Reference no: EM133253276
Flow of Funds
Abraham Company has obtained substantial loans from finance companies and commercial banks. The interest rate on the loans, which included a risk premium, is tied to the six-month Treasury bill rate and is adjusted every six (6) months. Therefore, Abraham's cost of obtaining funds is sensitive to interest rate movements. The company expects that the Philippine economy will strengthen, so it plans to grow in the future by expanding its business and by making acquisitions. Abraham anticipates needing substantial long-term financing to pay for its growth and plans to borrow additional funds, either through loans or by issuing bonds; it is also considering issuing stock to raise funds in the next year
Questions:
1. Assume that the market's expectations for the economy are similar to Abraham's expectations. Also, assume that interest rate expectations primarily influence the yield curve. Would the yield curve be upward sloping or downward sloping? Why?
2. If Abraham could obtain more debt financing for 10-year projects, would it prefer to receive credit at a long-term fixed interest rate or a floating rate? Why?
3. If Abraham attempts to obtain funds by issuing 10-year bonds, explain what information would help in estimating the yield, it would have to pay on 10-year bonds. That is, what are the key factors that would influence the rate Abraham would pay on its 10-year bonds?
4. If Abraham attempts to obtain funds by issuing loans with floating interest rates every six (6) months, explain what information would help in estimating the yield it would have to pay over the next 10 years. That is, what are the key factors that would influence the rate Abraham would pay over 10 years?
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