An institutional investor, Gilbert Limited, is planning to purchase a straight Eurobond in order to include it in the investment portfolio. Gilbert receives following information: • Current Eurobonds in the Euromarkets are trading at a yield of 10.50% annually • An existing Eurobond with a face value of USD 2 million pays annual fixed 8.50% coupons • The bond Gilbert is considering will mature on 31 December 2022. ii. Why is the price at 15 June 2019 different from the price Gilbert should have been paid if it purchased the bond at 01 January 2019

An institutional investor, Gilbert Limited, is planning to purchase a straight Eurobond in order to include it in the investment portfolio. Gilbert receives following information: • Current Eurobonds in the Euromarkets are trading at a yield of 10.50% annually • An existing Eurobond with a face value of USD 2 million pays annual fixed 8.50% coupons • The bond Gilbert is considering will mature on 31 December 2022. ii. Why is the price at 15 June 2019 different from the price Gilbert should have been paid if it purchased the bond at 01 January 2019

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter22: International Financial Management

Section: Chapter Questions

Problem 2P

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A. An institutional investor, Gilbert Limited, is planning to purchase a straight Eurobond in order to include it in the investment portfolio. Gilbert receives the following information: • Current Eurobonds in the Euromarkets are trading at a yield of 10.50% annually • An existing Eurobond with a face value of USD 2 million pays annual fixed 8.50% coupons • The bond Gilbert is considering will mature on 31 December 2022. i. If Gilbert purchases the bond on 15 June 2019 and the last coupon on the bond was paid on 31 December 2018, what should be the price that Gilbert should pay for this bond?
Suppose you (U.S. investor) purchase a 5-year, AA-rated Euro bond for par that is paying an annual coupon at the rate equal to 8 percent. The bond has a face value of 1,000 Euros. The spot exchange rate at the time of purchase is USD1.15/EUR. At the end of the year 1, the bond is upgraded to AAA-rated and the yield changes to 7.5% per annum continuous compounding. In addition due to changes in macroeconomic environment, the exchange rate also changed to USD1.25/EUR. Assume that a U.S. investor holds this bond for one year and sells it in the market at the end of year 1. EUR is the abbreviation for Euro and USD is the abbreviation for U.S. dollar. What is the overall gain / loss in U.S. dollars for the U.S. investor at the end of year 1 (t = 1 year)? (Roundoff your answer to four decimal places, in order to get as accurate answer as possible on Canvas. If your answer is -$1.2345, loss of $1.2345, then type your answer as -1.2345.)
(a) Micron Industries is considering issuing a $20,000,000 15-year bond in early 2022, with an annual coupon rate of 4%, and semiannual interest payments. Required: If the company anticipates that the yield to maturity on the date of issue is expected to be 4.5%, given the company’s credit ratings and current market conditions, how much would an investor be willing to pay for $1,000 face value of this bond? (b) Micron Industries is also considering a Class B issue of its common stock on the market via an Initial Public Offering (IPO) in late 2021. The company is expected to pay the following dividends over the next 4 years: $2.00, $3.00, $3.50 and $4.50. Thereafter, the company is expected to increase dividends by an annual rate of 6%. Required: Assuming investors would require a return of 12% on this riskier type of investment, how much would an investor pay for this share today? (c) Micron Industries is also assiduously finalising the issuance of its preference shares. The…
(a) Micron Industries is considering issuing a $20,000,000 15-year bond in early 2022, with an annual coupon rate of 4%, and semiannual interest payments. Required:If the company anticipates that the yield to maturity on the date of issue is expected to be 4.5%, given the company’s credit ratings and current market conditions, how much would an investor be willing to pay for $1,000 face value of this bond? (b) Micron Industries is also considering a Class B issue of its common stock on the market via an Initial Public Offering (IPO) in late 2021. The company is expected to pay the following dividends over the next 4 years: $2.00, $3.00, $3.50 and $4.50. Thereafter, the company is expected to increase dividends by an annual rate of 6%. Required: Assuming investors would require a return of 12% on this riskier type of investment, how much would an investor pay for this share today? (c) Micron Industries is also assiduously finalising the issuance of its preference shares. The company…
