Suppose you read an article about the Golden Gate Bridge and Highway District bonds. It includes the following information: Bridge Bonds Series A Dated 7-15-2005 4.375% Due 7-15-2055 @100.00 What is the issuing date of this bond? 7-15-2005 7-15-2055 If the price of the bond is initially discounted and offers no coupon payments, the bond is called a bond. Which feature of a bond contract allows the issuer to redeem bonds under specified terms prior to maturity? Convertible provision Sinking fund provision Deferred call provision Call provision Issuers can gradually reduce the outstanding balance of a bond issue by using a sinking fund account into which they deposit a specified amount of money each year. To operationalize the sinking fund provision of an indenture, issuers can (1) purchase a portion of the debt in the open market or (2) call the bonds if they contain a call provision. Under what circumstances would a firm be more likely to buy the required number of bonds in the open market as opposed to using one of the other procedures? When interest rates are higher than they were when the bonds were issued When interest rates are lower than they were when the bonds were issued
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1. You are considering buying a bond that matures in 10 years from today. The par value of the bond is $10,000 and the coupon rate is 7%. If the current market interest rates are 5%, what is the bond price today if the coupon is paid annually? 2. A Zero Coupon bond has a par value of $1000 and matures in 20 years. Investors require a 10% annual return on these bonds. For what price should the bond sell? (Note: Zero coupon bonds do not pay interest) 3. Suppose there are two bonds you are considering: Bond A Bond B Maturity (years) 20 30 Coupon Rate (%) paid Semiannually 12 8 Par Value $1000 $1000 a. If both bonds had a required rate of return of 10%, what would the bonds price be? b. Explain what it means when a bond is selling at a discount, a premium, or at its face amount (par value). Based on results in part (a), would you consider both bonds to be selling at discount, premium or at par? c. Re-calculate the prices of the bonds if the required returns falls to 9%? 6. An Investor is considering two bonds. One is a corporate bond yielding 12% and is currently selling at par. The marginal tax rate is 28%. The other is a municipal bond with a coupon rate of 9.50%. Which should the investor choose? 15. A 15 year $5000 par value bond has a 12% semiannual coupon and a nominal yield to maturity of 8.5%. What is the price of the bond?
Madhur L.
The value of a bond is its stated face value or maturity value, and its coupon interest rate is the stated annual interest rate on the bond. The maturity date is the date on which the par value must be repaid. A provision gives the issuer the right to redeem the bonds under specified terms prior to their normal maturity date, although not all bonds have this provision. Some bonds have provisions which require the issuer to systematically retire a portion of the bond issue each year. Because sinking fund provisions facilitate their orderly retirement, bonds with these provisions are regarded as being so they will have coupon rates than similar bonds without these provisions.
Akash M.
Suppose that a three-year corporate bond provides a coupon of 7% per year payable semiannually and has a yield of 5% (expressed with semiannual compounding). The yield for all maturities on risk-free bonds is 4% per annum (expressed with semiannual compounding). Assume that defaults can take place every six months (immediately before a coupon payment) and the recovery rate is 45%. Estimate the default probabilities assuming (a) the unconditional default probabilities are the same on each possible default date and (b) the default probabilities conditional on no earlier default are the same on each possible default date. A company has issued one- and two-year bonds providing 8% coupons, payable annually. The yields on the bonds (expressed with continuous compounding) are 6.0% and 6.6%, respectively. Risk-free rates are 4.5% for all maturities. The recovery rate is 35%. Defaults can take place halfway through each year. Estimate the risk-neutral default rate each year. The value of a company's equity is $4 million and the volatility of its equity is 60%. The debt that will have to be repaid in two years is $15 million. The risk-free interest rate is 6% per annum. Use Merton's model to estimate the expected loss from default, the probability of default, and the recovery rate (as a percentage of the no-default value) in the event of default. (Hint: The Solver function in Excel can be used for this question as indicated in footnote 23.)
Manasvee S.
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