Question 4: Debt markets [15 Marks]

Show all your workings when calculations are required and round off your FINAL result to TWO decimal places

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]