Question

cash flows? How can the 'normal' shape of the yield curve be incorporated into the calculation of Problem 3. Problem 5. BP&A is a well-known investment bank which is required to provide the analysis of the corporate bond market. The project is ordered by a large FMCG company planning to finance its expansion by the bond issue. This task is granted to you as a highly qualified professional You have collected the input data regarding prices on Treasuries & premiums required by investors for investing in corporate bonds: Maturity Premium,% 0,5% Prices, $ 995 980 975 970 1% 1,5% 2% a) Comment on the functions performed by investment banks. (5 points) b) Describe the main types of marketable treasury securities. (3 points) c) Sketch the yield curve for corporate bonds based on the data you have collected and comment on the practical implication of this yield curve for your client. (8 points) d) Advise your client on the types of bond instruments that can be issued specifically stating the benefits and drawbacks of each. (5 points) e) Provide the fair price at which the bond of the client should be traded is it has the following characteristics: 8% coupon rate, semiannual coupon payments, 4 years till maturity. (4 points)

Answer 1

Answer a) The major function performed by investment banks are as

• Fund raising activity for their client ( IPO , Debt issue)
• Restructuring of company ( merger and Acquisition )
• Risk Management for client portfolio
• Structuring of derivative contracts
• Management of investment

Answer b) The main types of marketable treasury securities are

• Treasury-bills
• Treasury notes
• Treasury bonds
• Treasury inflation protected securities

Answer c)

Yield curve is graphical representation of yield and maturity time.

Yield 2.50% 2.00% 1.50% 1.00% 0.50% 0.00%

Answer d) There are different types of bond available for company to be issued to raise fund from market. Like

• Zero coupon bond : such bond are issued on discount doesn't bear any coupon rate. Company doesn't have a regular cash outflow.
• Coupon bond:such bond can be issued on discount, premium or at par and bear any coupon rate. Company have a regular cash outflow.
• Perpetual bond : such bond are issued to provide a regular cash flow with no maturity period .

I suggest to issue a coupon based bond for limited period of time.

Answer d)The company has high credit rating (assumption)

Value of bond $V=\sum_{i=1}^{n}\frac{C_i}{(1+r)^i}+\frac{Maturity\ value}{(1+r)^n}$

or use of excel function pv(rate,nper,pmt,fv)

Par value	100
Coupon rate	8% (4% semiannual)
Coupon flow(pmt)	4%*100=4
Maturity time	4 year
Number of coupon (nper)	4*2=8
Required rate ( r )	2% (1% semi annual)
Value	$122.96	PV(1%,8,-4,-100)