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Fundamentals of Corporate Finance

Stephen A. Ross; Randolph W. Westerfield; Bradford D. Jordan

Chapter 7

INTEREST RATES AND BOND VALUATION - all with Video Answers

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Chapter Questions

00:38

Problem 1

Is it true that a U.S. Treasury security is risk-free?

NS
Nayeli Selkis
Numerade Educator
01:29

Problem 2

Which has greater interest rate risk, a 30 -year Treasury bond or a 30 -year BB corporate bond?

Sandile Ndlovu
Sandile Ndlovu
Numerade Educator

Problem 3

With regard to bid and ask prices on a Treasury bond, is it possible for the bid price to be higher? Why or why not?

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Problem 4

Treasury bid and ask quotes are sometimes given in terms of yields, so there would be a bid yield and an ask yield. Which do you think would be larger? Explain.

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Problem 5

A company is contemplating a long-term bond issue. It is debating whether to include a call provision. What are the benefits to the company from including a call provision? What are the costs? How do these answers change for a put provision?

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Problem 6

How does a bond issuer decide on the appropriate coupon rate to set on its bonds? Explain the difference between the coupon rate and the required return on a bond.

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00:51

Problem 7

Are there any circumstances under which an investor might be more concerned about the nominal return on an investment than the real return?

Amrita Bhasin
Amrita Bhasin
Numerade Educator

Problem 8

Companies pay rating agencies such as Moody's and S\&P to rate their bonds, and the costs can be substantial. However, companies are not required to have their bonds rated; doing so is strictly voluntary. Why do you think they do it?

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01:03

Problem 9

Often, junk bonds are not rated. Why?

Sandile Ndlovu
Sandile Ndlovu
Numerade Educator
01:53

Problem 10

What is the difference between the term structure of interest rates and the yield curve?

Robert Daugherty
Robert Daugherty
Numerade Educator

Problem 11

Looking back at the crossover bonds we discussed in the chapter, why do you think split ratings such as these occur?

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04:36

Problem 12

Why is it that municipal bonds are not taxed at the federal level, but are taxable across state lines? Why are U.S. Treasury bonds not taxable at the state level?

Jennifer Stoner
Jennifer Stoner
Numerade Educator
01:15

Problem 13

What are the implications for bond investors of the lack of transparency in the bond market?

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator

Problem 14

A controversy erupted regarding bond-rating agencies when some agencies began to provide unsolicited bond ratings. Why do you think this is controversial?

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00:55

Problem 15

The 100-year bonds we discussed in the chapter have something in common with junk bonds. Critics charge that, in both cases, the issuers are really selling equity in disguise. What are the issues here? Why would a company want to sell "equity in disguise"?

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator