Question 1 - Debt Securities
1. Commonwealth Bank is in the process of managing its short-term liquidity. They intend to obtain short-term funds on the money market from a wholesale investor. To do so, they issue a 60-day Certificate of Deposit (COD) at 5.2% p.a. The value raised is $50,000,000 (fifty million Australian Dollars).
a. What is the Face Value of one of the Certificates of Deposit? What does this value mean?
b. If the bank wants to raise $250,000,000 (two-hundred and fifty million Australian Dollars) how many of these COD's would they issue?
c. What will be the dollar return to the investor if they hold the COD until maturity?
2. Rio Tinto is looking to expand through exploration into a new mine, 100km south-east of Port Hedland, Western Australia. To obtain long-term funding, 3 years ago Rio Tinto issued 250 (two hundred and fifty) 10-year bonds with a face value of $1,000 and an annual coupon of 7%.
a. If three years ago, investors required a yield to maturity on bonds in the same risk class of 8%, how much financing would Rio Tinto have raised when they issued the bonds?
b. Over the last three years, interest rates in the economy have fallen. Does this mean that Rio Tinto was better off issuing bonds three years ago or would they have raised more money by issuing bonds today?
3. The previous two questions consider short and long-term debt financing. Define short and long-term debt issuance and identify them as short or long-term debt securities. Explain factors that are considered when deciding which type of financing to use.
Question 2 - GFC and Commercial Banking
Read the article and answer the following questions. You may need to do some of your own additional research.
Article - Next financial crash is coming - and before we've fixed flaws from the last one
Using your knowledge from the course and the article above, answer the following questions:
a) Outline two important functions that the financial system performs in the economy. Why is the smooth functioning of the financial system important to the economy?
b) What are some of the dangers and incentive problems of the financial sector getting "too big"?
c) Basel III is explained as an extension of Basel II. Do you agree with this statement? Why or why not.
d) Why is "the drying up of market liquidity" a perceived problem? Explain the issue with reference to the recent GFC and any other relevant examples.
Question 3 - Share Valuation
Read the article below and answer the following questions. You may need to do some of your own additional research.
Article - Housing, banks at risk of significant overvaluation: ANALYST OPINION
Using your knowledge from the course and the article above, answer the following questions:
a. NAB shares just paid a dividend of $2.83. You expect the dividends to grow at 5% forever. The required rate of return on NAB shares are 8%. What is the price of NAB shares today?
b. What does a high P/E ratio say about investor expectations? Under what circumstances can a P/E ratio be "too high"? What are the P/E ratios currently for CBA, WBC and ANZ and what do these indicate about investor expectations?
c. Use P/E analysis and market data to estimate a price for NAB shares. Do you think this value is a correct valuation of NAB shares? Justify your opinion.
d. Based on your analysis in questions a) - d) do you think there is a "price bubble" in Australian banking shares at the moment? Justify your answer with theory and some research.
e. According to the article what will happen to bank share prices if EPS for the big four banks fall? As a result, what would happen to the banks' Tier 1 and Tier 2 capital and therefore its capital ratio (CAR)?
Do Question 3 Share Valuation.
Attachment:- Assignment File.rar