Question

a) Pearson Publishing Ltd needs to borrow money for two purposes: purchase of inventory and purchase of a building to expand its business. Please advise this company on how to raise funds for these two purposes. In your discussion you need to define and distinguish between the debt markets advised. (6 marks) b) Pearson decides to issue a 90-day commercial paper at a yield of 2.5% p.a. If the face value of the paper is $150,000, how much fund will Pearson be able to raise? (3 marks) c) The company has decided to issue a bond at a Face Value of $1,000. The coupon rate of the bond is 8% per annum and the coupons are paid semi-annually. The bond has a term to maturity of 5 years and the yield-to-maturity is 8% per annum as well. Without calculation, briefly explain what the implied price of this bond would be? (2 marks) d) If an investor bought the bond at issuance at the implied price in part c) and then sold it at $1030 after holding it for 1.5 years, what was his holding period yield per annum? (4 marks)

Answer 1

page:01 Olle Answers a) pearson publishing should bounow short term for purchase of inventory short term finance may be raised from. 1. commercial which papers unsecured promissory notes. 2. public deposits 3. Inter - corporate deposits 4. short term loan from commercial banks pearson publishing should bunsow long term for purchase of building to expand its business long term finance may be raised from. Issue q debentwices p. Issue of corporate bonds 3. Term loans from financial institutions Face value paper = $150000 yield = 2:51. pa Commercial paper period = 90 days discount factor @ 2.5.1. pa for 0.25 years = 1/1.025 0.25 = 0.99385 So discounted value of commercial paper = 150000x0.99385 $149076.88 pearson will be able to raise of Commercial = 0,25 year so 149077

bond sl.pa As the to the Value bond Coupon rate of page:02 YTM o market yield is also st. pa Bond par value $1000 coupon Date is equal to expected market yield, the implied price of bond will be equal poor of $1000 d) holding period yield per annum purchase price of bond $1000 sales price after 1.5 years = 511030 dividend received (3 semi annual) - YOX 3 = $120 capital gain = $30 Total retwin Holding period return in 1.5 years = 150/1000 15.001 Holding period return per year = 151.17.5 Toil. < $150