Finance Mini Case Study Sample
Sharing all the topics covered in syllabus till now to give you an idea of the course:
• Calculation of Present Value
• Calculation of Future Value
• Use of financial calculator
• using time value of money to estimate value of cash flows?
• Stated interest rate vs. effective rate
•Calculate value of bonds
• government, provincial and corporate bonds
• Callable bond, & debentures
• Role of bonds in
• long-term financing
• Calculate stock value using dividend growth model
• Beta basics of standard deviation
• role of stocks in long-term financing
• different financing sources
• Review of Balance Sheets
• Income Statements
• Cash Flow Statements
• Cash flow vs Accounting Income
• impact of CCA?
The case study must be written in an essay format to each question including the references in APA format. An executive summary and a conclusion of bonds definition and characteristics are highly recommended.
Each question must be written at least 200 words. Charts and tables can be used in elaboration but not included in the words counts.
The similarity rate should be below 30%.
The assignment must be completed individually. Any academic integrity will result in zero marks and be reported to the academic office.
Grading Rubrics follows the General Rubric on Moodle.
Treasury yields dip as lower U.K. inflation sparks broader bond rally.
Treasury yields fell Wednesday morning after cooler-than-forecast U.K. inflation bolstered the narrative that central banks will soon be done raising interest rates.
What's happening
What's driving markets
Data from the U.K. showed consumer price inflation rose in June to 7.9%, its lowest level in more than a year and below economists' forecasts -- prompting a dip in government bond yields in Europe and the U.S. Global bond bulls jumped on the report from Britain as further evidence that inflationary pressures -- though still high in the U.K.'s case -- are waning in developed economies like the U.S., and that this will help central banks to soon stop raising
borrowing costs.
Markets have priced in a 99.8% probability that the Federal Reserve will raise its policy interest-rate target by 25 basis points to between 5.25%-5.5% next Wednesday, according to the CME FedWatch Tool. The chances of another hike of that size, taking the fed funds rate target to 5.5% to 5.75%, by November was seen at 27.9%. The central bank is expected to take its fed funds rate target back down to around 5% or lower next year.
In U.S. economic updates on Wednesday, housing starts fell to a 1.43 million annual pace last month from 1.56 million in May, as homebuilders sharply slowed down on the start of construction on new single-family homes. Building permits, a sign of future construction, fell 3.7% to a 1.44 million rate.
What analysts are saying
"June's U.K. CPI printed lower than anticipated overnight, adding to the global bond bullishness and bringing U.S. 10-year yields as low as 3.725% -- a definitive break of the 40-day moving-average of 3.78%," said BMO Capital Markets strategists Ian Lyngen and Ben Jeffery. "While the 40-day has been breached previously this week, it has managed to hold on a closing basis --making Wednesday's close of particular relevance from a technical perspective. As British inflation appears to be easing, investors are increasingly onboard with less rate hike urgency from the major global banks later in the summer, but not before the near-term adjustments are realized," they wrote in a note.
Source: Vivien Lou Chen and Jamie Chisholm, Morningstar,
https://www.morningstar.com/news/marketwatch/20230719350/treasury-yields-dip-
as-lower-uk-inflation-sparks-broader-bond-rally, accessed July 19, 2023
Question 1:
Track US and UK 10 years T-bills yields everyday between July 17 and July 21, 2023.
List the source websites. Comparing to the same period in 2022, elaborate the trend of both bonds’ yields. Explain the relationship between bond yields and interest rate?
Question 2:
What’s the difference between corporate bonds and government bonds? Why are corporate bonds important in a firm’s capital structure? Use a real corporate bond example to explain.
Questions 3:
What is the impact of inflation in the UK and US on treasury yields? What are the complications for a financial institution that made a substantial investment in US treasury securities when the yields were low? (The Silicon Valley Bank’s collapse is an example).
Solution
Introduction
The report here discusses the different aspects of the economic and financial markets. Bonds are one of the viable instruments which are used by the corporate as well as the government for arranging capital for any operations (Vasylieva et al., 2021). In return, bonds pay a coupon interest which is fixed. University assignment help, The report highlights the 10-year Bond yield and Historical data of the UK and the US. It will also present a comparative analysis of the annual change in the yield of both bonds and the impact of inflation on their higher yield. Inflation in an economy also has a significant impact on treasury yield. The report also discusses the impact of inflation in UK and US treasury Yields and the impact of the low treasury yield on the collapse of Silicon Valley Bank.
