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.

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?

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?

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?

Answer 1

a)Pearson Publishing should borrow short term for purchase of inventory.Short term finance may be raised from

1.Commercial Papers which are unseured promissory notes

2. Public Deposits

3.Inter-corporate deposits

4. Short term loan from Commercial Banks

Pearson Publishing should borrow Long  term for purchase of building to expand its business.Long term finance may be raised from

1.Issue of debentures

2. Issue of Corporate Bonds

3.Term Loans from Financial Institutions

b.90-day commercial paper at a yield of 2.5% p.a

Face Value=$150,000

90 day interest =2.5*(90/360)=0.625%=0.00625

Pearson will be able to raise=150000/(1+0.00625)=$149,068

c.Without calculation, briefly explain what the implied price of this bond would be:

Implied Price =Present Value of future cash flows discounted at Yield to maturity

Coupon Rate =8%

Discount rate=Yield to maturity=8%

Since the discount rate and coupon rate are same,Implied Price =Face Value=$1000

d) Holding Period Return for 1.5 years=(1030-1000)/1000=0.03=3%

Holding period yield per annum=3/1.5=2%