ATTEMPT ALL THREE (3) QUESTIONS QUESTION ONE RST Ple is a stock exchange listed manufacturing company board to expand its manufacturing facilities, mounting to k75 million by way of a five year corporate bond issue bond will have a par value five. uring company. Following a decision made by the ng facilities, the company needs to raise additional finance par value of K100 and will be redeemed at this par value at the orporate bond issue. The proposed corporate value at the end of year The issue will significantly change the c asurer has been advised that this is still structure and as such, the credit rating y change the company's capital structure and as will fall from the current AAA to A the company's treasurer has been advised that this is still within the investment grade. The government bond yield curve shows the following spot rates: 1 year 2 years 3 years 4 years 5 years 4.52% 4.85% 5.25% 5.85% 6.02% In addition, the following table showing the credit spreads applicable to the sector in which Plc operates have been obtained from a credit rating agency Credit spreads in basis points 5 years 4 years Credit Rating 2 years 1 year 3 years 50 60 AAA 20 40 30 82 64 45 55 52 62 73 85 The following proposals have been made in respect of the proposed bond issue: 76 Proposal 1 Issue the proposed corporate bond with a fixed annual coupon rate of 6%, with the first coupon payment being made at the end of year 1. Proposal 2 Issue the proposed corporate bond with an annual fixed coupon rate of 4% from year 1 to year 3 and a fixed annual coupon rate of 7% from year 4 to year 5. Proposal 3 Issue the proposed corporate bond at an annual fixed coupon rate but such that the issue price will be equal to the bond's par value of K100. Proposal 4 Issue the proposed corporate bond with a variable annual coupon rate based on the Bank Base rate so that the annual coupons will be Bank Base Rate + 40 basis points. Page 2 of 6 of a wetum Required: (a) Calculate whether the proposed bond would be issued al terms of issue were: [5 Marks Those in proposal 1 [5 Marks (*) Those in proposal 2 (b) Calculate what the fined a s coupon rate would be if the proposed bond was issued based on the terms of proposal 3 [5 Marks] (c) Explain why a company may consider issuing a bond based on the terms stated under 12 Marks1 proposal 2 (0) Discuss the problems that are likely to be faced by the company if the proposed bond was 13 Marks) issued based on the terms of proposal 4 [TOTAL: 20 MARKS) QUESTION TWO Three government bonds are in issue, bond 1, bond 2 and bond 3. Each bond has a par value of K100 and is redeemable at the par value. The following additional information is available in respect of each bond: Bond Maturity term Annual coupon rate Price Bond 1 1 year 3.25% K99.90 Bond 2 2 years 3 75% K98.75 Band 3 3 years 3.85% K97.80 Required: (a) By bootstrapping the above coupon paying bonds, estimate the one year, two year and three year spot rates and state the shape of the resulting spot yield curve. [8 Marks) (b) Calculate the yield to maturity of each of Bond 2 and Bond 3 and briefly discuss the relationships between the spot rates and the yields to maturity for both bonds 7 Marks (TOTAL: 15 MARKS] QUESTION THREE Financial intermediaries play major roles in the financial markets. Without financial intermediaries being in place, some financial market transactions may not occur smoothly. Required: (a) Explain the types of open market operations performed by the Central Bank and discuss the effects that these nan mak a rations have an interest rates and prices of securities ATTEMPT ALL THREE (3) QUESTIONS QUESTION ONE RST Ple is a stock exchange listed manufacturing company board to expand its manufacturing facilities, mounting to k75 million by way of a five year corporate bond issue bond will have a par value five. uring company. Following a decision made by the ng facilities, the company needs to raise additional finance par value of K100 and will be redeemed at this par value at the orporate bond issue. The proposed corporate value at the end of year The issue will significantly change the c asurer has been advised that this is still structure and as such, the credit rating y change the company's capital structure and as will fall from the current AAA to A the company's treasurer has been advised that this is still within the investment grade. The government bond yield curve shows the following spot rates: 1 year 2 years 3 years 4 years 5 years 4.52% 4.85% 5.25% 5.85% 6.02% In addition, the following table showing the credit spreads applicable to the sector in which Plc operates have been obtained from a credit rating agency Credit spreads in basis points 5 years 4 years Credit Rating 2 years 1 year 3 years 50 60 AAA 20 40 30 82 64 45 55 52 62 73 85 The following proposals have been made in respect of the proposed bond issue: 76 Proposal 1 Issue the proposed corporate bond with a fixed annual coupon rate of 6%, with the first coupon payment being made at the end of year 1. Proposal 2 Issue the proposed corporate bond with an annual fixed coupon rate of 4% from year 1 to year 3 and a fixed annual coupon rate of 7% from year 4 to year 5. Proposal 3 Issue the proposed corporate bond at an annual fixed coupon rate but such that the issue price will be equal to the bond's par value of K100. Proposal 4 Issue the proposed corporate bond with a variable annual coupon rate based on the Bank Base rate so that the annual coupons will be Bank Base Rate + 40 basis points. Page 2 of 6 of a wetum Required: (a) Calculate whether the proposed bond would be issued al terms of issue were: [5 Marks Those in proposal 1 [5 Marks (*) Those in proposal 2 (b) Calculate what the fined a s coupon rate would be if the proposed bond was issued based on the terms of proposal 3 [5 Marks] (c) Explain why a company may consider issuing a bond based on the terms stated under 12 Marks1 proposal 2 (0) Discuss the problems that are likely to be faced by the company if the proposed bond was 13 Marks) issued based on the terms of proposal 4 [TOTAL: 20 MARKS) QUESTION TWO Three government bonds are in issue, bond 1, bond 2 and bond 3. Each bond has a par value of K100 and is redeemable at the par value. The following additional information is available in respect of each bond: Bond Maturity term Annual coupon rate Price Bond 1 1 year 3.25% K99.90 Bond 2 2 years 3 75% K98.75 Band 3 3 years 3.85% K97.80 Required: (a) By bootstrapping the above coupon paying bonds, estimate the one year, two year and three year spot rates and state the shape of the resulting spot yield curve. [8 Marks) (b) Calculate the yield to maturity of each of Bond 2 and Bond 3 and briefly discuss the relationships between the spot rates and the yields to maturity for both bonds 7 Marks (TOTAL: 15 MARKS] QUESTION THREE Financial intermediaries play major roles in the financial markets. Without financial intermediaries being in place, some financial market transactions may not occur smoothly. Required: (a) Explain the types of open market operations performed by the Central Bank and discuss the effects that these nan mak a rations have an interest rates and prices of securities