Financial Institutions, Instruments and Markets
9th edition
Christopher Viney and Peter Phillips
CHAPTER 8,9,10
8- 5 Holding period yield (HPY):
a. What is meant by HPY, and how does it differ from yield to
maturity?
b. A 90-day discount security with a face value of $500 000 is
purchased to yield 8.23 per cent per annum. After 55 days it is
sold at a yield of 8.45 per cent per annum. What is the HPY for the
original purchaser?
c. An existing discount security, with a face value of $750 000
and with 60 days to maturity, was purchased at a yield of 8.15
per cent per annum. After 21 days it is sold at a yield of 8.50 per
cent per annum. What is the rate of return earned over the 21-
day holding period?
d. The new holder of the security in (c) above sells it into the
money market after 7 days at the current yield of 7.90 per cent
per annum.
1) What is the holding period yield received by the seller?
2) If the buyer holds the security to maturity, what is the
holding period yield? (LO 8.1)
9-5 As a lending manager with Mega Bank, you have been asked
by a corporate client to explain commercial bill financing. Describe
the structure of a bank-accepted bill facility. Include in your answer
definitions and explanations of the roles of the parties associated
with the bill issue. (LO 9.4)
9-6 Commonwealth Bank offers a bill facility to business
customers. The bank's website explains the advantages of the
product: 'A bill facility helps you manage cash flow more effectively
by making payments only on the maturity of the bill. It also
provides interest rate protection and flexibility.' Identify the main
features of a bank-accepted bill and discuss the advantages
identified by Commonwealth Bank. (LO 9.4)
9-7 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)
9- 8 After 43 days, the bank bill in Question 7 is sold by the
original discounter into the secondary market for $1 447 326.50.
The purchaser holds the bill to maturity. What is the yield received
by:
a) the original discounter of the bill?
b) the holder of the bill at the date of maturity? (LO 9.5)
9- 12 A customer of a bank has $500 000 in surplus funds that
need to be invested for a short period of time. The bank offers to
sell a 180-day negotiable certificate of deposit to the customer at a
yield of 5.34 per cent per annum. Calculate the face value of the
CD and advise the customer of the dollar return on the CD. (LO
9.5)
10- 10 BHP Billiton Limited is listed on the ASX and is expanding its
business operations into China. In order to expand, the company
will need to raise additional funds through the issue of corporate
bonds direct to the capital markets. Two securities that are often
issued into the corporate bond market are debentures and
unsecured notes.
a. Discuss the structure and attributes of each of these securities.
ection 10.3
b. Within the context of a bond issued by a corporation, discuss
the nature of a fixed and floating charge.
c. Explain which types of borrowers will have access to funds
through the
10-11 The major global financial markets each have an active
corporate bond market. These corporate bond markets are a
significant source of funds for corporations raising finance direct
from the capital markets.
a. Describe the structure and operation of the corporate bond
markets. In your answer explain why corporations seek to raise
debt funds direct from the markets, why investors provide debt
funds directly to the capital markets and who are the main
providers of direct finance in the capital markets.
b. Commercial banks also issue bonds into the capital markets.
Some of these bonds may be described as covered bonds. What
are covered bonds issued by commercial banks? (LO 10.3)
10-12 Minnow Limited is a subsidiary of a large multinational
organisation that has a BBB credit rating issued by Standard and
Poor’s credit rating agency. Minnow Limited plans to issue
debentures to raise additional funds to finance further growth
within the company. The investment bank advising the company
on the debenture issue has informed the company that it could
issue the debentures through a public issue, a family issue or a
private placement.
a. Explain each of the three issue methods; that is, public issue,
family issue and private placement.
b. Briefly discuss the prospectus and information memorandum
requirements that will be required with each type of issue. (LO
10.3)
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?
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?
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)
10-14 On 1 January 2019 a company issued five-year fixed-interest
bonds with a face value of $2 million to an institutional investor,
paying half-yearly coupons at 8.36 per cent per annum. Coupons
are payable on 30 June and 31 December each year until maturity.
On 15 August 2020 the holder of the bonds sells at a current yield
of 8.84 per cent per annum. Calculate the price at which the
institutional investor sold the bonds. (LO 10.4)
