An Australian commercial bank is looking to issue $1 billion of bonds into the wholesale funding markets to fund its ever-increasing demand for credit growth which is fuelling yet another house price boom. The bonds will be structured with a fixed-interest coupon priced on current government bond yields and equal to current interest rates of 3.00 per cent per annum, coupons paid half-yearly and a tenor of seven years. The bonds are denominated and priced into $1,000 allotments.

a. What amount would the bank have raised once the bond is priced and launched into the capital markets?

b. After one year, yields on identical types of securities are now 4.00 per cent per annum. The existing bond now has exactly six years to maturity. What is the value, or price, of the existing bond in the secondary market?

Answer rating: 100% (QA)

a To calculate the amount the bank would have raised once the bond is priced and launched into the c... View the full answer