BE334: Optane is a Company Based in the United States (US): Financial Markets and Monetary Policy Assignment, UOE, Singapore

Assignment Brief:

Optane is a company based in the United States (US). Currently, the US economy is growing strongly and Optane expects this to continue in the next few years. As such, Optane may need to increase its production capacity by about 50 percent over the next few years to satisfy demand. It would need financing to expand and accommodate the increase in production.

Currently, the yield curve for US Treasuries is upward sloping. However, the management of Optane is also concerned about a possible slowing of the economy because of potential actions by the Federal Reserve bank to reduce inflation. Optane is considering the issuance of stock or bonds to raise funds in the next year.

Question A:

Currently, Optane is highly leveraged and has taken on large amounts of debt that have been pledged with the assets that it owns. Optane does not have any other collateral to pledge for future borrowings. Presently, the premium that Optane has to pay for its credit risk is similar for both the short-term and long-term debt.

Discuss if the cost of borrowing for Optane will remain the same in the future for both short-term and long-term debt. If Optane were to issue bonds, explain if it would be beneficial for the company to include a call provision in the bonds.

Question B:

If Optane decides to issue bonds, the management has decided that it would be a relatively small bond offering. Compare and contrast Optane’s options should they consider a private placement or a public placement of the bond issue.

Question C:

Institutional investors that include insurance firms and pension funds would have a substantial portion of their investments in bonds. Discuss how the flow of funds takes place through these institutions. Illustrate your discussion by including the issue of bonds by Optane company.