Question

Assuming the government is selling a government bond to fight COVID-19, and at the same time, ASHANTI Goldfields Company is selling a corporate bond to increase its production. Under what conditions will the production-linked corporate bond be oversubscribed at the expense of the government bond. Explore all possible scenarios

Answer 1

The primary reason for a corporate bond to be sold more than a Government bond is the increased yield. This increased yield comes at a cost of increased risk. Since it is a corporate bond, if the company performance falls, there is a high possibility that there will be default. However, a government bond is secured.

In this scenario, since it is a production linked bond for a gold mining company, gold production and consumption will be on the rise. Added to that is the current rising price of gold. This shows that the company has very little chance of default. So at very low risk, the buyers are getting a higher return as compared to the government bond. So there is a possibility that people will prefer buying the Production Linked Corporate bonds over the government bond.

So indirectly, the corporate bonds also carry very little risk in the current market scenario and so are very secure but provide much more returns than a secure government bond and thus might be oversubscribed in relation to a government bond.

If you found this helpful, please rate it so that I can have higher earnings at no extra cost to you. This will motivate me to write more.