Exhibit 1

A U.S.-based crude oil producer, “Bottom of Barrel” (nicknamed “BB King” in the fracking community) engages in fracking to produce oil. Fracking is a high-tech but expensive method of oil drilling, in which high-pressure jets of water (often mixed with a concoction of toxic chemicals) are injected into rocks deep underneath the earth's surface. This creates fractures in rock formations that have oil droplets trapped within. The fractures allow the oil droplets to flow out of the rocks. And, the pressurized water pushes them to the surface.

With the collapse of demand for oil. Low oil prices (currently, WTI a grade of oil produced in the US, is trading at $20/barrel), makes fracking uneconomical because of the high cost of production. As a result, BB King is facing tremendous financial strains. To keep the company afloat, BB King’s CFO, Jackie Townsend decided to raise cash by issuing $500 MM with a new senior unsecured bond that will mature in 10 years. On the day of issuance, the price of the bond is set at par (i.e., principal = $100), and the company’s “price-talk” indicates that the annual coupon rate is offered at 7.5%. The bond will pay semi-annual coupons (i.e., every six months) similar to most corporate bonds.

Question

1) This question is based on Exhibit 1. After the bond’s initial offer, it starts to trade in the bond market. And after a week of extremely volatile price movements, the bond price closed at $76.00 at the end of the week. What is the yield to maturity of this bond at the end of the week?

A. 5.81%

B. 7.50%

C. 9.87%

D. 11.62%

2) This question is based on Exhibit 1. An investor bought the bond when the yield to maturity is at 9.5%. The investor intends to hold BB King Bond to maturity. What is the annualized rate of return that will be realized by this investor?

A. Greater than 9.5%

B. Less than 9.5%

C. Equal to 9.5%

Answer rating: 100% (QA)

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