You work in an investment firm that helps clients invest their money. A fintech company has come forward to raise funds for their expansion in the regional Southeast Asian markets.

They specialize in lending to small and medium enterprises (SMEs). They are proposing to sell bonds or equity to you. Below are the terms:

 

Bond Price: $95
Par value: $100
Settlement date: 1 Jan 2023 

Maturity date: 1 Jan 2031 

Annual coupon rate: 6.0% 

Coupons: Semi-annual payment 

Day count basis: Actual/365

 

(a) Compute the Yield to Maturity (YTM) for the bond?

 

(b) Using modified duration, estimate the price of bond if global interest rates were to rise by 0.5%. Assume YTM to rise by the same amount of global interest rates?

 

Equity
Latest earnings per share: $2
Dividend payout ratio: 50%
Last dividend paid: $1
Expected earnings growth for next 5 years: 8% per year 

Expected earnings growth for 6th year onwards: 4% per year 

Required Rate of return: 7.0%

 

(c)  Compute the price for each share?

 

(d) Write  a report to evaluate these 2 instruments above and recommend to your company merits and demerits of each instrument for investment purpose. In addition, take into account the following current environment?

• Global interest rates are on the rise.

• Slowdown in global economy

 

Your company based in Singapore is also involved in import-export trades. Most recently, your company has sold 1,000 units of a product to your customer in the United States. You customer can only pay you in 3 months' time in US dollars.

 

The unit price of your product is $15 Singapore dollars. The current exchange rate is USDSGD = 1.5000. You expect USDSGD = 1.4000 in 3 months' time.

 

(e) Appraise what your company should do to protect itself from currency fluctuations?

Answer rating: 100% (QA)

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