Answer to Question 1
United Kingdom 10-Year Bond Yield Historical Data
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Comparing the UK 10-year yield bond, the price of bond yield on Jun 18, 2022, to Jun 21, 2022, was 2.157, 2.178, 2.144, 2.48 per cent, which was consistently increased to 4.341, 4.22, 4.274, and 4.271 per cent in the consecutive year of the same data, in FY23. The percentage of change in yield was 101.16% on Jun 18, 2023. On Jun 19, it was 93.76% on Jun 20, 99.35, and again the change surged to 108.54% on Jun 21.
In the case of the US 10-year Bond Yield on Jul 17, 2022, the yield was 3.809%, which decreased to 3.789 on Jul 18 and 3.748, 3.856 and 3.837 on Jul 21, 2023 (Investing.com, 2023). In the previous year, the percentage yield was 2.989 per cent on Jul 18, 2022, which increased to 3.028, 3.03 on 19th and 20th July. On Jul 21, 2022, it was reduced to 2.828. The percentage in comparison to the last year was 26.76%, 23.78%, 27.26% and 33.14% daily from 18-21st July (Investing.com, 2023). Comparing the Bond Yield in the UK and the US, there is an amount of difference in return with a higher percentage of changes.
Relationship between bond yield and interest rate
There is an inverse relation between the Bond yield and interest rate. Bond yield is a return which an investor receives by investing in a bond. At the same time, the interest rate is a tool used by the Central bank to balance the flow of the economy. To stimulate and encourage borrowing, they decrease the interest rate and, to cool off the overheated market, increase the interest rate (Akram, 2020). In relation to bond yield with interest rate, If the central bank offers a higher interest rate, then the newly launched bonds have also to offer a higher coupon rate. When the interest rate change, if the central bank increases, the new bond yield to attract the new investors will offer a higher coupon rate. During the old low and fixed coupon rate bonds, this will be less expensive, and investors will ask for a discount on the existing bond price to get a higher yield. And vice versa, in the case of the new bond issue, when the interest rate is low, the coupon rate will be low. The old investors with high yields will find their bonds attractive. So, investors in the secondary market will pay a premium and push the yield lower.
In the UK, consumer price inflation in June rose to 7.9%, which is below the economic forecast. To control inflation or cool up the market, they raise the interest rate, simultaneously increasing the percentage of yield in the UK economy. At the same time, it was time for developed economies to stop increasing the borrowing cost. As Per the Federal Reserve policy, the interest rate was targeted at 5.25 to 5.5%. The interest rate was less than the rate in the UK, and to attract the UK bond has delivered a better Yield.
Answer to Question 2
Difference between corporate bonds and government bonds
Corporate bonds are issued by the business and corporate houses, which are the same in nature but considered to be riskier than government bonds. There is the probability of corporate bonds to get default on the repayment, and hence compared to risk, the return on interest is also a high rate to attract and compensate for the risk (Seltzer, Starks, & Zhu, 2022). But they are less liquid as they have a relatively lesser market demand compared to government bonds.
Government bonds are issued by municipalities, states, or sovereign governments. The bonds are a safe investment tool with government security as the government is obliged to repay the loan (Siahaan & Robiyanto, 2021). As a secure tool, the market demand is high, so bonds are usually issued at low coupon rates. Due to high demand, the bonds are highly liquid.
Importance of bond in capital Structure.
To structure the capital of a business or finance any venture, project, or operation, the corporate can issue a bond and borrow money from lenders by paying them a fixed amount of coupon rate (Jiang et al., 2021). It is a suitable way to raise long-term debt and finance by borrowing money from a broad pool of investments with diverse sources of funds. Unlike the traditional method of shares issued to the general public, a loan from a bank or debt from any specific party business can fund larger projects or expansion of the operations or payment of a debt can be suitable. The tool from investors' perspective, is less risky as it is secured to pay.
Real Corporate Bond
Apple incorporation with the name of APPLE17/27 issued a Bond on 6/20/2017 at a 10-year maturity date with regular interest. The coupon amount was 3.0% at quarterly payment, and the denomination/principal amount was 1000. The issue volume amounted to 1,000,000,000 with the issue price of 99.77.
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(Source: markets.businessinsider.com, 2023.)
Issuing the bond has provided Apple with the capital to conduct its regular conduct of business for research and development and repurchase. The amount of investment for a long term with a minimum interest rate without compromising the share of capital and without paying a high rate of interest to banks or financing lenders. The current yield of the by bond is 3.2% which is lower than the few corporate bonds but still higher than the government bonds and considered to be one of the most suitable and secure bonds to invest in. This is a way to leverage the capital structure with a lesser burden.
