Relationship between price, yield to maturity and coupon

Date:  2020-02-21 06:36:51
6 pages  (1743 words)
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This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

Yield to maturity (YTM) can be defined as the rate of return for which an investor receives assuming there is no default risk in the bond while the coupon rate is the stated (fixed) rate of return on each bond. The coupon rate and the yield to maturity determine the price of the bond in the market. Most bonds on issue, the YTM and coupon rate are equal thus selling at par. During the life of the bond, the YTM may exceed the coupon rate and the price of the bond will falls below the par value CITATION Kru15 \l 1033 (Krugman, Obstfeld, & Melitz, 2015). However, if the YTM falls below the coupon rate, the price of the bond will rise above the par value CITATION How07 \l 1033 (Howells & Bain, 2007).

Part (d)

A yield curve is a curve that seeks to explain the relationship of difference of interest rates payable on bonds with similar risks but with different lengths of time to maturity

An upward sloping yield curve shows that the short term interest rates are lower than long term interest rates CITATION Car14 \l 1033 (Carlin & Soskice, 2014)A downward sloping yield curve shows that the long term interest rates are higher than the short term interest rates CITATION Lev05 \l 1033 (Levi, 2005). The reasons analyzing different shapes of yield curve can be analyzed explained using theories such as the expectation theory, liquidity preference theory and market segmentation theory CITATION How07 \l 1033 (Howells & Bain, 2007).

Question 2

Part (a)

The major parties involved in the process as advisors were:

Sponsors This is a requirement of SGX Listing which requires companies being listed in the Catalysts to assist with the IPO and to confirm that the company is suitable to be listed and can comply with the set rules. The sponsors of LHN Limited are PrimePartners Corporate Finance Pte. Ltd., who act as LHN placement agent CITATION LHN15 \l 1033 (LHN Group, 2015)Legal advisers These parties provide legal support required for legal and regulatory matters such as preparation of relevant documents and interpretation of statutes for different countries. The legal advisors of LHN Limited include; Harney Westwood & Riegels, Dau & Tuah among others CITATION LHN15 \l 1033 (LHN Group, 2015).

Auditor and reporting accountants These parties are involved in the preparation of financial statements and information based on relevant standards to ensure that financial information provided and true and fair CITATION Wea08 \l 1033 (Weaver & Weston, 2008). The financial statements provide basis for investors to evaluate the performance of the company in figures and this duty has been given to the Foo Kon Tan LLP Public Accountants and Chartered Accountants CITATION LHN15 \l 1033 (LHN Group, 2015).

Industry market research These are the parties that reviews the non-financial forward looking statements to ensure that such assertions are a reflection of industry practices and expectations. They ensure that the surveys, reports and market research are obtained from reliable sources to provide further assurance of expectation to prospective investors. For the prospectus, LHN Limited had Converging Knowledge Private Limited as the industry consultants and helped the company prepare a report titled The Property Management Industry in Singapore, with a focus on Space Optimization dated CITATION LHN15 \l 1033 (LHN Group, 2015).

Part (b)

Rationale of Choosing to list on the Catalist Board rather than the Main Board Listing on Catalist

Catalist refers to the junior listing board that was established by the SGX to enable small and medium enterprises. Such entities are required to have a minimum of $10 million in profit in its last years audited statement and have a market value of less than $150 million CITATION LHN15 \l 1033 (LHN Group, 2015). Companies listed on this board are deemed to have higher investment risk compared to those in the Main Board as companies may be listed without any record of profitability or assurance that there will market for shares traded on Catalist CITATION Wea08 \l 1033 (Weaver & Weston, 2008).

Companies listing on the Catalist are further required to have sponsors for them to raise funds and/or engage in merger-and-acquisition activities. Based on the audited financial statements attached in the LHN Limited had a net income of $12.703 million in 2014 and this is the final year before it was listed in the Catalist and book value of $72.417 million in 2014 CITATION LHN15 \l 1033 (LHN Group, 2015). The market capitalization of the company has been quoted to be $52 million which is a major consideration as it enables LHN Limited to be classified as small and medium sized companies CITATION LHN15 \l 1033 (LHN Group, 2015).

Part (c)

Methods by which one can invest in LHN Limited without participation in public tranche

Placing: It involves having the placement house issuing whole or part of the shares with another investor, and in most instances are large institutions, thereby enabling interested parties to invest in such shares. In this scenario, the shares have not been issued to the public but instead a small number of investors can be bought by institutional investors such as pension funds and insurance companies CITATION Wil11 \l 1033 (Wild, Shaw, & Chiappetta, 2011). The uncle may still invest in LHN by investing in any pension fund or insurance companies that will win the bid from the placement companies CITATION Ehr12 \l 1033 (Ehrhardt, 2012).

