Property developer Lendlease issues 90-day bank bills that have a yield-to-maturity (YTM) of 3% p.a. that you as a potential buyer value at a price of $95,000.
The latest analyst report comes out showing improvement in working capital for the remainder of the year. This is due to the ability of Lendlease to improve collections on accounts receivable.
Which of the following best describes how you would revalue the investment?

Question

Property developer Lendlease issues 90-day bank bills that have a yield-to-maturity (YTM) of 3% p.a. that you as a potential buyer value at a price of $95,000.

The latest analyst report comes out showing improvement in working capital for the remainder of the year. This is due to the ability of Lendlease to improve collections on accounts receivable.

Which of the following best describes how you would revalue the investment?

Answer

Improving collections on customer debts causes a fall in liquidity risk, which reduces the YTM, increasing the value of the bill where you would pay a price higher than $95,000.

Answer

Rising earnings causes a fall in credit risk, which reduces the YTM, increasing the value of the bill where you would pay a price higher than $95,000.

Answer

Falling collections on customer debt causes an increase in liquidity risk, which increases the YTM, reducing the value of the bill where you would pay a price lower than $95,000.

Answer

Improving collections on customer debts causes a fall in credit risk, which increases the YTM, reducing the value of the bill where you would pay a price lower than $95,000.

Answer

Falling earnings causes an increase in interest rate risk, which increases the YTM, increasing the value of the bill where you would pay a price higher than $95,000.

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