A public company is planning to raise 3.2 million dollars by using financial instruments for a...

A public company is planning to raise 3.2 million dollars by using financial instruments

for a seven-month project. Assume you work as a financial advisor, which instrument you

would suggest the company to issue or purchase? Is the instrument you suggest a money

market instrument or capital market instrument? Explain the reason(s).

Discuss at least two reasons (differences) why the instrument you suggested in part (a)

may trade at a different yield to a 10-year treasury bond.

Solutions

Expert Solution

Since the company is the public limited, the company can issue the short term bonds for the purpose of the raising of the finances required for the project

It will not dilute the ownership of the company and the legal compliances in the bond market is quite less as the company has to honor the interest charge as and when it is due.

The interest rate charge on the bond will be less than the rate of the working capital loan from the bank or the NBFc as the company can get the benefit of the credit rating.

The intrument is a capital market instrument though the period of it will be low

Reason from the difference from the 10 year treasury bond

1. The bond issued by the company will not be the risk free and thus the benefit of the risk premium can be enjoyed by the buyer.

2. The prices of the bond in the market will change which will benefit the buyer in the form of getting the long and the short position

jeff jeffy answered 1 year ago

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