Question

Assuming the government is selling a government bond to fight COVID-19, and at the same time, ASHANTI Goldfields Company is selling a corporate bond to increase its production. Under what conditions will the production-linked corporate bond be over-subscribed at the expense of the government bond. Explore all possible senarios

Answer 1

There are four scenarios:

No.1) if the price of corporate bond is smaller than the government bond, the corporate bond would be more attractive to purchase and therefore, this could be oversubscribed.

No.2) if the coupon rate and yield in case of corporate bond is higher than government bond, the oversubscription may happen.

No.3) if the corporate bond is issued at discount but the government bond is issued at premium, the corporate bond could have been more attractive.

No.4) if the rating of corporate bond is so high that it throws challenge to the government bond in terms of security, then corporate bond could have been oversubscribed.