Question

a) Pearson Publishing Ltd needs to borrow money for two purposes: purchase of inventory and purchase of a building to expand its business. Please advise this company on how to raise funds for these two purposes. In your discussion you need to define and distinguish between the debt markets advised. (6 marks)

b) Pearson decides to issue a 90-day commercial paper at a yield of 2.5% p.a. If the face value of the paper is $150,000, how much fund will Pearson be able to raise? (3 marks)

c) The company has decided to issue a bond at a Face Value of $1,000. The coupon rate of the bond is 8% per annum and the coupons are paid semi-annually. The bond has a term to maturity of 5 years and the yield-to-maturity is 8% per annum as well. Without calculation, briefly explain what the implied price of this bond would be? (2 marks)

d) If an investor bought the bond at issuance at the implied price in part c) and then sold it at $1030 after holding it for 1.5 years, what was his holding period yield per annum? (4 marks)

Answer 1

Ans b.
Person will issue the commercial paper at a discounted price and will get the
later the repay the face value to the buyer of the commercial paper.
Face value of commercial paper =	$                  150,000
Yield =2.5% pa
Commercial paper period =90 days =0.25 year
Disocount Factor @2.5% pa for 0.25 years=1/1.025^0.25=	0.99385
So Discounted Value of Commercial paper =150000*0.99385=	$             149,076.88
So Pearson will be able to raise $149,076.88
Ans c.
The coupon rate of Bond =8% pa
YTM or Market yield is also 8% pa.
Bond par value =$1,000
As the coupon rate is equal to expected market yield,
the implied price of bond will be equal to the par value of
Bond =$1,000.
Ans d.
Purchase price of Bond =$1000
Sales Price after 1.5 years =$1030
Dividend received (3 semi annual )=40*3=	$                    120.00
Capital Gain =	$                       30.00
Total Return	$                    150.00
Holding period return in 1.5 years =150/1000=	15.00%
Holding period return per year =15%/1.5=	10.00%