SMG FE 101 Chapter Notes - Chapter 6: United States Treasury Security, Yield Curve, Interest Rate Risk

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emeraldgoose991

4 Jan 2017

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Bond: security sold by governments and corporations to raise money from investors today in exchange for a promised future payment (you loan your money and they promise to pay you back in full) Bond certificate: states the terms of the bond and dates of all the payments to be made. Maturity date: the final repayment date of a bond. Term: the time remaining until the final repayment date of a bond. Bonds make two types of payments to their holders. Face value, par value, principal amount: the notional amount of a bond used to compute its interest payments, the face value of the bond is generally due at the bond"s maturity. Generally denominated in standard increments of . Bond with a face value is a bond. Coupons: the promised interest payments of a bond, paid periodically until the maturity date of the bond. Zero- coupon bonds: a bond that makes only one payment at maturity.

Related Questions

Hi There

Can you please help with the below question. Thank you in advance.

Ms. Alumm is the portfolio manager for a large insurance company. She is considering investing $1 million to purchase the bonds of Patriot Enterprises, Inc.
[A] All of Patriot's bonds have market prices that imply a yield to maturity of 8% "bond equivalent yield" (that is, 4% every 6-month period).1 Each Patriot bond is described here, based on a
$1,000 face value (par value), which is the promised payment at maturity.

. Bond A has five years until maturity and pays a 9% coupon yield ($45 every 6 months on a $1,000 face value bond).
. Bond B has ten years until maturity, pays an 8% coupon yield ($40 semiannual payments), and is being offered in a private placement at par.
. Bond C is a zero-coupon bond that pays no explicit interest, but will pay the face amount of $1,000 per bond at maturity in ten years.
1. At what price should each bond sell currently?

[B] Ms. Alumm realizes that in addition to determining the current prices of these bonds, she would also like to know how these prices might respond to changing interest rates once her company has purchased them.
2. After purchasing the bonds at an 8% bond-equivalent yield, what would happen to the price of each bond, and how much money would the company make if market yields on Patriot bonds fall to 6%?. . . rise to 10%?

[C] As an alternative, Ms. Alumm has been invited to invest $1 million in a private placement of a 10-year Eurobond2 of a second firm, Nationaliste, S.A. Nationaliste bonds are similar in risk to "Bond B" above: they promise an 8% coupon yield for 10 years, but coupons are paid annually, not semiannually. The Nationaliste bonds are priced at a 1% discount from par, or $990 per $1,000 face value.
3. What yield to maturity is implied by the Nationaliste Eurobond? Compare this yield to the 8% "bondequivalent yield" of the Patriot semiannual coupon bond (Bond B) above. What should Ms. Alumm do?

beigehound466

You own some bonds issued by Another Failing Airline Inc. (AFA). When AFA issued the bonds it was in good financial health and was able to get a coupon rate of 6.6%. The bonds pay coupons annually, and have exactly 10 years remaining until maturity. Each bond has a face value of $1000. Due to the recent increase in operating costs, most notably fuel prices, AFA is no longer able to pay the coupon payments on its bonds. At a creditors meeting, bond holders agreed to forgive the next 3 interest payments (starting with the payment due one year from today). This means that the next interest payment on the bonds will be made 4 years from today. After that, interest payments will be made annually until maturity. Given the risk of AFA and its recent credit downgrade to CC, the required return on these bonds is now 24.2%. What is the fair price of one AFA bond?

chocolatehyena459

q1)WhichBank has just issued 90-day bank bills with a face value of $300,000. If the current 90-day bill rate is 7.7% p.a., what is the current value of these bank bills? Enter your answer to the nearest dollar

Q2)You own some bonds issued by Another Failing Airline Inc. (AFA). When AFA issued the bonds it was in good financial health and was able to get a coupon rate of 6.4%. The bonds pay coupons annually, and have exactly 10 years remaining until maturity. Each bond has a face value of $1000.

Due to the recent increase in operating costs, most notably fuel prices, AFA is no longer able to pay the coupon payments on its bonds. At a creditors meeting, bond holders agreed to forgive the next 3 interest payments (starting with the payment due one year from today). This means that the next interest payment on the bonds will be made 4 years from today. After that, interest payments will be made annually until maturity. Given the risk of AFA and its recent credit downgrade to CC, the required return on these bonds is now 19.2%.

What is the fair price of one AFA bond? Enter your answer to the nearest cent.

for q2 should my answer be 311.93 or 312?

beigemole589

SMG FE 101 Chapter Notes - Chapter 6: United States Treasury Security, Yield Curve, Interest Rate Risk

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