BUS288 WEEKLY ASSIGNMENT

V-7 A company issues a bank-accepted bill to fund a short-term business project. The
bill is issued for 180 days, with a face value of $1 500 000 and a yield of 9.87 per cent
per annum. What amount will the company raise to fund the project? (LO 9.5)
Price of bank bill
FV $1,500,000
r 9.87%p.a
t 180/365=0.4931 years

PV=FV/1+rt
PV=$15,00,000/1+0.987(180/365)
PV=$1,430,377.83(Amount raised by the company)

10-13 Woodside Petroleum Limited has issued $100 million of debentures, with a
fixed-interest coupon equal to current interest rates of 7.70 per cent per annum,
coupons paid half-yearly and a maturity of 10 years.
 
a. What amount will Woodside raise on the initial issue of the debentures?

 The amount raised by Woodside on the initial issue of the debentures will be equal
to the face value which is $100 million because current yields on this type of
security are equal to the fixed interest rate paid on the debenture at the issue date.

b. After three years, yields on identical types of securities have risen to 8.75 per
cent per annum. The existing debentures now have exactly seven years to
maturity. What is the value, or price, of the existing debentures in the
secondary market?

FV= $100,000,000
Coupon Rate: $100,000,000*7.70%/2= $3,850,000 PMT
N= 7*2=14
I= 0.0875/2=0.043750or 4.375% I/Y
P/Y, C/Y 2
Present value of the face value
FV(1+i)n
=$100,000,000(1+0.043750)-14
=$54,909,711.40
Present value of coupon stream
=C[1-(1+i)-n]/i
=$3,850,000[1-(1-0,043750)-14 ]/0.043750
=$39,679,453.97

Price of Debenture
=$54,909,711.40+ $39,679,453.97
=$94,589,165.37 PV

Use financial calculator

c. Discuss why the value of the debenture has changed; that is, explain the bond
price/yield relationship using the above example. (LO 10.4)

 The price of the existing fixed interest security(debenture) has fallen because
yields in the market have risen.

 It shows an inverse relationship between the interest rate movement and price.

 As coupon payments on the existing bond are fixed, the coupon rate of 7.70%
is low which means that it is of less worth to the investor. But the investor will
now require the current yield of 8.75% p.a. and fixed 7.70% coupon cannot be
adjusted which will ultimately lead to lowering the price of the existing bond/