FINANCIAL STRATEGY

Financial Strategy



Financial Strategy

Section - A

Case Study - 1

Bilko Company

(A)

(i)

(A) Four OHP- Bank, maturity 30- 6- 2013 with annual 3 %, YTM is 3 % per annum. S & P long term credit rating AA.

Rate

0.03

No. of Years

4

Annuity Payment

3000000

Future Value

100000000

Bond Price

($1,100,000,000.00)

(B) Five year corporal electronics Company maturity 30- 6- 2014 with annual coupon 5 %. YTM 8 % per annum. S & P long term credit rating BBB.

Rate

0.05

No. of Years

5

Annuity Payment

0

Future Value

100000000

Bond Price

($78,352,616.65)

(C) Fifteen year European Investment Bank maturity 30- 6- 2024. Zero coupon rate. YTM is 4 % per annum. S & P long term credit rating AAA.

Rate

0

No. of Years

15

Annuity Payment

0

Future Value

100000000

Bond Price

($100,000,000.00)

(ii) The duration of each bond varies and it is more it vary more than a year so the present value or the current price of each bond differ.

(iii)

(A) Impact on the bond valuation of the bond portfolio of a 1 % increase in the maturity which was four OHP- Bank, maturity 30- 6- 2013 with annual 3 %, YTM is 3 % per annum. S & P long term credit rating AA.

Rate

0.04

No. of Years

4

Annuity Payment

3000000

Future Value

100000000

Bond Price

($1,096,370,104.78)

(B) Impact on the bond valuation of the bond portfolio of a 1 % increase in the maturity which was five year corporal electronics Company maturity 30- 6- 2014 with annual coupon 5 %,YTM is 8 % per annum. S & P long term credit rating BBB.

Rate

0.06

No. of Years

5

Annuity Payment

0

Future Value

100000000

Bond Price

($74,725,817.29)

(C) Impact on the bond valuation of the bond portfolio of a 1 % increase in the maturity which was fifteen year European Investment Bank maturity 30- 6- 2024. Zero coupon rate. YTM is 4 % per annum. S & P long term credit rating AAA.

Rate

1

No. of Years

15

Annuity Payment

0

Future Value

100000000

Bond Price

($ 3,051.76)

(iv)

The yield to maturity of Corporal Electronics and OHP- Bank and European Investment Bank are different. It means if the bank facility of 100000000 is taken from different bank than their maturity period of each of the loan provider will vary. Moreover to select one bank among the three than the Bilko company should go for the European Investment Bank as the Bank's yield to maturity is 15 years and in this case the price of the bond is more than the prices of bond of other banks offerings.

(v)

Given the terms of four OHP- Bank, maturity 30- 6- 2013 with annual 3 %, YTM is 3 % per annum. S & P long term credit rating AA. The OHP Bank implied variable cost of funds to the nearest basis point (0.01 %).

Rate

0.01

No. of Years

4

Annuity Payment

3000000

Future Value

100000000

Bond Price

($1,107,803,931.10)

(B)

Interest rates are the price of money. If a person, company or government needs money to buy goods or to finance their operations, and requests a loan, the interest that they pay on this loan will cost to pay for that service. As with any product, fulfills the law of supply and demand while it easier to get money (more choice, greater liquidity), the interest rate will be lower. Conversely, if there is not enough money to lend, the rate will ...