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Question: you are a senior financial analyst and have been asked...

Question details

You are a senior financial analyst and have been asked to analyse recent developments in the Euro era and the U.S markets and advise the top management on the economic conditions in both markets. You have collected data on the euro area yields of the central government bonds and the U.S. treasury bond yields. For this purpose, you have downloaded the following data from the European Central Bank and the U.S Federal Reserve Bank on 24th September 2020 (Mo = month, Yr = Year):

24/09/2020

Time to Maturity

Euro area Central Government Bond Yield Rates

U.S. Treasury

Bond Yield

Rates

1 Mo

-

0.08%

3 Mo

-0.60%

0.10%

6 Mo

-0.62%

0.11%

1 Yr

-0.66%

0.12%

2 Yr

-0.71%

0.14%

3 Yr

-0.74%

0.16%

4 Yr

-0.74%

-

5 Yr

-0.72%

0.27%

7 Yr

-0.63%

0.46%

10 Yr

-0.49%

0.67%

20 Yr

-0.17%

1.19%

30 Yr

-0.05%

1.40%

REQUIRED:

a)    Considering both yield rates on 24th September 2020, depict the yield curves charts and describe the implied market outlook in the Euro area and the U.S. market to the top management.

 [4 marks].

QUESTION 1 (continued)

b)    Calculate the market price of each bond on 24th September 2020 that issued by North Polar Ltd., a European company specialises in manufacturing semiconductors, using the yield curve data provided in the table above. What is the current total value of minimum application?

Corporate Bonds Fact Sheet

Issuer

North Polar Ltd.

Issuing date

24th September 2020

Bond expiration date

24th September 2025

Face value

€ 1000 per bond.

Minimum application

50 Bonds (€ 50,000)

Interest rate 

Floating Interest Rate. The Interest Rate is the sum of the Market Rate plus the Margin.

Coupon rate (annual)

Central Government Bond Yield + 1.86% p.a.

Coupon payment

Annually (coupon payment is paid on 10th July every year)

Market Yield

4.5%

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