Scenic City issued bonds to build hypermarkets as well as a high rise condominium. The home currency is Ringgit and the cost of the project has been estimated to be RM50 million. To finance the construction of the hypermarket and condominium, Scenic City issued peso- denominated bonds in Philippines whose currency is the peso. When the bond was issued, the interest rate was low in Philippines. The foreign bond issue raised 600 million pesos when the exchange rate at the time was 12 pesos/RM. Of the total amount raised, 50% was zero coupon bond and the balance was straight bond. Each foreign straight bond has a par value of 100 pesos and pays 7% interest in pesos at the end of each year. The bonds will be redeemed in six years' time at par. The current cost of dent of peso-denominated bonds of similar risk is 8%. The zero coupon bond also has a par value of 100 pesos with a redemption period of six years. The zero coupon bond is currently valued at 70 pesos. In addition to domestic sales, Scenic City sold shoplots and condominium units to foreign investors. In the current year, the company sold its properties to Philippines investors and expected to receive 40 million pesos in four months. The finance department has decided to hedge the currency risk of the receipts. The following exchange rates and interest rates are available: Spot Four months forward P12.5645/RM-P12.5649/RM P12.4612/RM-P12.4618/RM Interest rates: Borrowing rate Lending rate Peso Ringgit 9% p.a. 8% p.a. 6% p.a. 4% p.a. Taxation may be ignored in all calculation parts of this question. You are required to: (a) Calculate the yield to maturity of zero coupon bond. (4 marks) (CLO2:PLO6:C3) (CLO2:PLO6:C3) (b) Interpret the reasons for the different market prices and yields. (4 marks) (CLO2:PLO2:C2) (CLO2:PLO2:C2) (c) Using the forward and money-market hedge, calculate the expected Ringgit receipts in four months and recommend the beneficial strategy. (7 marks) (CLO1:PLO6:C3) (CLO1:PLO6:C3) (d) Discuss the effect if the company's bond is downgraded. (5 marks) (CLO2:PLO2:C2) (CLO2:PLO2:C2) Scenic City issued bonds to build hypermarkets as well as a high rise condominium. The home currency is Ringgit and the cost of the project has been estimated to be RM50 million. To finance the construction of the hypermarket and condominium, Scenic City issued peso- denominated bonds in Philippines whose currency is the peso. When the bond was issued, the interest rate was low in Philippines. The foreign bond issue raised 600 million pesos when the exchange rate at the time was 12 pesos/RM. Of the total amount raised, 50% was zero coupon bond and the balance was straight bond. Each foreign straight bond has a par value of 100 pesos and pays 7% interest in pesos at the end of each year. The bonds will be redeemed in six years' time at par. The current cost of dent of peso-denominated bonds of similar risk is 8%. The zero coupon bond also has a par value of 100 pesos with a redemption period of six years. The zero coupon bond is currently valued at 70 pesos. In addition to domestic sales, Scenic City sold shoplots and condominium units to foreign investors. In the current year, the company sold its properties to Philippines investors and expected to receive 40 million pesos in four months. The finance department has decided to hedge the currency risk of the receipts. The following exchange rates and interest rates are available: Spot Four months forward P12.5645/RM-P12.5649/RM P12.4612/RM-P12.4618/RM Interest rates: Borrowing rate Lending rate Peso Ringgit 9% p.a. 8% p.a. 6% p.a. 4% p.a. Taxation may be ignored in all calculation parts of this question. You are required to: (a) Calculate the yield to maturity of zero coupon bond. (4 marks) (CLO2:PLO6:C3) (CLO2:PLO6:C3) (b) Interpret the reasons for the different market prices and yields. (4 marks) (CLO2:PLO2:C2) (CLO2:PLO2:C2) (c) Using the forward and money-market hedge, calculate the expected Ringgit receipts in four months and recommend the beneficial strategy. (7 marks) (CLO1:PLO6:C3) (CLO1:PLO6:C3) (d) Discuss the effect if the company's bond is downgraded. (5 marks) (CLO2:PLO2:C2) (CLO2:PLO2:C2)
