Question

In: Finance

Assuming the government is selling a government bond to fight COVID-19, and at the same time,...

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 over-
subscribed at the expense of the government bond. Explore all likely scenarios.

Solutions

Expert Solution

Since the corporate bond is over- subscribed at the expense of the government bond it can be due to many factors.

1. If suppose this company has found the cure for COVID and need money to scale production of vaccines, then investors will definitely prefer it over the government bond.

2. It can also be that the company wants to expand production of items related to corona virus like sanitizers, gloves, masks and PPE etc.

3. In this time of crisis, the government bond yield has gone down because of investors' flight to safety. Hence, it might be that the risk-profile of the company and the corresponding returns associated with those risks are such that it offers a bargain as compared to the government bond.

4. It can also be that they would have come up with a new offering which changes the traditional modes of businesses. For e.g. people are afraid to buy things from outside and they are also afraid of ordering things online. Hence, if they come up with suppose a drone or any other product which allows e-commerce sites to deliver their products and other essentials like food etc in a way that minimzes human contact and reduces fear in the minds of people, then investors would prefer it because the demand for such a product would be very good in these times.


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