Answer to Question 3
Impact of inflation in the UK and the US on treasury yields
In the time of inflation, the prices of commodity increase, purchasing power reduces, and the value of money decrease. Treasury yield data can be used to estimate the inflation. An increase in the inflation may also lead to a rise in treasury Yield (Suh & Kim, 2021). It is a positive sign for bondholders. The inflation in the UK fell to 7.9%, which is a lower level than expected, which will drive the lower treasury yield.
In the US, the targeted interest-rate target was 5.25% to 5.5%, which is about 25 basis points. There was also a probability to hike the interest-rate rate from 5.5% to 5.75%. With the expected hike in the interest rate, the treasury yield in the US will also increase.
Complications for a financial institution for investment in US low treasury yield
However, in increasing treasury yield, the financial institutes may have a positive yield on their investment in treasury. But when the yield is low, the financial institutes invested in the treasury security will have a lower yield because the value of the deposit will decrease in the case of Silicon Valley Bank US, which has a significant investment in the US treasury. When the inflation rose, the security value fell. It led to a decrease in the interest income of SVB as the investment was made with a low Yield. Due to inflation, the asset's value decreased, and the purchasing power was reduced. The borrowing of the SVB became more challenging to repay and resulted in the collapse.
Conclusion
Bond is a fixed-income investment security tool which is a loan made by investors to the borrowers, who are usually the government or corporate houses. The loan borrowed is generally made through a written acknowledgement between both parties, the lender and the borrower for the existence of the debt. The disclosure also includes the term and conditions of the loan and its payment. The Borrower agrees to repay the amount of the loan, including the amount of interest over a specific period. To finance any project or undertakings, companies, state, and sovereign governments usually issues bonds which are a safe investment with fixed return and obligation for the repayment of the loan on a pre-decided maturity date.
On the other hand, coupon Rate is the interest rate that is agreed upon by the borrower to pay for its investment over the face value of the bond. This can be yearly, Half yearly or sometimes quarterly. Assuming a bond having a face value of $1000 with a 5% coupon rate will receive $50 annually as a coupon rate. Face value is the amount of the bond it will be worth at the date of maturity. The coupon rate makes payment of interest on a specific date is called the Coupon date. Upon the compilation of lending tenure at the maturity date, the face value of a bond is returned by the issuer. In bond may issue at different prices, at par of the same rate as face value, at a premium more than the premium value or at a discount less than the face value.
Reference
Akram, T., (2020). A note concerning government bond yields. Levy Economics Institute, Working Papers Series, November.https://www.econstor.eu/bitstream/10419/238667/1/wp-977.pdf
markets.businessinsider.com (2023). APPLE INC.DL-NOTES. https://markets.businessinsider.com/bonds/apple_incdl-notes_201717-27-bond-2027-us037833cx61
Investing.com., (2023). US 10-year bond yield. https://www.investing.com/rates-bonds/u.s.-10-year-bond-yield-historical-data
Jiang, X., Shen, J.H., Lee, C.C. & Chen, C., (2021). Supply-side structural reform and dynamic capital structure adjustment: Evidence from Chinese-listed firms. Pacific-Basin Finance Journal, 65, p.101482.https://www.sciencedirect.com/science/article/pii/S0927538X20306946
Seltzer, L.H., Starks, L. & Zhu, Q., (2022). Climate regulatory risk and corporate bonds (No. w29994). National Bureau of Economic Research.https://www.nber.org/system/files/working_papers/w29994/w29994.pdf
Siahaan, G.E.D. & Robiyanto, R., (2021). Bond as a safe haven during market crash: Examination of Covid-19 pandemic in Asean-5. Jurnal Manajemen dan Kewirausahaan, 23(1), pp.1-9.https://jurnalmanajemen.petra.ac.id/index.php/man/article/view/23034/20299
Suh, S. & Kim, D., (2021). Inflation targeting and expectation anchoring: Evidence from developed and emerging market economies. The North American Journal of Economics and Finance, 58, p.101535.https://www.sciencedirect.com/science/article/pii/S1062940821001480
United Kingdom 10-Year Bond Historical Data - Investing.com India. (2022). Investing.com India. https://in.investing.com/rates-bonds/uk-10-year-bond-yield-historical-data
United States 10-Year Bond Historical Data - Investing.com. (n.d.). Investing.com. https://www.investing.com/rates-bonds/u.s.-10-year-bond-yield-historical-data
Vasylieva, D., Kudyk, T., Lisovska, V., Abuselidze, G. & Hryvkivska, O., (2021). Ensuring the issuance of investment-attractive corporate bonds. In E3S Web of Conferences (Vol. 295, p. 01008). EDP Sciences. https://www.e3s-conferences.org/articles/e3sconf/pdf/2021/71/e3sconf_wfsdi2021_01008.pdf
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