ADMS 3530 Lecture 4: Week 4 - Lecture 4 -Supplementary Notes (Ch.6 Bonds )-2

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fuchsiaeel885

19 Oct 2015

School

York University

Department

Administrative Studies

Course

ADMS 3530

Professor

Samuel Benchimol

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Document Summary

Lecture 4 : supplementary notes for ch. 6 bonds: description of bond terms securities issued by corporations and governments when they want to raise money. usually a term loan for a fixed number of years i. e. long-term debt. Par value the payment a holder will receive at the maturity of the bond is almost always is ,000 also referred to as face value, maturity value or principal amount. Maturity date: date the loan will be paid off, usually 5 , 10, 20 years from issue date. = (coupon rate x par value ) / 2: e. g. Pmt = ( 0. 07 x )/2 = every six months (i. e 2 times per year!) * do not mix-up coupon rate and market interest rate: they are usually different. If they are the same, (i. e. coupon rate = market interest rate), then bond will sell at par value or ) 1: how do we value a bond? (why do we care?)

Related Questions

QUESTION 1 The largest investors in corporate bonds are life insurance companies and pension funds. True False 5 points QUESTION 2 Most secondary market transactions for corporate bonds take place through dealers in the over-the-counter (OTC) market. True False 5 points QUESTION 3 The value (or price) of a bond is the present value of its expected future cash flows. True False 5 points QUESTION 4 Bond prices decline when the interest rate decreases. True False 5 points QUESTION 5 The face or par value for bonds is the amount paid to bondholders at maturity and is usually equal to $1,000. True False 5 points QUESTION 6 The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond. True False 5 points QUESTION 7 Zero coupon bonds have no coupon payments so they sell for more than their par value. True False 5 points QUESTION 8 Interest rate risk is the risk that bond prices will fluctuate when the interest rate changes. True False 5 points QUESTION 9 US Treasury securities are considered risky investments because the coupon payments are unpredictable. True False 5 points QUESTION 10 Bonds are very difficult to value because their future cash flows are very difficult to predict. True False 5 points QUESTION 11 If the bond's coupon rate is equal to the market rate then the bond will sell at a price equal to its face value greater than its face value less than its face value equal to its foreign currency value, e.g., its price in British pounds 5 points QUESTION 12 When calculating the price of a bond that pays a semiannual coupon one needs to use double the number of years until maturity for the number of payments use half the annual coupon payment use half the annual rate of return as the discount rate all of the above 5 points QUESTION 13 The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments more than the price of the bond equal to zero equal to the price of the bond less than the price of the bond 5 points QUESTION 14 Which one of the following statements is true? All else equal long-term bonds have lower price volatility than short-term bonds. There is an inverse relation between bond prices and market interest rates. All else equal short-term bonds are more risky than long-term bonds. All else equal US government bonds are more risky than corporate bonds. 5 points QUESTION 15 An investor owns a 10-year US government bond with a 9 percent coupon rate. If the yield-to-maturity on the bond is 8 percent then this bond is selling for its par value. a discount. a premium. its face value. 5 points QUESTION 16 BA Corp is issuing a 10-year bond with a coupon rate of 8 percent and a par value of $1,000. The market interest rate on similar bonds is currently 6 percent. If the coupon payments are made annually, what is the value of this bond? 5 points QUESTION 17 Knight, Inc. has issued a 3-year bond with a $1,000 par value and an annual coupon rate of 6 percent. The current market rate of interest is 5 percent. What is the value of this bond if the coupon payments are made semiannually? 5 points QUESTION 18 Diane Carter is interested in buying a 5-year zero coupon bond with a face value of $5,000. If the market interest rate on these types of bonds is currently 9 percent, what is the current price of this bond? 5 points QUESTION 19 Rudy Sandberg wants to invest in 4-year bonds that are currently priced at $933.76. The bonds have a coupon rate of 6 percent and annual coupon payments. If the par value of the bonds is $1,000, what is the bond's yield-to-maturity? 5 points QUESTION 20 You own a 5-year bond with a face value of $1,000 and a coupon rate of 5 percent with annual payments. The bond is currently worth $810.46. If market interest rates remain unchanged, what will be the value of the bond next year when there are 4 years left until maturity?

Fill in the blank using a number of terms listed below (@1 point per question).

Beta coefficient, Bonds, CAPM, Cash flows, Change, CV, Convertible bonds, Correlation, Correlation coefficient, Debenture, Discount, Diversifiable risk, Expected return, Interest rate risk, Inverted, Junk Bonds, Market risk, More, Normal, Opposite, Probability distribution, Ratings, Reinvestment rate risk, Risk, Risk averse investor, Risk premium, Standard deviation

When interest rates move up or down, bond prices move in the _________________ direction.

