FIN 310 Chapter Notes - Chapter 10: Investment, Quick Ratio, Debenture

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sapphiregnat826

1 Nov 2016

School

Quinnipiac University

Department

Finance

Course

FIN 310

Professor

Benjamin Abugri

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Document Summary

Bond a security that obligates the issuer to make a specified payment to the holder over a period of time. Face value/ par value the payment to the bondholder at the maturity of the bond. Zero-coupon bond a bond paying no coupons that sells at a discount and provides only a payment of par value at maturity. Maturities ranging from 10 to 30 years. Accrued interest = (annual coupon payment/2) * (days since last coupon payment/ days separating coupon payment) Callable bond bonds that may be repurchased by that issuer at a specific call price during the call period. Convertible bonds a bond with an option allowing the bondholder to exchange the bond for a specific number of shares of common stock. Market conversation value the current value of the shares for which the bond is exchange. Conversion premium - the excess of the bond price over its conversion value.

Related Questions

The yield to maturity on two 10-year maturity bonds currently is 7%. Each bond has a call price of $1,100. One bond has a coupon rate of 6% and the other 8%. Assume for simplicity that bonds are called as soon as the present value of their remaining payments exceeds their call price. What will be the capital gain on each bond if the market interest rate suddenly falls to 6%. A 20-year maturity 9% coupon bond paying coupons semiannually is callable in 5 years at a call price of $1050. The bond currently sells at a yield to maturity of 8%. What is the yield to call?

viridianplatypus869

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

FIN 310 Chapter Notes - Chapter 10: Investment, Quick Ratio, Debenture

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