]

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Cornerstones of Financial and Managerial Accounting

Authors: Rich Jones, Mowen, Hansen, Heitger

1st Edition

9780538751292, 324787359, 538751290, 978-0324787351

More Books

Students also viewed these Accounting questions

Question

=+ b. A change in weather patterns increases the depreciation rate.

Answered: 1 week ago