Question 2 Mini Case ? EVERGREEN International Ltd cont. 3 years ago (April 2011) Evergreen issued a 7-year fixed rate bond denominated in SGD with a coupon of 5%, a debt necessary then to finance a new production line that is expected to last until 2020. Today, the 4-year interest rate in SGD for comparable companies stands at 3.5%, and the US Federal Reserve has firmly indicated that it would hold short-term interest rates at their current low levels for the foreseeable future. Mr Koh thinks thus that SGD rates should therefore also remain at their current low level of +1-0,5 %. DBS has recently told Mr Koh: I can pay you fix 3.5% for 4 years and receive 6 months Sibor + 200 bp. (a) Examine whether Evergreen is running any risk on this bond, and/or whether this bond presents the best possible scenario for Evergreen. (3 marks) (b) What is the transaction proposed by the bank, and discuss whether Mr Koh should accept or decline it? Analyse the risk. (4 marks) (c) Assuming Evergreen has entered the transaction in April 2014 for a notional of 5 million SGD when the 6 months Sibor rate was 0.54% .The payments being done in arrears (i.e. at the end of each 6 months period), what are the cash flows generated by the transaction on October 2014? (assume 30 days per month) (4 marks) (d) In October 2014, Sibor 6 months has suddenly increased to 1.68%. Calculate the cash flows generated by the transaction on April 2015. (4 marks) Remark - Please make sure you cite every reference you use in your answer. The reference should be cited in the main body of the text as well as in the list of references at the end of the answer. Question 2 Mini Case ? EVERGREEN International Ltd cont. 3 years ago (April 2011) Evergreen issued a 7-year fixed rate bond denominated in SGD with a coupon of 5%, a debt necessary then to finance a new production line that is expected to last until 2020. Today, the 4-year interest rate in SGD for comparable companies stands at 3.5%, and the US Federal Reserve has firmly indicated that it would hold short-term interest rates at their current low levels for the foreseeable future. Mr Koh thinks thus that SGD rates should therefore also remain at their current low level of +1-0,5 %. DBS has recently told Mr Koh: I can pay you fix 3.5% for 4 years and receive 6 months Sibor + 200 bp. (a) Examine whether Evergreen is running any risk on this bond, and/or whether this bond presents the best possible scenario for Evergreen. (3 marks) (b) What is the transaction proposed by the bank, and discuss whether Mr Koh should accept or decline it? Analyse the risk. (4 marks) (c) Assuming Evergreen has entered the transaction in April 2014 for a notional of 5 million SGD when the 6 months Sibor rate was 0.54% .The payments being done in arrears (i.e. at the end of each 6 months period), what are the cash flows generated by the transaction on October 2014? (assume 30 days per month) (4 marks) (d) In October 2014, Sibor 6 months has suddenly increased to 1.68%. Calculate the cash flows generated by the transaction on April 2015. (4 marks) Remark - Please make sure you cite every reference you use in your answer. The reference should be cited in the main body of the text as well as in the list of references at the end of the
