Question
To expand its business, the Chairman of Kingston Outlet factory would like to issue either a Bond X with par value of RM1,000, coupon rate
To expand its business, the Chairman of Kingston Outlet factory would like to issue either a Bond X with par value of RM1,000, coupon rate of 6% percent, and maturity of 10 years from now or Bond Y with equal par value and maturity period; but has a coupon rate of 7.4% paid semi-annually.
a) How much does an investor is willing to pay for each bond? (3 marks)
b) Based on the answer in (a), (i) which bond is a better option for Kingston Outlet Factory to raise its capital with and (ii) which bond is a better option for an investor? (3 marks)
c) If Eric, a novice investor was to pay the current market price of RM950 for each bond, what would be the yield-to-maturity (YTM) on the bonds? Advise him on the best option and why he should take based on the YTM calculated. (4 marks)
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