...What is a bond? Bonds are a form of debt. Bonds are loans, or IOUs, but you serve as the bank. You loan your money to a company, a city, the government and they promise to pay you back in full, with regular interest payments. A city may sell bonds to raise money to build a bridge, while the federal government issues bonds to finance its spiraling debts. The value of a bond is equal to the present value of its expected future cash flows. The valuation process involves estimating the expected future cash flows then determining the appropriate interest rate or interest rates that should be used to discount the cash flows, lastly you would need to calculate the present value of the expected cash flows. A bond’s value tends to fluctuate on daily and yearly bases due to prices either increasing or decreasing in value. As rates increase or decrease, the discount rate that is used also changes. (This was last updated may 24,2015) Maturity | Change in Bond Price If Interest Rates Rise To: | | 7.5% | 8.0% | 9.0% | 2 Years | -0.9% | -1.1% | -3.6% | 5 Years | -2.1% | -3.5% | -4.7% | 10 Years | -3.5% | -6.8% | -13.0% | 30 Years | -5.9% | -11.3% | -20.6% | Maturity | Change in Bond Price If Interest Rates Fall To: | | 6.5% | 6.0% | 5.0% | 2 Years | +0.9% | +1.9% | +3.8% | 5 Years | +2.1% | +4.3% | +8.7% | 10 Years | +3.6% | +7.4% | +15.6% | 30 Years | +6.6% | +13.8% | +30.9% | Verizon Communications Inc. sold $49 billion of bonds in eight parts...
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...1) What are a bond’s key features? a) The promises of the bond issuer and the rights of the bondholders are set forth in great detail in a bond’s indenture. b) The term to maturity of a bond is the number of years the debt is outstanding or the number of years remaining prior to final principal payment. The maturity date of a bond refers to the date that the debt will cease to exist, at which time the issuer will redeem the bond by paying the outstanding balance. c) The par value of a bond is the amount that the issuer agrees to repay the bondholder at or by the maturity date. d) The coupon rate, also called the nominal rate, is the interest rate that the issuer agrees to pay to the bondholder each year. The annual amount of interest payment made to bondholders during the term of the bond is called the coupon. The coupon is determined by multiplying the coupon rate by the par value of the bond. e) There are certain bonds that do not make periodic coupon payments, such as zero coupon bonds, step up notes, deferred coupon bonds and floating rate bonds. 2) What are call provisions and sinking fund provisions? Do these provisions make bonds more or less risky? f) An issuer generally wants the right to retire a bond issue prior to the stated maturity date. The issuer recognizes that at some time in the future interest rates may fall sufficiently below the issue’s coupon rate so that redeeming the issue and replacing it with another lower...
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...What fundamentals affect the yield of bonds (Singapore market) By: G8 Lee Kang Wee Olivia Tan Daryle-‐alexis Tan Ho Guoming FIIM FNCE 102 Professor Huang Sheng Introduction As an international financial centre with about 11% of GDP from financial services, we felt it would be interesting to find out more about the Singapore money market. Since the start of the new millennium, Singapore’s bond market has taken off and has now one of the most developed bond markets in Asia with about SGD357 billion in 2011 and this number is expected to grow further with more and more money flying into Asia from the West due to various economic situations. One area of high growth is in the Islamic debt area. For the purpose of ...
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...Chapter 4 Answers to Concept Review Questions 1. Managers need to understand how bonds and stocks are priced because (1) firms regularly issue stocks and bonds to raise money for investment (2) understanding how securities are priced is helpful when conducting an acquisition or a divestiture, (3) the stock price is an objective signal of how managers are performing, and (4) finance theory teaches that the goal of the manager should be to maximize the firm’s stock price. 5. The coupon rate equals the annual coupon payment divided by par value. The coupon yield equals the annual coupon payment divided by the bond’s market price. 6. A bond sells at a discount when the bond’s coupon rate is lower than the market’s required rate of return on the bond. 11. An issuer benefits from an option to call a bond, because such an option allows the issuer to lock in a more favorable interest rate if rates should fall.. The option to convert bonds into common stock benefits bondholders. Once the stock price rises high enough, the value of the bonds starts to behave like the stock’s value—the prices start to rise. So convertible bonds offer investors some minimal level of return plus a lot of upside potential. 13. The price of a Treasury note quoted as 98:10 is 98 10/32 percent of par value or $983.125. Answers to End-of-Chapter Questions Q4-1. What is the relationship between the price of a financial asset and the return that investors require on that asset, holding...
