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QUESTION - To expand its business, the Chairman of Kingston Outlet factory would like to issue either a Bond X with par value of RM1,000, coupon rate of 6% percent, and maturity of 10 years from now or Bond Y with equal par value and maturity period; but has a coupon rate of 7.4% paid semi-annually.
a) How much does an investor is willing to pay for each bond?
b) Based on the answer in (a),
(i) which bond is a better option for Kingston Outlet Factory to raise its capital with and
(ii) which bond is a better option for an investor?
c) If Eric, a novice investor was to pay the current market price of RM950 for each bond, what would be the yield-to-maturity (YTM) on the bonds? Advise him on the best option and why he should take based on the YTM calculated.
Hubbard argues that the Fed can control the Fed funds rate, but the interest rate that is important for the economy is a longer-term real rate of interest. How much control does the Fed have over this longer real rate?
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