UNIVERSITY OF DAR ES SALAAM

BUSINESS SCHOOL
Department of Finance

COURSE FN 307: Treasury Management

SEMINAR QUESTIONS SET V

DOMESTIC & INTERNATIONAL CAPITAL MARKETS
1. You purchased a fifteen-year 10% coupon bond at par five years ago. The bond can be
redeemed for $900 after five years. The current required rate of return on similar non-
convertible bonds is 9%. Should you redeem the bond? Explain.
2. Why junk bonds are called high-yield bonds?
3. With examples discuss different types of international bonds.
4. What key factors are driving growths of the international capital market?
5. Which of the following would be likely to show the greatest short-run price volatility: a
short-term bond, a long-term bond? Explain.
6. When market interest rates are 10 percent, what relationship would you expect between the
price and redemption yields of two 8 percent bonds, one maturing in three years, the other
maturing in ten years?
7. Give two reasons why institutions like banks prefer to hold short-term rather than long-term
bonds.
8. Explain the terms: dirty price, clean price, interest yield, redemption yield.
9. Are high yield bonds good investments? Why or why not?
10. Assume a yield to maturity of 8%. Compute the duration for the following bonds each 100
Euro par value. Compute duration.
a. 10 years, zero coupon;
b. 10 years, 8 percent;
c. 10 years, 12 percent coupon.
11. In problem 9 assume that yields change from 8 to 9 %. Work out the exact change in price
and compare it with the change in price predicted by duration. Explain the difference.
Assume 100 Euro par values.
12. A firm has decided immediately to refund existing callable bond issue. Under what
 circumstances is there an immediate benefit to refunding? What does that benefit depend
upon?
13. How can callable bonds be substitutes for short-term bonds?
14. A firm has a perpetual callable bond outstanding with a par value of 100 Euro and an annual
coupon of 14 Euro. The firm can refund this with a new non-callable perpetual bond having
an 8 percent coupon. The call price on the old bond issue is 114 Euro. Flotation costs for a
new issue are 2 percent of par value. What is the myopic benefit of refunding?
15. What costs incurred in the public issue?
16. Why IPO generally underpriced?
17. What are the characteristics of the right issue?
18. Discuss the procedures of the right issue.
19. What is the theoretical value of a right?
20. Compare the right issue with the private placement
21. The equity stock of Karnataka is selling for Tzs 1200 per share. The company is planning to
issue right shares at Tzs 800 each in the ration of 1:2 this means that two rights will be
required to subscribe to one share. Calculate;
a. The theoretical value per share of the ex-right stock
b. The theoretical value of each right
22. The equity stock of Gujarat Tractors Company is selling for Tzs 220 per share. The company
is planning to issue right shares at Tzs 150 each. Four rights would be required to subscribe
to one share. Calculate;
a. Theoretical value per share of the cum-right stock
b. The theoretical value per share of the ex-right stock
c. Theoretical value of each right.
23. The equity stock of Narmada Foods is selling for Tzs 180 per share. The form is planning to
issue right shares in the ratio of one right share for every existing five shares.
a. What is the theoretical value of a right if subscription price is Tzs 150
b. What is the ex-right value per share if the subscription price is Tzs 160
c. What is the theoretical value per share when the stock goes ex-right, if the
subscription price is Tzs 180.
24. Company XYZ has 30 million shares of common stock outstanding. It wishes to issue
another 1,500,000 shares. The current market price per share is $25 and the rights offering
subscription price is $20 per share.
a. How many rights will current stockholders receive?
b. How many rights are needed to buy one additional share?
25. How do you value a stock that is not publicly traded
26. You are a treasury manager of GonzalecEletrick Company and you want to know the value
of James Consol Company stock for acquisition purpose. James Consol Company currently
pays a dividend of $ 1.6 per share on its common stock. The company expects to increase
dividend at a 20 per cent annual rate for the first four years and at 13 per cent for the next
four years and then grow the dividend at 7 per cent rate thereafter. This phased growth
pattern is in keeping with expected life cycle of earnings. You require a 16 per cent return on
investment in this stock. What value will you place on a share of this stock?