FIN630 - Investment Analysis & Portfolio Management Solution 3rd Feb 2016

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ABC Ltd. is among the biggest and fastest growing companies in Pakistan with a vision to cater local needs with products conforming to global standards. The company has over 12 million consumers all over Pakistan and earned Rs. 43 billion as revenues in year 2014. The company has planned to add another division into dairy business. The project required an amount of Rs. 100 million. The company has multiple financing options including equity as well as debt market. In a presentation about the project and financing options, financial manager has outlined following opportunities from the debt market.

Part A:
Following are the financing options and the economy forecasts.
The interest rates are expected to decline over the next six months.
1. In such an economy outlook where interest rates are expected to decline what kind of bonds in terms of duration (Longer or shorter), company should include in its portfolio. Give reason for your choice.


2. The table shows three sets of non-callable bonds. For each set, select the one bond from each set that would be best for the company while keeping in mind the interest rate outlook and the consequent strategy set forth in Part 1 (selected duration of the bond). In each case briefly discuss why you selected the bond. (see the table in assignment file)

Part B:
ABC Ltd. has also decided to issue 8%, Rs. 1,000 par value bond A with YTM of 10%. It will mature in three years and will pay interest semiannually.
The company has another option of a bond B with duration of 2.30 years and modified duration of 1.43 years.