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...Chapter 4: mini case a. What are the key features of a bond? • Par Value • Coupon Rate • Maturity Date • Provisions to Call or Redeem Bonds • Issue Date • Default Risk b. c. What are call provisions and sinking fund provisions? Do these provisions make bonds more or less risky? Bonds that have call provisions allow the firms who issued the bonds to recall (redeem) them back. However, sinking fund provisions allows firms to retire funds in an orderly manner. Firms can retire funds by two ways: 1) they can call in a percentage of bonds each year or 2) they can buy them through the open market. d. How is the value of an asset whose value is based on expected future cash flows determined? It is determined by the present value of all future cash flows the assets will generate. e. How is the value of a bond determined? What is the value of a 10yr, $1000 par value bond with a 10% annual coupon if its required rate of return is 10%? The value of a bond is determined by using the following equation: V b= INT / (1+ rd) 1 + INT / (1+ rd) 2 + … + INT / (1+ rd) n The value of a bond with a 10yr maturity, $1,000 par, 10% coupon rate, and a required rate of 10% is $1000. Hence, the coupon is equal to the required rate; therefore, it’s equal to its par value. |N |PMT |Required |FV |PV | |10 ...
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...chapter 07 Interest Rates and Bond Valuation Answer Key Multiple Choice Questions 1. Mary just purchased a bond which pays $60 a year in interest. What is this $60 called? A. coupon B. face value C. discount D. call premium E. yield Refer to section 7.1 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 7-1 Section: 7.1 Topic: Coupon 2. Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called? A. coupon B. face value C. discount D. yield E. dirty price Refer to section 7.1 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 7-1 Section: 7.1 Topic: Face value 3. A bond's coupon rate is equal to the annual interest divided by which one of the following? A. call price B. current price C. face value D. clean price E. dirty price Refer to section 7.1 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 7-1 Section: 7.1 Topic: Coupon rate 4. The specified date on which the principal amount of a bond is payable is referred to as which one of the following? A. coupon date B. yield date C. maturity D. dirty date E. clean date Refer to section 7.1 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 7-1 Section: 7.1 Topic: Maturity 5. Currently, the bond market requires a return of 11.6 percent on the 10-year bonds issued by Winston Industries. The...
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...3% and the two-period spot interest rate is 7%. What is the present value of $100 received one year from now? A. $87.34 B. $93.46 C. $96.12 D. $97.08 E. None of the above.$97.08 2. The present value of $100 received one year from now is $91.27 and the present value of $100 received two years from now is $88.76. What is the two-year spot interest-rate? A. 6.14% B. 6.18% C. 6.23% D. 6.31% E. None of the above.$84.17 3. Assume that the one-period spot interest rate is 3% and the two-period spot interest rate is 7%. You invest $100 one-year from today. What is the time 2 value? A. $110.87 B. $111.16 C. $118.81 D. $119.28 E. None of the above. 4. Assume that the three-year spot interest rate is 3% and the four-year spot interest rate is 9%. You are going to receive $120 four years from now. What is the time 3 value? A. $104.03 B. $104.97 C. $105.19 D. $105.44 E. None of the above.$104.03 $118.81 5. Assume that the one-period spot interest rate is 3% and the two-period spot interest rate is 9%. You purchase a two-year bond with annual coupons of $4 and par value of $100? What is the price of this bond? A. $89.58 B. $91.42 ...
