PRE FINM3404 51 2023 Exam(1).pdf X G File | C:/Users/User/Documents/Final%20Exam/FINM%203404/FINM3404%2051%202023%20Exam(1).pdf . . E A Draw | Read aloud 2 of 5 Q 503 Question 2 A. Danlin Cafe suggests in its annual report that it has entered into fixed rate contracts with RRT Bank o covering a further $100 million of debt with a 3-4 year maturity profile, ensuring that a total of $150 million of its debt from RRT Bank is subject to fixed interest rates. Danlin Cafe has managed its interest + rate exposure but to what type of interest rate risk is RRT bank exposed during the term of this fixed rate loan? Explain with an example. [4 marks] B. Consider yourself as an analyst working in AllStar Investment Bank. The Chief Financial Officer (CFO) PDE of Gerald Limited (GL) has approached AllStar for an advice whether GL should refund its existing bonds with a size of $75 million. The bonds were issued 5 years ago with an original maturity of 15 years and annual coupon rate of 13 percent. At the time of issue, the underwriting cost was $5 million. For tax purposes, this underwriting cost is being amortized on a straight-line basis over the 15-year original life of the bonds. The issues are currently callable at a premium of 9 percent. Coupled with the fact that the market interest rates on new 10-year bonds of the same quality have dropped to 11 percent, GL is anxious to determine how much the company would save if the old issue could be refunded at the new rate. AllStar has assured GL that the underwriting cost of the new issue will be $1 million lower than what it was required for the old issue at the time of the issuance. This amount, which will be paid upfront, will be amortized on a straight-line basis over the life of the new bonds for tax purposes. The company's tax rate is 30%. Both AllStar and GL's senior management anticipate that long-term interest rate will be stable at 11 percent. Your assistant, Martha Lewis, calculated and communicated to you that the total present value of outflows is $7,908,780. Your colleague Duncan Martin believes that AllStar should advice GL to call the old issue and refund it with the new issue because the new issue has both lower interest rate and lower underwriting costs. Do you think Duncan is correct in their recommendation? Why or why not? As a senior analyst at AllStar Investment Bank looking after this case, what recommendation would you make to the CFO of Co Gerald Ltd? Provide your analyses with detailed calculations. [6 marks] 17'C Sunny ~ 90 61) ENG 8:35 AM O 9/06/2023