Offer to sell: It involves having a placement company purchase the tranche of shares at an agreed price, usually a premium, and then resells the shares to the public overtime at prices deemed profitable to the placement company CITATION Unk12 \l 1033 (Practical Law, 2012). The placement and sub placement companies are therefore institutional investors who can acquire such shares either as a direct allotment from the company or by purchase from existing members. Therefore, the uncle can purchase the shares of LHN Limited by purchasing them from brokers in the market licensed to sell them usually at their profits margin CITATION Ehr12 \l 1033 (Ehrhardt, 2012).

Underwriting: Under this system, a financial institution agrees to purchase the shares that have not been allotted to the public at the issue price CITATION Mel09 \l 1033 (Melville, 2009). The agreement is usually at a fixed fee and a percentage of the finances received from the profit margin CITATION Lev05 \l 1033 (Levi, 2005). The underwriting company will serve as an intermediary through which savers can access them. This will enable the shares of LHN to be sold to the public from which the uncle can access them depending on the rates set by the underwriting company CITATION Unk12 \l 1033 (Practical Law, 2012).

Question 3

Part (a)

Exchange rate can be described as the amount of currency for which another currency is exchanged. Different systems have been put in place to ensure foreign currency transactions bring the desired effect economically, which is to help transfer resources from one country to another CITATION Car14 \l 1033 (Carlin & Soskice, 2014). Such systems that have been practiced or are being practiced today include the fixed exchange rate system, a floating exchange rate system and the managed exchanged rate system. The exchange rate systems are determined by the central banks of such countries.

Fixed exchange rate

Exchange rates are fixed by the central bank and they are not allowed to fluctuate freely in response to the market forces of supply and demand. In this case the central bank is obliged to buy and sell its own currency in order to maintain its exchange rate within agreed range. In most instances, there are provisions to such authorities giving mandates to the central bank adjust the exchange rate to reflect the economic reality, thereby setting new equilibrium CITATION Arn11 \l 1033 (Arnold, 2011).

In this system, the actual exchange rate may be above or below the equilibrium and both are reflections of market economics. If the exchange rate is above equilibrium the currency is deemed to be overvalued and there exists currency surplus. If the exchange rate is below the equilibrium, the currency is deemed to be undervalued and thus currency deficit CITATION Car14 \l 1033 (Carlin & Soskice, 2014). The mechanisms to adjust such fluctuations are known as devaluation and revaluation.

Devaluation occurs when the official price of a currency is lowered while revaluation occurs when the official price of a currency is raised. One of the main risks of overvalued or undervalued currency is the widening of the trade deficits CITATION Kru15 \l 1033 (Krugman, Obstfeld, & Melitz, 2015). Nations implementing the fixed exchange rate systems are thus required to deal with trade deficit and overvalued currencies CITATION Car14 \l 1033 (Carlin & Soskice, 2014). This necessitates such countries to have protectionist trade policies such as quotas and tariffs to regulate import and export, thereby affecting foreign exchange rates CITATION Wan09 \l 1033 (Wang, 2009).

Advantaged of fixed exchange rate systems

It reduces uncertainty -Under this system, the exchange rate is fixed and any necessary adjustments are made after communication with relevant stakeholders. This helps ensure that prices of goods and services remain constant within a known range leading to lower risk hence better investment decisions abroad. The system has also been used by countries as a tool of manipulating competitiveness thereby allowing countries to export unemployment to other countries CITATION Arn11 \l 1033 (Arnold, 2011).

Disadvantages of fixed exchange rate system

The system has been determined to be asymmetrical and forces countries with deficit to implement restrictive barriers such as quotas and tariffs. These measures have been seen to interfere with trade lowering efficiency of resources thus low growth rate CITATION Arn11 \l 1033 (Arnold, 2011).

An example of an economy with fixed exchange rate system Qatar economy in which the exchange rate of USD has been set at a fixed rate of 3.64 Riyal per USD since 2001 CITATION Wan09 \l 1033 (Wang, 2009).

Part (b)

Floating exchange rate system

Under this system, the exchange rate is determined by the forces of demand and supply. The equilibrium exchange rate is set at the point in which the demand for one currency equals the supply of another currency. At equilibrium point there is no excess or shortage of home currency and any deviations above or below the equilibrium leads to either excess demand or excess supply of the home currency CITATION Arn11 \l 1033 (Arnold, 2011).

The deviations of the equilibrium exchange rate from the initial equilibrium are caused by the changes in demand, supply or both and is a reflection of the performance of one economy against other economies involved in the trade. These changes either above or below the equilibrium are best described as appreciation or depreciation of local currencies. Appreciation occurs when value of one currency increases relative to other currencies and it takes more foreign currency to buy it while depreciation occurs when the value of one currency decreases relativ...

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