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...double bond _______ electrons are shared between two atoms. a. 2 b. 3 c. 4 d. 6 2. Which molecule has a triple bond? a. H2 b. F2 c. Cl2 d. N2 3. Which central atom has eight electrons around it when it forms the covalent compounds? a. AlCl3 b. phosphorus pentachloride c. sulfur hexafluoride d. methane 4. what is the molecular geometry for PCl3. a. trigonal planar b. tetrahedral c. linear d. pyramidal 5. Which is the shortest bond? a. N–N b. N=N c. N≡N d. All three bond lengths should be about the same 6. Based on the indicated electronegativities, arrange the following in order of increasing ionic character: CsBr, LaBr3, PBr3, MgBr2. a. CsBr, LaBr3, MgBr2, PBr3 b. CsBr, MgBr2, PBr3, LaBr3 c. PBr3, LaBr3, MgBr2, CsBr d. PBr3, MgBr2, LaBr3, CsBr 7. The oxygen-oxygen bond in O2 has a bond order of a. 3 b. 1 c. 2 d. 6 8. Which of the following contains an atom that does not obey the octet rule? a. KBr b. CO2 c. ClF3 d. ICl 9. How many lone pairs of electrons are on the Xe atom in XeF6? a. 0 b. 1 c. 2 d. 3 10. What is the molecular geometry of IF5? a. octahedral b. seesaw c. square pyramidal d. trigonal bipyramidal 11. A single sp3 hybrid orbital has a. one lobe. b. two lobes of equal size. c. two lobes of unequal size. d. four lobes of equal size. 12. A double bond is generally composed of a. three π bonds. b. one π bond and one σ bond. c. one π bond and two σ bonds. d. three σ bonds. 13. What orbital...
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...Washington version 2.0 School of Business April 2004 Walt Disney Company’s Sleeping Beauty Bonds – Duration Analysis* In July 1993, the Walt Disney Company issued $300,000,000 in senior debentures (bonds). The debentures carried an interest rate of 7.55%, payable semiannually, and were priced at “par”. They were due to be repaid on July 15, 2093, a full one hundred years after the date of issue. However, at the company’s option, the debentures could be repaid (in whole or in part) any time after July 15, 2023 or 30 years after the issue date. Beauty, the fairy tale princess and heroine of a popular Disney animated film, according to legend, slept under enchantment in a magic castle for one hundred years. The Disney 100-year debentures were immediately dubbed the “Sleeping Beauties.” The issue caused a lot of comment among traders of portfolio managers. “It’s crazy,” said William Gross, head of fixed-income investments at Piper Capital Management Company. “Look at the path of Coney Island over the last fifty years and see what happens to amusement parks.”[1] Scott Jacobson, head of fixed-income research at Piper Capital Management, felt that the bonds were too risky for his clients, but “if corporate treasurers can get away with it, why not?”[2] Other interpreted the successful sales of the bonds as a vote of confidence in the Disney Company and U.S. economy policy. “It shows that people believe the...
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...Corporate Bond What Does Corporate Bond Mean? A debt security issued by a corporation and sold to investors. The backing for the bond is usually the payment ability of the company, which is typically money to be earned from future operations. In some cases, the company's physical assets may be used as collateral for bonds. Corporate bonds are considered higher risk than government bonds. As a result, interest rates are almost always higher, even for top-flight credit quality companies. Investopedia explains Corporate Bond Corporate bonds are issued in blocks of $1,000 in par value, and almost all have a standard coupon payment structure. Corporate bonds may also have call provisions to allow for early prepayment if prevailing rates change. Corporate bonds, i.e. debt financing, are a major source of capital for many businesses along with equity and bank loans/lines of credit. Generally speaking, a company needs to have some consistent earnings potential to be able to offer debt securities to the public at a favorable coupon rate. The higher a company's perceived credit quality, the easier it becomes to issue debt at low rates and issue higher amounts of debt. Most corporate bonds are taxable with terms of more than one year. Corporate debt that matures in less than one year is typically called "commercial paper". Capital Markets What Does Capital Markets Mean? A market in which individuals and institutions trade financial securities. Organizations/institutions...
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...very dramatically in the last three decades. What has been the impact on interest | | |coverage, particularly since 1977? | | | | | |In 1977, the average U.S. manufacturing corporation had its interest covered almost eight times. By the early 2000’s,| | |the ratio had been cut in half. | | | | |16-2. |What are some specific features of bond agreements? | | | | | |The bond agreement specifies such basic items as the par value, the coupon rate, and the maturity date. | | | | |16-3. |What is the difference between a bond agreement and a bond indenture? ...
