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a.) The prices of corporate bonds fluctuate as they are traded on the bond market. Like government bonds, a corporate bond pays a fixed amount of interest each year, which is called the coupon rate. If bond prices fall, the effective interest rate goes up because an investor pays less but gets the same coupon rate. Conversely, if the bond price increases, the percentage yield goes down.
i.) prevailing rates
If prevailing interest rates should rise, the yields bonds provide at a given price become less attractive. Demand for the bonds falls, creating downward pressure on prices. Bond prices tend to decline with the effective interest rate climbing until it is competitive with new interest rate levels. Of course, if prevailing rates go down, the opposite effect is likely; increased investor demand for the now superior yields of corporate bonds drives bond prices up until the resulting yields fall to the new interest rate levels. A bond's coupon rate is directly affected by national interest rates, and consequently, so is its market price. Newly issued bonds tend to have coupon rates that match or exceed the current national interest rate.The coupon rate of a bond is the rate of interest it pays annually, which is generally fixed at issuance and expressed as a percentage of the bond's par, or face value.When national interest rates change, the coupon rates of newly issued bonds tend to follow suit. When interest rates go up, so must coupon rates for new bonds to remain attractive to investors. When rates go down, companies can issue bonds with correspondingly lower rates without fear of being priced out of the market.
ii.) credit risk
the most important factor affecting the interest rates of corporate bonds is credit risk. Corporate bonds are assessed based on the probability a company will be able to redeem (pay off) the bonds at maturity. Most investors rely on bond rating services to provide credit risk ratings. The bonds of companies with the best credit rate pay lower interest rates as a rule because investors will accept lower yields in return for reduced risk. If a company bond ratings are downgraded, the price of the bonds usually falls, resulting in increased yields. This occurs because investors want better interest rates to compensate for the increased risk.

b.) Chemara Oils Bhd's bond price would decrease if the market interest rate increase in the following years because the fixed interest and principal payments stated in the bond will become less attractive to investors.  For example,  when the interest rate is 6% and the bond price is RM1000, the investor would receive 60x3= RM180 in the next 3 years. if the interest rate become 7% in the following next 3 years, the investor could receive 70x3= RM 210 in the next 3 years which higher than the previous interest. The investor would not be interested to buy a low interest bond instead of the high interest bond. Hence, there bond price will be decreased in order to offer and attract the buyer.

c.) The alternative sources of funding in the financial system is equity market. The market in which shares are issued and traded, either through exchanges or over-the-counter markets. Also known as the stock market, it is one of the most vital areas of a market economy because it gives companies access to capital and investors a slice of ownership in a company with the potential to realize gains based on its future performance. In the equity market, investors bid for stocks by offering a certain price, and sellers ask for a specific price. When these two prices match, a sale occurs. Often, there are many investors bidding on the same stock. When this occurs, the first investor to place the bid is the first to get the stock. When a buyer will pay any price for the stock, he or she is buying at market value; similarly, when a seller will take any price for the stock, he or she is selling at market value.
Besides that, money market also another alternative for Chemara oils bhd. The money market is where financial instruments with high liquidity and very short maturities are traded. It is used by participants as a means for borrowing and lending in the short term, with maturities that usually range from overnight to just under a year. The money market instruments include banker acceptance, treasury bills, malaysian goverment securities ,government investment issue and others.The money market is different from the capital market, which is the sale and purchase of long-term debt and equity instruments.

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a) answer
b) answer
c) answer

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(a)  Coupon rate is the annual coupon payment divided by bond's face value. One of the factors that affecting Chemara Oil's agreed 6% coupon rate is the Yield To Maturity (YTM). When Chemara Oils Bhd wants to have a bond where its bond price is same as its face value (RM 15 million), the company will set the coupon rate same as the YTM. When

Chemara Oils Bhd wants to  have a bond where its face value is greater than the bond price, the company will set the coupon rates lower than the YTM to make the investors to have built-in gain to compensate the lender for the below market coupon rate and vice versa.
Besides that, the time to maturity is also one of the factors that affecting Chemara Oil's agreed 6% coupon rate. This is because the longer the time to maturity, the grater the interest rate risk. The risk that arise for bond owners from fluctuating interest rates in higher. Hence, the investors may demand greater interest rates to offset this risk. As a result, Chemara Oils Bhd need to take this into consideration when deciding the coupon rates.

Furthermore,  the factors that affecting Chemara Oil's agreed 6% coupon rate is the credit risk of Chemara Oils Bhd. If Chemara Oils Bhd has the ability to pay off the bonds at maturity, this means that Chemara Oils Bhd has lower credit risk. Bonds that rated at or above Moody's Baa or Standard and Poor's BBB can offer lower coupon rates because the investors have much confidence on them and willing to invest on the bond issued by them.

