Susan is the treasurer of ABC Property Ltd. The company needs to raise money to build a residential complex which takes 5 years to complete. The company has planned to sell the complex after completion, but has a fall back plan of renting some of the flats out should the market condition is not to their favour to sell. In general, the demand for property purchase is low during a high interest rates environment. Currently, interest rates are relatively low and the yield curve is relatively flat. The credit spread (i.e. the risk premium for ABC to issue bond) is all time low too. Mary with a view that interest rates will stay low for a long period of time, is considering issuing a 10 year bond with one time put in year 5 in order to capture her view, as opposed to the traditional 5 year bond or 10 year bond.

a. Discuss the pros and cons of her decision. What will likely the consequence be should rates move up in 5 years time. (10 points)

b. ABC is a listed company whose board members as well as the shareholders are relatively conservative. In view of this, her colleague is suggesting to issue a 10 year bond and callable in 5 years. Mary has the concern of the cost as the coupon rate for traditional callable bond is likely to be higher than a straight 10 year bond. Name two alternatives for Susan to alleviate her concern. (6 points)

c. What will Mary likely to do eventually? Explain. (4 points)