Question
The management of a construction company is considering issuing a 5-year bond to finance its future investment projects in Dubai. However, all members of the
The management of a construction company is considering issuing a 5-year bond to finance its future investment projects in Dubai. However, all members of the BoD are civil engineers and have very vague and sporadic knowledge of finance. You are hired by the firm to act as a financial advisor.
Additional readings:
http://franklin-street.com/Docs_News/PR_Sullivan_Yield_Curve.pdf
https://www.wallstreetprep.com/knowledge/explain-the-yield-curve-to-me-like-im-an-idiot/?gclid=EAIaIQobChMI-qbyyazA6AIVAcreCh19Ggs_EAMYAiAAEgJXLPD_BwE
Q1. Explain the manager of the firm the obligations of a bond issuer.
Currently, the economy is experiencing a positive business cycle and the management believes that the time is perfect for the issue of the bond.
Q2. (i). Explain the management the risks and opportunities given contemporary business conditions (Hint: upward slope of the yield curve). What is your advice to the firm? (ii). How demand and supply bond curves react under these conditions?
Q3. (i). How is the value of a bond determined? (ii). Which factors affect price sensitivity?
Q4. What is the value of a 5-year, AED 1,000 par value bond with an 8% annual coupon if the YTM (required rate of return) of return is 8%? Explain to the manager of the firm without calculation.
Q5. (i). What would be the value of the bond if, just after it had been issued, the expected inflation rate rose by 2%, causing investors to require a 10% return? Would we now have a discount or a premium bond? (ii). What would happen to the value of this bond over time if the required rate of return remained at 10% until maturity? Show with a graph and explain to the manager.
Q6. (i). What is an approximation of the yield to maturity for this bond if the bond is selling at AED 900? (ii). Explain the management what your fears are, and you believe that the selling price would reach AED 900?
Q7. Calculate the current yield, the capital gains yield, and the duration of the bond (price is found in Q5).
Q8. How would the composition of capital gain yield and current yield for tis bond changes over the time, as the bond approaches to the maturity.?
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