_____________ are referred to as non-amortized debt, which means interest is paid regularly during the term, usually semiannually, whereas repayment of principal does not occur until the maturity date.

The longer a bond has to maturity, _______________ sensitive the bondâs price is to changes in market interest rates. This is called ________________________.

Bonds with short maturities expose investors to high ____________________, which is the risk that income from a bond portfolio will decline because cash flows received from bonds will be rolled over at lower interest rates.

A bond with an annual coupon payment of $100 originally sold at par for $1,000. Market interest rates are currently 12%. This bond would be selling at a _____________ in order to compensate the purchaser for the below market coupon rate.

Once a bond has been issued, if the holder of the bond retains it until maturity the market value of the bond may ________________, but the ________________ will not.

An unsecured bond is referred to as a(n) __________________.

____________________ can generally be issued at somewhat lower interest rates than regular bonds.

Double-B and lower bonds are speculative, to be called _______________.

Bonds are assigned _____________ that reflect the probability of their going into default. The higher it is, the lower its risk and therefore its interest rate.

When the yield curve slopes upward, it is said to be _______________, because it is like this most of the time. Conversely, a downward-slopping yield curve is termed ______________.

Time Value of Money Project

Name: __________________

Please show all your work if you use the Calculator. If done in Excel, please send me the spreadsheet / workbook.

What is the market value of the following bond?

Coupon 8%

Maturity date 2038

Interest paid semiannually

Par Value $1000

Market interest rate 10%

What is the market value of the following bond?

Coupon 9%

Maturity date 2028

Interest paid semiannually

Par Value $1000

Market interest rate 8%

What is the yield to maturity of the following bond?

Coupon 9%

Maturity date 2027

Interest paid semiannually

Par Value $1000

Market price $955.00

What is the current yield of bond in Question 3?

The risk free rate is 7%, the return in the market is 10%, and the beta is 1.30.What return must you receive to be satisfied that you are being fairly compensated for the risk of the firm?

What should a zero coupon bond maturing for $1000 in 9 years with a 7% market rate sell for?

Page Two

Preferred stock has a dividend of $12 per year.The required return is 6%.What should be the price per share?

Hurricane Corporation expects to grow its dividend by 5% per year.The current dividend is $2 per share.The required return is 8%.

What is the estimated value of a share of common stock?

If price is $40 and dividends were $1.50 per share but expected to grow at 4% per year, what would be the required rate of return?

Compute the expected return for the following investment

State of nature Probability Return

Boom 25% 20%

Average 60% 8%

Recession 15% 0%

The following are the expected returns on a portfolio of investments.What is the expected rate of return on the portfolio?

Investment # of shares Price per share Expected return

A. 2000 $20 10%

B. 3000 $10 15%

C. 1000 $15 8%

You take out a $200,000 mortgage for 20 years at 6%.

What is your monthly payment?

What is the principle and interest on the first payment?

What is the principle and interest on the twelfth payment?

How much interest will you pay over the 20 years?

You bought a house 8 years ago with a $250,000 mortgage.It was a 15 year loan with monthly payments which will pay off the loan when you make the last payment. The interest rate was 6%.What are your monthly payment and your current loan balance?How much interest will you pay in the upcoming year?

Page Three

You want to retire has a millionaire. How much do you need to put away each month if:

You use common stocks and have an average return of 10%?

You use corporate bonds and have an average return of 6%?

You use government bonds and have an average return of 4%?

You put your money in a CD at 2.5% interest rate?

(Please use your own age. If you are over 45, please solve for saving a $100,000.)

You are offered a contract with a signing bonus. If they offered you either $215,000 in cash or $2,000 a month for 15 years, guaranteed, which do you take (based strictly on the math)? Your safe rate of return is 7.5%.

You are 30 years old today and planning to retire at age 62.You want to plan your finances for living 35 years past age 62 and die dead broke. You determine you will need $3000 per month from age 62 for the 35 years.

Your plan is to go live in the tropics, on the beach, and live on coconuts and fishing. Also, you need to conclude your retirement savings at age 55 because all your spare money then will be going to your childrenâs education.

The question is how much money you will need to save each month between now and 55 so that you can quit contributing. The expected return on your investments over the whole period is 10% per year. Please ignore inflation.

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ADMS 3530 Lecture 4: Week 4 - Lecture 4 -Supplementary Notes (Ch.6 Bonds )-2

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