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Scenario :Vacancy for ‘Finance Executive In-Charge of Debt Capital’ Sowers and Harvesters PLC, is a UK-based multinational business that produces heavy duty agricultural equipment and sells them into...

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Scenario:Vacancy for ‘Finance Executive In-Charge of Debt Capital’

Sowers and Harvesters PLC, is a UK-based multinational business that produces heavy duty agricultural equipment and sells them into global markets. The firm has a large and appropriate balance of debt (bonds) in its capital structure and maintains a policy of raising increasing and balanced amounts of finance from both debt and equity markets to support its ambitious growth programmes. The firm remains open to taking advantage of cheaper forms of debt finance, and has from time to time called back more expensive bonds in favour of new issues that were cheaper. In pursuit of its ambitious programmes, and therefore the need to raise and manage more finance from the financial markets, the company has decided to appoint a full time finance-qualified person to manage its medium to long term debt finance processes to ensure efficiency in leveraging. Accordingly, the firm has advertised a vacancy for the position of ‘Finance Executive In-Charge of Debt Capital’. You have completed an undergraduate studies and obtained a degree in finance, and currently studying for the Chartered Financial Analyst (CFA) qualification. You saw the advert and applied. You have been shortlisted together with others to participate in the selection process. The first task in the process is for you to demonstrate, through report writing, a thorough knowledge and understanding of the bond market. The finance director, Mrs Grace Zheng, who will chair the panel of interviewers, has asked you to submit a report to be placed before the panel of interviewers. To serve as evidence of knowledge and understanding of the bond market your report should discuss, accurately, essential operations and aspects of the bond market with particular focus on interest rates as a source of income to investors and as a measure of ‘return on investments’ (yields). Specifically, your report should discuss the following items, explaining how, and the extent to which, knowledge and understanding of them may be relevant to the work of the finance executive to be appointed.

a)Bond characteristics, and bond quotes for different types of bonds.(300 words).

b)Factors that may influence coupon rates (selectnot more thanthree factors).(300 words).

c)The calculation oftwo typesof bond yields, namely, (i)either‘yield to maturity’or‘yield to call’,and(ii) ‘equivalent tax yield’.(300 words).


(a)Prepare a report to be presented to Mrs Grace Zheng, the director of finance and chair of the selection committee. You should analyse and evaluate issues to be covered in the report as suggested in ‘a’ to ‘c’ above. Where appropriate, provide figures, tables and worked examples to illustrate different aspects/issues in your report as you may see need.

(b)In addition to above you are to discuss/demonstrate the extent to which your knowledge and understanding of capital investment appraisal (on the basis of size of investment, number of years, and cost of capital) may influence your recommendations to the finance director regarding the issue/sale of bonds in the capital market. You may be guided by your knowledge and understanding of the use of Net Present Value (NPV) and/or Pay Back methods.(350 words).

(c)If, instead of a combination of both debt and equity capital or debt capital only, the management ofSowers and Harvesters PLC decides to use equity capital only to finance its investment projects, cost of capital will be higher and may probably lead to the rejection of some exclusive projects when the high cost of capital is used as the discount rate. Explain and demonstrate why equity cost of capital is higher than debt forms of capital.(250 words).

Answered Same Day Jun 29, 2021


Rithik answered on Jun 30 2021
123 Votes
Table of Contents
(a) Report    3
a) Bond Quotes and Bond Characteristics of Various Kinds of Bonds    3
Bond Characteristics    3
Bond Quotes    3
) Factors Influencing Coupon Rates    3
Interest Rates    3
Inflation    4
Credit Ratings    4
c) Calculation of Two Types of Bond Yields    4
(i) Yield to Maturity (YTM)    4
(ii) Tax Equivalent Yield (TEY)    5
(b) Impact of Knowledge of Capital Investment Appraisal on My Recommendations to Finance Director    6
(c) Reason for Equity Cost of Capital Being Higher Than Debt Forms of Capital    7
References    8
(a) Report
a) Bond Quotes and Bond Characteristics of Various Kinds of Bonds
Bond Characteristics
There are different types of characteristics of bonds they are:
· Face Value: The face value decides that what will be the value of bond. For instance, the corporate bonds normally have a par value of $1000 and it is considered greater amount for government bonds.
· Interest: There are many bonds, which have an interest period of every 6 months and it is even available for all modes of pay like as, monthly, quarterly and annually.
· Fix Rate Bonds: The fix rate bonds are those bonds that helpful to generate a constant interest rate. The customer getting the same amount that is depend their interest payment schedule.
· Maturity Bonds: It can range from small as one day to as long as 30 to 40 years. This bond is less risky, which an easily predictable or easily speculative than abond that matures in 20 years.
Bond Quotes
A bond quote is a price that defines the bond should be fairly, straightforward and expressed as a bond for trading as compared to other types of investments (Berger et al. 2020). Bond quotes for different types of bonds is that the bond quote signifies the last price at which the bond is traded. Apparently, the par value of the bond quote is traditionally it stated at 100, which represents the face value of 1000 bonds at 100%.
Besides that, bond quotes also expressed in fractions and sometimes they are also expressed as a face value or as a percentage of par and then converted into a particular point of scale (Bianchi, Buchner & Kozhan, 2019). On the other side bond quote is a price that defines the bond should be fairly, straight forward and expressed as a bond that deals in purchasing of new bonds for trading as compared to other types of investments.
) Factors Influencing Coupon Rates
The factors that influence coupon rates are –
Interest Rates
In interest rates, there is an inverse relationship between bond price and interest rates. Likewise, if the bond prices fall then the interest rates will rise and vice versa. For example, suppose there is a person who owns a particular bond and paying the 4% interest on the same bond. When the interest rates are going to low assume 2% then the going rate is higher than the interest rate (Bragg, 2017). This factor makes the consumer bond more worthy for the upcoming investors. The bond will become less profitable or attractive when the interest rates rise to 6%.
Inflation plays a vital role in the scenario of bonds because more than 70% of its rising and fall decides the nature of the inflation at the particular point of time....

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