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FIN 3715 Chapter Notes - Chapter 7: Promissory Note, Current Yield, Cash Flow

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whitetoad550
5 May 2015
School
LSU
Department
Finance
Course
FIN 3715
Professor
A L L

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Document Summary

Bond is a long-term promissory note of ten years or more issued by the borrower, and promising to pay the owner a predetermined fixed interest per year, along with the face value of the bond at maturity. Types of bonds: debentures are any long term unsecured debt. They assume more risk than secured bonds and therefore provide investors with a greater yield. The largest attraction is the less rigorous disclosure requirements and relative lack of regulations: convertible bonds can be converted into stock at a preset price. 7. 2 terminology and characteristics of bonds: claims on assets and income: bonds get the first claim in case of insolvency. There are three main rating agencies: moody"s, standard & poor"s, fitch investor services. Book value is the value of an asset as on the firm"s balance sheet, and is representative of the historic value of the asset rather than the current value.

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Related Questions

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.

The following balance sheet represents Boles Electronics Corporation's position at the time it filed for bankruptcy (in thousands of dollars):

Cash $10 Accounts payable $1,600
Receivables 100 Notes payable 500
Inventories 890 Wages payable 150
Taxes payable 50
Total current assets $1,000 Total current liabilities $2,300
Net plant 4,000 Mortgage bods 2,000
Net equipment 5,000 Subordinated debentures 2,500
Preferred stock 1,500
Common stock 1,700
Total assets $10,000 Total claims $10,000

The mortgage bonds are secured by the plant but not by the equipment. The subordinated debentrues are subordinated to notes payable. The firm was unable to reorganize under Chapter 11; therefore, it was liquidated under Chapter 7. The trustee, whose legal and administrative fees amounted to $200,000, sold off the assets and received the following proceeds (in thousands of dollars):

Asset Proceeds
Plant $1,600
Equipment 1,300
Receivables 50
Inventories 240
Total $3,190

In addition, the firm had $10,000 in cash abailable for distribution. No single wage earner had more than $10,000 in claims, and there were no unfunded pension plan liabilities.

QUESTION 2:

Determine the dollar distribution to each creditor and to the trustee. What percentage of each claim is satisfied?

2. For this and the next question. The City of Knights issued $10,000,000 of 9% coupon, 20-year, semiannual payment, tax-exempt municipal bonds. The bonds were issued 5 years ago. The bonds can be called now if the city chooses to do so. The call premium is 4% of the face value. New 15-year, 5%, semiannual payment bonds can be sold at par, but flotation costs on this issue would be 2% of the amount of bonds sold. Note that the combined costs associated with calling the existing bonds and paying for the flotation cost of the new issue represent the total initial outlay for the refinancing. The initial cost is $600,000. CALCULATE THE TOTAL SEMI-ANNUAL SAVINGS ASSOCIATED WITH REFINANCING

120,000

30,000

none of the above

3. What is the net present value of the refunding? Note that cities pay no income taxes. Hence, taxes are not relevant in this analysis.

$453,443

$499,921

$240,000

$551,163

none of the above

4. For this and the next 2 question. New York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14.5% coupon, 30-year bond issue that was issued 5 years ago. It has been amortizing $3 million of flotation costs on these bonds over their 30-year life. The company could sell a new issue of 25-year bonds at an annual interest rate of 11.67% in today's market. A call premium of 14% would be required to retire the old bonds, and flotation costs on the new issue would be $3 million. The company's marginal tax rate is 40%. The new bonds would be issued when the old bonds are called. The initial cost of the refunding is $6,200,000?

Calculate the after-tax annual INTEREST SAVINGS if the refunding takes place.

$664,050

$768,000

$849,000

$930,369

none of the above

5. What is the NPV if the bods are refunded today?

$1,746,987

$1,838,933

$1,935,719

$3,785,322

6. A callable bond with an original maturity of 20 years now has 15 years to mature. The bond was originally issued at par with a coupon rate of 12% and semiannual interest payments. The bond can be called 7 years from now at a 20 percent call premium. Calculate this bond’s yield-to-call and yield-to-maturity if the current price is $860.

YTC = 14.29%; YTM = 17,09%

YTC = 17.09%; YTM = 14.29%

None of the above

7. Which of the following statements is most correct?

Junk bonds typically carry a lower yield to maturity than investment grade bonds

A debenture is a secured bond which is backed by some or all of the firm’s fixed assets

All else equal, subordinated bonds typically carry lower yields than mortgage bonds

None of the above statements is correct

8. Assume you wish to purchase a bond with a 30-year maturity, a coupon rate of 10 percent, a face value of $1,000, and semiannual interest payments. If you require 9% yield to maturity, what is the present value of the bond?

$905.35

$1,102.74

$1,103.19

$1,149.63

9. A bond has a coupon rate of 8%, a maturity of 10 years, a face value of $1,000, and makes semiannual payments. If the price is $9.34.96, what is the annual nominal yield to maturity on the bond?

8.39%

9.64%

4.41%

none of the above