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Summarize call provisions and sinking fund provisions. Explain how these types of provisions individually make bonds more or less risky for a) an investor, and b) the issuer.

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Jean Keeling
Jean KeelingLv2
5 Apr 2018

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The (-Select- A. discount B. premium C. par) value of a bond is its stated face value or maturity value, and its coupon interest rate is the stated annual interest rate on the bond. The maturity date is the date on which the par value must be repaid. A (-Select- A. call B. redemption C. sinking) provision gives the issuer the right to redeem the bonds under specified terms prior to their normal maturity date, although not all bonds have this provision. Some bonds have (-Select- A. redemption fund B. sinking fund C. call fund) provisions which require the issuer to systematically retire a portion of the bond issue each year. Because sinking fund provisions facilitate their orderly retirement, bonds with these provisions are regarded as being (-Select-A. riskier B. safer C. equivalent) so they will have (-Select- A. lower B. equivalent C. higher) coupon rates than similar bonds without these provisions.

Bonds can be (-Select- A. floating B. zero C. fixed) -rate bonds with a constant coupon rate over the life of the bond, or they can be (-Select- A. floating B. zero C. fixed) -rate bonds with a coupon rate that varies over time depending on the level of interest rates. (-Select- A. Annual coupon B. Zero coupon C. Fixed coupon) bonds pay no annual interest but are sold at a (-Select- A. premium above B. price at C. discount below) par, thus compensating investors in the form of capital appreciation. An original issue discount (OID) bond is any bond originally offered at a price (-Select- A. above its B. below its C. equal to) par value.

(-Select- A. Convertible B. Perpetual C. Putable) bonds are exchangeable at the option of the holder for the issuing firm's common stock. Bonds can be issued with warrants giving the holder the option to purchase the firm's stock for a stated price, thereby providing a capital gain if the stock's price rises. (-Select- A. Income B. Convertible C. Putable) bonds contain a provision that allows holders to sell them back to the company prior to maturity at a prearranged price. (-Select- A. Income B. Default C. Preferred) bonds pay interest only if the firm has earnings, while an indexed (purchasing power) bond bases interest payments on an inflation index to protect the holder from inflation.

Mortgage bonds are backed by (-Select- A. current assets B. fixed assets C. marketable securities) . First mortgage bonds are senior in priority to claims of second mortgage bonds. Debentures are long-term bonds that are not secured by a mortgage. Subordinated debentures are bonds having claims on assets only after senior debt has been paid in full in the event of liquidation. (-Select- A. Secured-debenture B. Investment-grade) bonds are rated triple B or higher, and many banks and other institutional investors are legally limited to only holding these bonds. In contrast, junk bonds are high-risk, high-yield bonds.

Please discuss all questions and explain. Thank you!

How do optional call provisions in a securitization differ from that of a call provision in a standard corporate bond questions relate to auto loan-backed securities.

(a) What is the cash flow for an auto loan-backed security?

(b) Why are prepayments of minor importance for automobile loan-backed securities?

(c) How are prepayments on pools of auto loans measured?

Sam Strother and Shawna Tibbs are vice presidents of Mutual ofSeattle Insurance
Company and co-directors of the company’s pension fund managementdivision. An
important new client, the North-Western Municipal Alliance, hasrequested that Mutual
of Seattle present an investment seminar to the mayors of therepresented cities, and
Strother and Tibbs, who will make the actual presentation, haveasked you to help them
by answering the following questions.
a. What are the key features of a bond?
b. What are call provisions and sinking fund provisions? Do theseprovisions make
bonds more or less risky?
c. How does one determine the value of any asset whose value isbased on expected
future cash flows?
d. How is the value of a bond determined? What is the value of a10-year, $1,000 par
value bond with a 10% annual coupon if its required rate of returnis 10%?
e. (1) What would be the value of the bond described in Part d if,just after it had been
issued, the expected inflation rate rose by 3 percentage points,causing investors
to require a 13% return? Would we now have a discount or a premiumbond?
(2) What would happen to the bond’s value if inflation fell and rddeclined to 7%?
Would we now have a premium or a discount bond?
(3) What would happen to the value of the 10-year bond over time ifthe required
rate of return remained at 13%? If it remained at 7%? (Hint: With afinancial
calculator, enter PMT, I/YR, FV, and N, and then change N to seewhat happens
to the PV as the bond approaches maturity.)
f. (1) What is the yield to maturity on a 10-year, 9% annualcoupon, $1,000 par value
bond that sells for $887.00? That sells for $1,134.20? What doesthe fact that a
bond sells at a discount or at a premium tell you about therelationship between
rd and the bond’s coupon rate?
(2) What are the total return, the current yield, and the capitalgains yield for the
discount bond? (Assume the bond is held to maturity and the companydoes not
default on the bond.)

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