(b) As time passes, market interest rate (YTM) changes as well. However, cash flows from a bond stay the same. As a result, if the market interest rate increases in the following year, the Chemara Oils Bhd’s bond price will reduce. This is because when YTM rise, the present value of the bond's remaining cash flow declines, the bond is worth less. Hence, bond prices and interest rates always move in opposite directions. When YTM is greater than the coupon rate (6%), the bond will become discount bond because face value is greater than the bond price. Chemara Oils Bhd need to issue bond at the price below face value because the coupon rate provided by the company is lower than what the market can offer. Hence, Chemara Oils Bhd issue bond at the price below face value in order to attract investors to buy their bonds. The investors can get built-in gain to compensate the lender for the below market coupon rate from the discount bond as well when the bonds is mature.

(c) One of the options that are currently available for these directors to obtain long-term funding is by issuing shares. Chemara Oils Bhd can raise capital in primary market by Initial Public Offerings (IPO). The company needs to meet the listing requirements set by Bursa Malaysia in order to list in the stock exchange. There are many benefits for Chemara to list their shares such as liquidity, easy to raise additional capital and credibility.
Besides that, Chemara Oils Bhd can seek funding from Development Financial Institutions (DFIs) in Malaysia such as Bank Pembangunan Malaysia Berhad (BPMB). BPMB is owned by the Malaysian Government that provide medium to long term financing to capital-intensive industry, which include infrastructure projects, maritime, high technology sectors and oil and gas. Since Chemara Oils Bhd involved in oil and gas indusry, hence this alternative sources of funding will be the most suitable to the company among other DFIs.

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16079584

a) There are several factors affecting the agreed 6% coupon rate of Chemara Oils Bhd. Firstly, changes in Yield to Maturity (YTM) will directly affect coupon rate because Chemara Oils Bhd need offer at least the same coupon rate with market rate for to attract investors. It is because if company offers too low coupon rate, investors are not willing pay for the par value of the bond as they are seeking for higher return. On the other hand, company will pay more coupon payments if it offers a higher coupon rate.

Other than that, credit risk also one of the factors that affects coupon rate. Investors usually rely on bond rating services to provide credit risk ratings. The higher ratings of bond, the lower coupon rate will offer by the Chemara Oils Bhd because investors will accept lower return as a result of reduction of risk. In contrast, bonds with higher risk and lower credit ratings are considered speculative, thus coupon rate will be higher.

Furthermore,  characteristics of the corporate bonds such as nature and maturity of bonds also determine the coupon rate. For example, since secured bonds are less risky than unsecured bonds, coupon rate will be lower and vice versa. Besides, bonds will longer maturity will also carry more risk since there are more uncertainties in the future, thus investors will demand for higher coupon rate to offset the increased of risk.

b) If the market interest rate increases in the following year, bond price will decrease. It is because the current bond has fixed interest rate or fixed cash flow, as market interest rate increases, the bond offered by Chemara Oils Bhd will be not demanding. Since bond price is the discounted amount of all future cash flows, when market interest rate increases, bond price decreases.

It is shown by the formula below:
Assume YTM grow from 6% to 7%,

bond price @ 6% YTM = RM15million (same as par value)

bond price @ 7% YTM = RM13.63million

In short, as YTM increases, bond price decreases.

c) Since Chemara Oil Bhd is seeking for alternative sources of long-term funding amounting to RM 15 million, the company can obtain fund from bank loan, Export-Import Bank of Malaysia Berhad (EXIM Bank) and equity funding.

First, Chemara Oil Bhd can obtain long term loan from bank. Chemara Oil Bhds can borrow loan based on the capital structure and future growth of the company. There are several benefits of obtaining bank loan because it is well known of its flexibility in draw down and repayment profile. Besides, obtaining a bank loan is generally less of an administrative hassle than going through the process of issuing bonds. In order to issue bonds, Chemara Oils Bhd will need to spend time and money on advertising and adheres to the requirement of Security Commission. In short, the costs in obtaining bank loan is lower than the costs involved in borrowing money through bonds.

Secondly, with an assumption that Chemara Oil Bhd has an operation in import and export of oil, Chemara Oil Bhd can seek alternative sources of funding from EXIM Bank because EXIM Bank can provide credit facilities to finance and support exports and imports of goods, services and overseas projects. Besides, EXIM Bank can provide insurance services to support exports and imports of oil services. Since EXIM Bank is one of the Development Financial Institution (DFI), borrower will be fund at lower rate and it has a benefit of favorable tax treatment.

Lastly, Chemara Oil Bhd can obtain fund from equity market, such as trading its share through IPO since it is a public listed company. Chemara Oil Bhd can further issue its shares to shareholder in order to obtain more fund through Bursa Malaysia. Stock market provides benefit that company is not required to provide coupon payments compared to debt funding. In contrast, bank loans or other forms of debt financing have an immediate impact on cash flow and carry severe penalties unless payments terms are met, thus equity is also one of the preferable sources of funding.