QUESTION 1 (23 MARKS)

Rex Corporation buy Lazzaro bonds for 10 years and has been issued 5 years ago at a coupon rate of 6%, yield to maturity is 5% and the interest is paid semi-annually. Rex also buy Alpha Beta bonds for 15 years at a coupon rate of 7%, yield to maturity of 10% and the interest is paid annually. Current market price for Lazzaro bond and Alpha Beta bonds are RM95 and RM110 respectively. Lazaro and Alpha Beta bonds at A rating and BB bond rating.

Two months later, Rex found that current market price for Flora Asia bond is RM145. Bintang Rex bought this bond 3 years ago with remaining years of 7 years that paid interest semi-annually with the coupon rate of 5%. While another bond Rex was invested in 2 years ago for 20 years bond was Gogu bond that the interest is paid annually, coupon rate is 10% and the current market price is RM98. Both bonds rate at AAA bond rating.

Required:

1. Justify either Lazzaro bond and Alpha Beta bond are mispricing (undervalued or overvalued) bonds. Support with calculations and conclude your results either worth to invest in both bonds. [Hint: Use formula of value of bond, Vb]

(7 marks)

(CLO2:PLO6:C6)

2. Assess either Flora Asia and Gogu bonds are traded at premium. Proof your answers with calculations and evaluate both yield-to-maturity (YTM). [Hint: Use interpolation method]

(12 marks)

(CLO2:PLO6:C6)

3. Rex has emphasized on the bond rating and selection of the bond is very important before they invest on any bonds. Based on the above bond rating given, analyse each of these bonds.

(4 marks)

(CLO2:PLO6:C4)