Question

a) In a declining interest rate scenario similar to what the world is experiencing now , would you expect corporates to issue 

more or less bonds and why? (5%)
b) For those corporates who decide to issue more bonds , would you advise
them to issue callable bonds , CoCos or straight bonds? Explain your answer. (10%)
c) I have two bonds in my portfolio that I bought on Jan. 1, 2020: National Bank of Oman (NBO) and Hikma Pharmaceuticals,
both maturing in 2023. I bought NBO at an average unit cost of 105 of face value and Hikma at 99 of face value. The two bonds 

are now trading at 70 and 102 respectively. Why do you think one is trading at a discount and the other at a premium ? (5%)

Would you advise me to sell the bonds, sell one keep the other, or buy more of these bonds? (5%)

Answer 1

a. Interest rates are inversely proportional to the prices of the bond. In the present scenario, as the economic growth is in recession and the market is down, the bond prices will react opposite. It is safe to invest in bond prices when the economy is down. And the company will issue more bonds to continue its operations. And there are some investors who are interested in paying for premium bonds for high returns.

b. Corporations may issue callable bonds because it gives a right to the issuer to give a call before its maturity gets over. And, it is usually issued by corporations when the interest rates are low.

c. The bond of NBO is trading at a discount and bond of Hikma at a premium due to their interest rates. It means that the bond of NBO has a high interest rate and it is a low-quality bond whereas the bond of Hikma has a low-interest rate and it is a high-quality bond. If the bond is trading at discount it means the issuer is in financial trouble, lowering the creditworthiness of the investor. Now, it depends on your choice which factor will you consider more for a bond.