FIN20150 Lecture Notes - Lecture 13: Dirty Price, Global Macro, Convertible Bond

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sangriacoyote110

22 Jan 2016

School

Department

Finance

Course

FIN20150

Professor

Ackermann Carl

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Document Summary

Bond= interest only loan so borrower will pay interest every period but none of principal will be repaid until the end of the loan. When interest rates rise, present value of remaining cash flows. Coupon- equal and regular interest payment that will be made. Face/par value- principal amount that will be paid at end of loan o. Coupon rate- annual coupon divided by face value of a bond. Cash flows of a bond stay the same over time o o. A bond"s yield- interest rate required in the market on a bond. Discount bond- when bond sells for less than face value. Premium bond- when bond sells for more than face value. Risk that arises for bond owners from fluctuating interest rates. The longer the time to maturity, the greater the interest rate risk declines, and bond is worth less.

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?

Question 5: (15 points).

(Bond valuation relationships) Arizona Public Utilities issued a bond that pays $70 in interest, with a $1,000 par value and matures in 25 years. The markers required yield to maturity on a comparable-risk bond is 8 percent. (Round to the nearest cent.) For questions with two answer options (e.g. increase/decrease) choose the best answer and write it in the answer block. Question Answer

a. What is the value of the bond if the markers required yield to maturity on a comparable-risk bond is 8 percent? $

b. What is the value of the bond if the markers required yield to maturity on a comparable-risk bond increases to 11 percent? $

c. What is the value of the bond if the market's required yield to maturity on a comparable-risk bond decreases to 7 percent? $

d. The change in the value of a bond caused by changing interest rates is called interest-rate risk.

Based on the answer: in parts b and c, a decrease in interest rates (the yield to maturity) will cause the value of a bond to (increase/decrease): By contrast in interest rates will cause the value to (increase/decrease): Also, based on the answers in part b, if the yield to maturity (current interest rate) equals the coupon interest rate, the bond will sell at (par/face value): exceeds the bond's coupon rate, the bond will sell at a (discount/premium): and is less than the bond's coupon rate, the bond will sell at a (discount/premium): e. Assume the bond matures in 5 years instead of 25 years, what is the value of the bond if the yield to maturity on a comparable-risk bond is 8 percent? $ 960.07 Assume the bond matures in 5 years instead of 25 years, what is the value of the bond if the yield to maturity on a comparable-risk bond is 11 percent? $ f. Assume the bond matures in 5 years instead of 25 years, what is the value of the bond if the yield to maturity on a comparable-risk bond is 7 percent? $ g. From the findings in part e, we can conclude that a bondholder owning a long-term bond is exposed to (more/less) interest-rate risk than one owning a short-term bond.

Bond valuation

An investor has two bonds in his portfolio that both have a face value of $1,000 and pay a 8% annual coupon. Bond L matures in 19 years, while Bond S matures in 1 year.

Assume that only one more interest payment is to be made on Bond S at its maturity and that 19 more payments are to be made on Bond L.

What will the value of the Bond L be if the going interest rate is 5%? Round your answer to the nearest cent.
$

What will the value of the Bond S be if the going interest rate is 5%? Round your answer to the nearest cent.
$

What will the value of the Bond L be if the going interest rate is 9%? Round your answer to the nearest cent.
$

What will the value of the Bond S be if the going interest rate is 9%? Round your answer to the nearest cent.
$

What will the value of the Bond L be if the going interest rate is 14%? Round your answer to the nearest cent.
$

What will the value of the Bond S be if the going interest rate is 14%? Round your answer to the nearest cent.
$

Why does the longer-term bondâs price vary more than the price of the shorter-term bond when interest rates change?

The change in price due to a change in the required rate of return decreases as a bond's maturity increases.

Long-term bonds have lower interest rate risk then do short-term bonds.

Long-term bonds have lower reinvestment rate risk then do short-term bonds.

The change in price due to a change in the required rate of return increases as a bond's maturity decreases.

Long-term bonds have greater interest rate risk then do short-term bonds.

FIN20150 Lecture Notes - Lecture 13: Dirty Price, Global Macro, Convertible Bond

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