Question

In: Finance

5. Calculate the price of a 3-year bond with a face value of $50,000, an annual...

5. Calculate the price of a 3-year bond with a face value of $50,000, an annual coupon rate of 8% and an annual market yield of 6%. Coupon payments are made semi-annually.
Select one:
a. $52,673
b. $47,379
c. $54,917
d. $52,709

21.On 3rd June, Treasurer of Australia, Josh Frydenberg announced that Australia is in recession after the economy was badly hit by bushfires and the coronavirus pandemic. According to the Bureau of Statistics, Australia’s GDP figures shrank 0.3% in the March quarter, the first quarter of negative growth in nine years.
To deal with recession, which monetary policy do you think the Reserve Bank of Australia (RBA) will use and why? Based on what you have learned in this unit, what effects will this policy have on cash rate, economic activities and inflation rate?

24.Last year, Cooper Technologies Ltd initiated an ambitious research and development (R&D) project aiming to create a unique technology to boost their competitive advantage against peer firms in the field of geospatial surveying. The R&D project was largely financed by the issuance of corporate bonds worth $350 million. The COVID-19 outbreak has caused severe disruptions to the progress of the project, which hence requires an extra funding of $250 million.
To meet the additional budget requirement, Cooper Technologies Ltd has decided to conduct an equity issuance in the form of a renounceable rights issue to shareholders. The issue price of a new share is at 12.18% discount of the current share price of $20.00.
Required (Please label your answers according to parts):
(a) Given that each right is currently traded at $2.03, what is the pro rata basis of the rights issue offer ? (i.e., how many existing shares does it take to obtain the right to subscribe for a new share ?).
(b) What is the theoretical ex-rights share price of Cooper Technologies Ltd?

Solutions

Expert Solution

Dear student, only one question is allowed at a time. I am answering the first question

5)

Price of a bond is the present value of all future cash flows receivable from the bond discounted at required rate of return

Future cash flows are periodic interest payments and maturity value of the bond

When interest is paid semi-annually, interest rate for discounting the bond is divided by 2 and time period of maturity is multiplied by 2

Face Value = $50,000

Semi-annual interest payment

= Face Value x Interest rate x 6months / 12 months

= $50,000 x 8% x 6 / 12

= $2,000

Discounting rate = Market yield / 2

= 6 / 2

= 3% or 0.03

So, Present value Factor

= 1 / ( 1 + Rate of interest ) ^ Number of periods

So, Pv factor for period 2

= 1 / ( 1.03 ^ 2 )

= 1 / 1.0609

= 0.942595

The following table shows the calculations

Calculations A B C = A x B
Period Cash Flow PV Factor Present Value
1 2000 0.970874 1941.748
2 2000 0.942596 1885.192
3 2000 0.915142 1830.283
4 2000 0.888487 1776.974
5 2000 0.862609 1725.218
6 2000 0.837484 1674.969
6 50000 0.837484 41874.21
Price 52709

So, as per above calculations, option d is the correct option


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