In the U.S. the Treasury yield curve is slightly from the 5-year and longer. How do you think the inverted yield curve will impact investor appetite? Do investors now prefer floating rate bond or fixed rate bond? Do they prefer shorter-tenor or longer-tenor issuance? How does it change corporate issuers preferences on issuance tenor?
Short-term and long-term Treasury live rates can be found on: https://www.wsj.com/market-data/bonds
b. Computational Questions
Company A is a EUR functional currency entity and would like to obtain EUR 300M fixed rate funding for 3-year. It currently has an Euro-MTN (EMTN) program which allows the Company to issue MTN in both EUR and GBP. Company A can issue the following debt:
Option 1: Issuing a EUR 300M Floating Rate Note (FRN). Pricing on a EUR floating rate note (FRN) for Company A will most likely land at EURIBOR + 100bps.
Option 2: Issuing an EUR 300M under the EMTN program. Pricing on a fixed rate EMTN in EUR will be around 4% for Company A.
Option 3: Issuing an GBP 250M under the EMTN program. Pricing on a fixed rate EMTN in GBP will be around 4.5% for Company A.
EURIBOR swap rate is currently at 3.5%
Swapping 4.5% 3-year GBP MTN to EUR will cost EUR 4.2%
Which option would you choose? and why?
Please draw a diagram for each option above, similar to the page 10 & 13 of the slide deck.
(Hint: Assumes all MTN issuances mentioned above are simple interest, annual payment and 1 GBP = 1.2 EUR)