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A financial analyst, in an advanced financial system, shared his assessment of a bond investment acquired by one of his clients. The bond was purchased by the US investor in the international bond market when it was first issued. Financial Analyst's Assessment I. Minucus Inc. and its Bonds Minucus Inc., a German corporation, with its head offices located in Frankfurt, Germany is the bond issuer. The bond is a 10- year bond which matures in September 2028 and is denominated in euros (). The bond will pay its face value of 1 million at maturity. The bond carries a fixed rate of interest of 4.5% per annum which is payable quarterly based on its face value. The bond does not offer a variable rate of interest. All principal repayments and interest payments are payable in euros. II. Brazil Operations The company used the debt financing from the bond issue to construct a manufacturing plant in Brazil. Earnings from the Brazilian manufacturing plant are specifically used to fund the payment of bond interest and will fund the repayment of bond principal at maturity. Brazil is currently hard hit by COVID-19 as more than 130,000 Brazilians have died as a result and multiple times have been infected with the virus. As a result, Minucus has temporarily closed the manufacturing plant. This led the company to recast its budget, and revenue and cash flow projections, for the manufacturing facility. Minucus estimates that the effects of the pandemic on its manufacturing facility will extend through to 2030. Although the company has historically been able to make its bond interest payments, it now questions whether it will be able to do so in the future based on its recasted financial statements. III. Germany Operations There have been over 266,000 reported cases of COVID-19 infection in Germany, with a reported death toll of almost 10,000. Consequently, Minucus has reported reduced levels of productivity (measured by hours worked) and lost opportunities (measured by sales reductions). As a result, international investors are seeking to unload their holdings of Minucus bonds. However, there are no takers in the international marketplace. One analyst stated that it is as if the market for Minucus bonds has frozen. There is a crack in the ice however since there may be a few interested parties willing to purchase some of these bonds. These investors though demand a higher yield, to compensate for increased risks, and therefore will only pay a deeply discounted price. Consequently, the current value of these bonds will continue to fall in the international bond market. IV. The Euro Area Interest rates in the Euro Area have fluctuated since exiting the global recession in 2010. Interest rates have reached as high as 4.75% in 2018 but fell as low as 0% in 2020. Interest rates in 2021 are expected to remain low until end 2021 when slight increases are projected. Further projections show that interest rate will likely return to its 2018 levels in 2025. The European Central Bank however is extremely guarded in its interest rate projections and has indicated that it is ready to implement the requisite monetary policies to safeguard the financial stability of the Euro Area as the pandemic continues. ECB/Eurosystem staff macroeconomic projections 2.24 September inflation rate 0.3% o 5.08 445 215 Economi rowth O The European Central Bank has also shared its inflation rate and economic growth projections through to 2022. Many analysts however believe that the economic growth projection in 2022 is an overreach: "Germany, for sure, will not even come that close in its recovery efforts in 2021." Required: Identify and define the financial risks to which a US corporate investor (i.e., the client of the Financial Analyst) would be exposed to in this case. You must also provide the evidence from the case that supports your risk identification choices. A financial analyst, in an advanced financial system, shared his assessment of a bond investment acquired by one of his clients. The bond was purchased by the US investor in the international bond market when it was first issued. Financial Analyst's Assessment I. Minucus Inc. and its Bonds Minucus Inc., a German corporation, with its head offices located in Frankfurt, Germany is the bond issuer. The bond is a 10- year bond which matures in September 2028 and is denominated in euros (). The bond will pay its face value of 1 million at maturity. The bond carries a fixed rate of interest of 4.5% per annum which is payable quarterly based on its face value. The bond does not offer a variable rate of interest. All principal repayments and interest payments are payable in euros. II. Brazil Operations The company used the debt financing from the bond issue to construct a manufacturing plant in Brazil. Earnings from the Brazilian manufacturing plant are specifically used to fund the payment of bond interest and will fund the repayment of bond principal at maturity. Brazil is currently hard hit by COVID-19 as more than 130,000 Brazilians have died as a result and multiple times have been infected with the virus. As a result, Minucus has temporarily closed the manufacturing plant. This led the company to recast its budget, and revenue and cash flow projections, for the manufacturing facility. Minucus estimates that the effects of the pandemic on its manufacturing facility will extend through to 2030. Although the company has historically been able to make its bond interest payments, it now questions whether it will be able to do so in the future based on its recasted financial statements. III. Germany Operations There have been over 266,000 reported cases of COVID-19 infection in Germany, with a reported death toll of almost 10,000. Consequently, Minucus has reported reduced levels of productivity (measured by hours worked) and lost opportunities (measured by sales reductions). As a result, international investors are seeking to unload their holdings of Minucus bonds. However, there are no takers in the international marketplace. One analyst stated that it is as if the market for Minucus bonds has frozen. There is a crack in the ice however since there may be a few interested parties willing to purchase some of these bonds. These investors though demand a higher yield, to compensate for increased risks, and therefore will only pay a deeply discounted price. Consequently, the current value of these bonds will continue to fall in the international bond market. IV. The Euro Area Interest rates in the Euro Area have fluctuated since exiting the global recession in 2010. Interest rates have reached as high as 4.75% in 2018 but fell as low as 0% in 2020. Interest rates in 2021 are expected to remain low until end 2021 when slight increases are projected. Further projections show that interest rate will likely return to its 2018 levels in 2025. The European Central Bank however is extremely guarded in its interest rate projections and has indicated that it is ready to implement the requisite monetary policies to safeguard the financial stability of the Euro Area as the pandemic continues. ECB/Eurosystem staff macroeconomic projections 2.24 September inflation rate 0.3% o 5.08 445 215 Economi rowth O The European Central Bank has also shared its inflation rate and economic growth projections through to 2022. Many analysts however believe that the economic growth projection in 2022 is an overreach: "Germany, for sure, will not even come that close in its recovery efforts in 2021." Required: Identify and define the financial risks to which a US corporate investor (i.e., the client of the Financial Analyst) would be exposed to in this case. You must also provide the evidence from the case that supports your risk identification choices

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