In: Finance
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?
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