Super Chicken Sdn Bhd is a listed company that is the largest egg producer in Ma
ID: 2809910 • Letter: S
Question
Super Chicken Sdn Bhd is a listed company that is the largest egg producer in Malaysia. It intends to expand its operations to Indonesia and is launching, in Singapore, a 10-year US$100 million bond issue at a coupon rate of LIBOR + 8%. The bond will be collateralised by the assets of 10 farms in Malaysia as well as the assets of 10 farms that will be developed in two years in Indonesia As the bond analyst for the Singapore Bond Fund, you have been instructed to look into the Explain what type of bond is the 10-year Superchicken USS bond paying a coupon of (2 marks) Besides interest rate and reinvestment risks, distinguish and discuss 3 types of risks (12 marks) merits and demerits of the bond issue (a) LIBOR+8%? (b) that a Singapore investor who invests in this bond faces.Explanation / Answer
Answer (a):
The 10-year Superchicken bond is type of a Straight bond that is a high-yield corporate bonds (low quality), These bonds are issued by companies or financing vehicles with relatively weak balance sheets. They carry ratings below triple-B. Default is a distinct possibility. As a result, high-yield bond prices are more closely tied to the health of corporate balance sheets and this is the reason why it offers high spread over LIBOR, that is 8%
Answer (b): Besides interest rate and reinvestment risk, the other types of risk that a singapore investor would face are:
Liquidity risk:
The risk of being unable to sell your investment at a fair price and get your money out when you want to. To sell the investment, you may need to accept a lower price. In some cases, such as exempt market investments, it may not be possible to sell the investment at all. Maybe the singapore investors won't be able to sell it if there is no market for it.
Credit risk (Default Risk):
The risk that the Superchicken company that issued the bond will run into financial difficulties and won’t be able to pay the interest or repay the principal at maturity. Credit risk applies to debt investments such as this bond. You can evaluate credit risk by looking at the credit rating of the bond.
Currency risk:
It applies when you own foreign investments. It is the risk of losing money because of a movement in the exchange rate. For example, if the U.S. dollar becomes less valuable relative to the Singapore dollar, the Superchicken US$ bonds will be worth less in Singapore dollars.
Inflation risk:
The risk of a loss in your purchasing power because the value of your investments does not keep up with inflation. Inflation erodes the purchasing power of money over time – the same amount of money will buy fewer goods and services. Inflation risk is particularly relevant if you own cash or bonds like these.
Answer (c).
Analysis of the quality of collateral attached with the bond:
On analysis, we found that the quality of collateral as risky but that risk is supposed to be linked with the high spread of 8% over LIBOR.
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