Question:
Elizabeth has graduated from UCSD and is now employed as a financial analyst at Qualcomm. She has been assigned to the treasury department. ElizabethAc€?cs boss is convinced, based on current economic data available to him, that interest rates will increase for the next 8 quarters. Given the increase in rates as well as the opening of the credit markets and current projects underway Qualcomm is looking to issue debt. Goldman Sachs, QualcommAc€?cs investment bank, has informed the company that they are able to issue bonds at 150 basis points over the yield curve for maturities of 5 years or less and 175 basis points over the yield curve for maturities greater than 5 years up to 10 years. Bond issuance costs are estimated at 1.5%. Given this scenario he has asked Elizabeth to do the following:
1. Calculate the current yield curve based on the information provided below.
2. What type of yield curve is it?
3. Calculate the borrowing costs for Qualcomm for the various maturities.
4. Given the premise that interest rates will increase, what should Elizabeth recommend to her boss? What maturity bonds should Qualcomm issue?
Yield Curve Information
Name Maturity Coupon Price
US Treasury 1 year 9% 99
US Treasury 3 years 7.5% 99
US Treasury 5 years 6% 99
US Treasury 7 years 5.5% 98
US Treasury 10 years 5.0% 97