60.1K

Verified Solution

Link Copied!

4. The banks of the UK and Canadian companies that purchase electronic tools from RedDot provides letters of credit and are required to conduct payment within 180 days after the goods have been shipped to them. Therefore, the banks issue bankers acceptances to RedDots bank. There are currently two bankers acceptances that RedDot can request his bank to discount: bankers acceptance one is from Canada. Its maturity value is SGD2,400,000 and it will mature in 30 days. The bankers acceptance commission is 1.35% and the market rate is 1.50%. The other bankers acceptance is from the UK. Its maturity value is SGD3,600,000 and it will mature in 180 days. The bankers acceptance commission is 0.95% and the market rate is 1.25%. The CEO mentions that RedDot pays an average of 1.1% on existing loans. He requires information of whether it is viable to discount any of the bankers acceptances or not. Calculate the bond equivalent rate that RedDot will receive for each of the bonds when they are discounted and compare it to the average cost of RedDots debt to determine whether any of the bankers acceptances should be discounted.

In the process to answer all the letter of credit questions of the CEO, you have collected and summarised the following data:

Bankers acceptances that RedDot holds:	Time till maturity (Days)	Maturity value	Acceptance commission	Market rate
B/A for export to Canadian company	30	SGD2,400,000	1.35%	1.5%
B/A for export to the UK company	180	SGD3,600,000	0.95%	1.25%
Existing average interest cost of debt for RedDot = 1.1%

Calculate the value of the Canadian bankers acceptance at maturity by applying the correct formula in the space below: (2 marks)

Calculate the discounted value of the Canadian bankers acceptance at maturity by applying the correct formula in the space below: (2 marks)

Calculate the bond equivalent rate of the Canadian bankers acceptance by applying the correct formula in the space below: (2 marks)

Should the Canadian bankers acceptance be discounted if you compare it to the average cost of existing loans to RedDot? Provide one reason for your answer in the space below: (1 mark)

Calculate the value of the UK bankers acceptance at maturity by applying the correct formula in the space below: (2 marks)

Calculate the discounted value of the UK bankers acceptance at maturity by applying the correct formula in the space below: (2 marks)

Calculate the bond equivalent rate of the UK bankers acceptance by applying the correct formula in the space below: (2 marks)

Should the UK bankers acceptance be discounted if you compare it to the average cost of existing loans to RedDot? Provide one reason for your answer. (1 mark)

Answer & Explanation Solved by verified expert

See Answer