Sambuka, Inc. can issue annual coupon bonds in either U.S. dollars or in Euros that mature in threeyears. Dollar-denominated bonds would have a coupon rate of 5 percent; Euro-denominated bonds would have a coupon rate of 4 percent. Assuming that Sambuka can issue bonds worth $10,000,000 in US dollars or 8 million Euros, given that the current exchange rate is $1.25/1 Euro. If the forecasted exchange rate for the Euro is $1.21for each of the next three years what is the annual cost of financing for the Euro-denominated bonds? Which type of bond should Sambuka issue?
Consider a firm that expects to borrow $100 million in June for a three-month period thereafter. Explain how the firm can lock in the borrowing rate today using Eurodollar (ED) futures. Suppose that the June ED futures price today is $92.8 and illustrate how hedging will work if the 3-month spot rate in June is (i) 6% per annum and (ii) 8% per annum. Can the firm perfectly hedge its interest rate risk? Explain why or why not.
IBM is considering having its German affiliate issue a 10-year, $100 million bond denominated in euros and pricedto yield 7.5%. Alternatively, IBM’s German unit can issuea dollar-denominated bond of the same size and maturityand carrying an interest rate of 6.7%.a. If the euro is forecast to depreciate by 1.7% annually, what is the expected dollar cost of the eurodenominated bond? How does this compare to the costof the dollar bond?b. At what rate of euro depreciation will the dollar cost ofthe euro-denominated bond equal the dollar cost of thedollar-denominated bond?c. Suppose IBM’s German unit faces a 35% corporate taxrate. What is the expected after-tax dollar cost of theeuro-denominated bond?
Union Corp must make a single payment of €5 million in six months at the maturity of a payable to a French firm. The finance manager expects the spot price of the € to remain stable at the current rate of $1.60/€. But as a precaution, the manager is concerned that the rate could rise as high as $1.70/€ or fall as low as $1.50/€. Because of this uncertainty, the manager recommends that Union Corp hedge the payment using either options or futures. Six months Call and Put options with an exercise price of $1.60/€ are available. The Call sells for $.08/€ and the Put sells for $.04/€. A six month futures contract on € is trading at $1.60/€. Should the manager be worried about the dollar depreciating or appreciating? If Union Corp decides to hedge using options, should it buy Calls or Puts to hedge the payment? Why? If futures are used to hedge, should the company buy or sell € futures? Why? What will be the net payment on the payable if an option contact was used? assume…
Melbourne Capital Ltd considers selling European call options on ANZ Bank Ltd for$1.50 per option. The current market price is $17.70 on 28th September 2020, theexercise price is $20, and the maturity of each call option is 6 months. Under what circumstances does the investor make a profit? Under what circumstances will the option be exercised? How many call options should the investor sell to raise a total capital of$1,260,000?
Melbourne Capital Ltd considers selling European call options on ANZ Bank Ltd for $1.50 per option. The current market price is $17.70 on 28th September 2020, the exercise price is $20, and the maturity of each call option is 6 months. (i) Under what circumstances does the investor make a profit? (ii) Under what circumstances will the option be exercised? (iii) How many call options should the investor sell to raise a total capital of $1,260,000?
An investor is interested in purchasing a 30-year U.S. government bond carrying an 8 percent coupon rate. The bond's current market price is $925 for a $1000 par value instrument. Suppose the inyestor sells the bond at the end of 13 years for $970. What is the holding-period yield? Show your work below.
You are an investor keen to invest in the shares of Asjeet Ltd and Pinder Ltd. Your plan is to construct a portfolio consisting of a 30% investment in Asjeet Ltd shares and 70% in Pinder Ltd shares. You estimate that the current yield on a 10-year Government bond is 3% p.a. and plan to use this security as a proxy for the risk-free asset. You also estimate that the market risk premium is 6% p.a. You go on to compile the following information with a view to treating the ASX 200 index as a proxy for the market portfolio. a)What is the standard deviation of returns for your portfolio (as a percentage to two decimal places – e.g. 10.03%)? b)What is the beta of Asjeet Ltd and Pinder Ltd shares (to two decimal places)? c)According to the CAPM, what is the expected return for your portfolio (as a percentage to two decimal places – e.g. 10.03%)?