Situation overview: Raising funds and allocations of funds are two important functions of a companys Financial Manager. As a CFO of Company B, you and your team are responsible for taking a comprehensive analysis about financial markets and economy, to forecast the movement of the interest rates and exchange rates, determine the Companys risk exposures in some scenarios and propose strategies to manage the funds raising and allocation to maximize the Companys profit.

Write a report on the following issues regarding the two important functions of Financial Management in Company B:

Part 1. Fund Raising ( 6 marks)

1. Proposal (2.5 marks)

Your Company is going to have a big project which requires a significant source of funds. Your team believes that risk-averse investors tend to prefer bonds to stocks due to a lot of advantages of investing in bonds that outweigh stocks. What should be your arguments to persuade Board of Directors to approve your teams plan in issuing bonds rather than stocks (from the point of view of the investors benefits).

2. Fixed-income debt instrument issuance strategy (3.5 marks)

2.1. Bond maturity

(i) Due to the pandemic, lots of enterprises have to downsize their production and business activities. Meanwhile, to support the trading of bond market, the Government has issued new regulations to extend trading time for bonds in the market and lower regulatory minimum margin for bond trading. Forecast and explain the interest rate movement in the market for the year to come, using the bond supply and demand curves model and graph with the above-mentioned factors (holding other things being unchanged, including macroeconomic policies such as fiscal policies).

(ii) With the above-mentioned forecast, propose and explain your decision for the maturity of the bonds (long or short term) issued right now.

2.2. Bond coupon

There have currently been tax-free Municipal Bonds with 5% coupon annually in the market with the same liquidity, risk.

(i) What is the most important factor that influences the corporate bond purchasing decision of investors? What should be your bonds minimum coupon rate in order to attract investors to buy your bonds, knowing that the marginal tax rate is 33%.

(ii) Is there any possibility for you to successfully sell the bond with 7% coupon rate? Why?

2.3. Bond prices Suppose you decide to issue 4-year-bonds with 1 million VND face value, 5.5% p.a. coupon, semi-annual coupon payment. You know that investors will be happy with the yield of 7% p.a. for their investment, what is the bond price you should offer in the market? Show table of calculation.

2.4. Bond currency denomination Beside domestic issuances, your team also proposes a plan to issue bonds abroad. Seoul financial market is one of your preferred market. Market research shows that Bank of Korea has followed the expansionary monetary policies and export-support-oriented exchange rate policies, meanwhile recovery signals in the US economy have brought Fed into the decision of tapering.

(i) Forecast (with explanation) movement trends of the value of Korean Won and US Dollar.

(ii) How will the above movement trends affect your choice of issuing Eurobonds or Foreign Bonds in South Korean market.

Part 2. Asset management (4 marks)

1. Fixed-income portfolio (2 marks)

Your company owns the following fixed-income bonds:

Bond	Market Value	Duration
X	25 billion VND	1.6 years
Y	45 billion VND	2.8 years
Z	30 billion VND	3.8 years

1. Calculate the companys portfolio duration?
2. With the interest rate movement forecast in Part I - 2.1(i), suppose the current interest rate is 12% p.a. and the level of interest rate change next year is projected to be 50 basis points,
   1. What will be the level of interest rate for next year?
   2. What is the approximate change in the value of your companys portfolio (in % and in

billion VND)? (Round up to 2 decimals required in calculations and results)

0. 3. With the above-mentioned market interest rate forecast for next year, your company has a plan to restructure its bond portfolio. Explain why do you agree or disagree with the following strategies (detailed calculation is not necessary):
1. Sell Bond X to buy a new 5-year zero-coupon bond with the same value (suppose that they have the same risk, liquidity, yield to maturity)
2. Sell Bond Z to buy more Bond Y with the same value (suppose that they have the same risk, liquidity, coupon, yield to maturity)

2. Stock investments: (1.5 mark)

Suppose your company is holding shares of Bank B. Your finance team has thoroughly analyzed the Bank financial report and found out that the Bank is holding more Rate Sensitive Liabilities than Rate Sensitive Assets. There is also news from the market reporting that under the pressure of avoiding the label of currency manipulator, the Centre Bank has to conduct interventions in the forex market to keep home currency appreciated, however, these are unsterilized interventions.

1. Forecast the movement of market interest rates as a result of the Centre Bank forex unsterilized interventions?
2. With the above information of the Banks asset-liability structures and the interest rate movement in the market, what will be your investment decision: to hold or to sell the Banks shares. Short explanation (no detailed calculation required).
3. In your opinion, what should the Centre Bank do in order to avoid impacts of the above- mentioned forex intervention on the interest rate movement in the market?

3. Liquidity management: (0.5 mark)

Your company has some idle cash for about 6 months. You are considering between: (i) purchasing 182-day Treasury bills that is worth 10,000,000VND each when it matures; or (ii) putting money in 182-day bank deposit at 5% per annum. Which one should you invest if you can buy the Treasury Bills at discount of 4,78% (knowing that this year is not a leap year).