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...Catastrophe Bonds Financial markets are consistently changing as new opportunities arise and others die off. Catastrophe bonds are an example of a new market opportunity that had not been thought of before. Catastrophe bonds can be defined as a high-yield debt instrument that is usually insurance linked and meant to raise money in case of a catastrophe such as a hurricane or earthquake. One of the advantages of catastrophe bonds is that they are not linked to the stock market or the poor economic conditions occurring today. The emergence of catastrophe bonds occurred because of the large losses insurance companies suffered following Hurricane Andrew. A catastrophe bond deal occurs as; “an insurer will issue a bond whose returns are tired to the likelihood of one or more natural disasters over a certain period of time. If the event does not happen, investors earn a yield on the bond. But the principle can be wiped out if a devastating storm does strike,” (Ahmed). The catastrophe bond can be beneficial to the insurance company when a natural disaster occurs because they now have more money on hand due to the investors. It can also be very beneficial for investors when a natural disaster does not occur and they earn a relatively high yield compared to other securities. The main issue with the catastrophe bond as both an insurance company and an investor is that the likelihood of a natural disaster is entirely random and cannot be predicted through any mathematical formula...
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...Chapter 10 Bond Prices and Yields Multiple Choice Questions 1. The invoice price of a bond is the ______. A. stated or flat price in a quote sheet plus accrued interest B. stated or flat price in a quote sheet minus accrued interest C. bid price D. average of the bid and ask price 2. Sinking funds are commonly viewed as protecting the _______ of the bond. A. issuer B. underwriter C. holder D. dealer 3. A collateral trust bond is _______. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured 4. A mortgage bond is _______. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured 5. A debenture is _________. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured 6. Bonds issued in the U.S. are __________ and most bonds issued overseas are ___________. A. bearer bonds; registered bonds B. registered bonds; bearer bonds C. straight bonds; convertible bonds D. puttable bonds; callable 7. Floating rate bonds have a __________ that is adjusted with current market interest rates. A. maturity date B. coupon payment date C. coupon rate D. dividend yield 8. Inflation-indexed Treasury securities are commonly called ____. A...
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...(5–1) Jackson Corporation’s bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 8%. The bonds have a yield to maturity of 9%. What is the current market price of these bonds? 0 1 2 3 4 5 6 7 8 9 10 11 n=12 PV 80 80 80 80 80 80 80 80 80 80 80 80 Par Vaule= $1,000.00 Coupon interest rate = 8% Par value = $1,000.00 Payment = Par value x coupon rate Payment = $1,000.00 x 0.08 Payment = $80.00 Yield to maturity = 9% The current market price of the Jackson Corporation's bonds are calculated as follows. =PV(Rate, Nper, Payment, FV, Type) =PV(9%,12,80,1000,0) [pic] The current market price of Jackson Corporation's bonds is $928.39. (5–3) Heath Foods’s bonds have 7 years remaining to maturity. The bonds have a face value of $1,000 and a yield to maturity of 8%. They pay interest annually and have a 9% coupon rate. What is their current yield? 0 1 2 3 4 5 6 n= 7 PV 90 90 90 90 90 90 90 Par Vaule= $1,000.00 Coupon interest rate = 9% Par value = $1,000.00 Payment = Par value x coupon rate Payment = $1,000.00 x 0.09 Payment = $90.00 Yield to maturity 8% The current yield for Heath Food's bond is calculated as follows. Current Yield=current payment/current price Current Yield = $90.00/Present Value =PV(Rate, Nper, Payment, FV, Type) =PV(8%,7,90,1000,0) [pic] Current Yield= $90.00/$1052...
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...yours alone - any discussion of either the questions on the assignment or your answers with anyone other than your instructor will be considered as cheating and, thus, as a violation of the GSU honor code. All questions are equally weighted. PART I: MULTIPLE CHOICE – Choose the letter of the most correct answer for each question. Record only one answer per question. Each question is worth 4 points. 1. IS THE FOLLOWING STATEMENT TRUE or FALSE? “A financial security is simply a contract between the provider of funds and the user of these funds that clearly specifies the amount of money that has been provided and the terms and conditions of how the user is going to repay the provider.” a. True b. False 2. A consol is a bond that: a. Pays a fixed annual coupon amount, and when originally issued, is set to mature in 30 years. b. Pays a fixed annual coupon amount, and when originally issued, is set to mature in 50 years. c. Does not pay an annual coupon (i.e., the annual coupon payment is $0) but when it matures pays out the par...
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