Case 78 Questions McDaniel Nienberg Palmer Pastor

1. To begin, assume that it is now January 1, 1993, and that each bond in Table 1 matures on December 31 of the year listed. Further, assumes that each bond has $1,000 par value, each had a 30-year maturity when it was issued, and the bonds currently have a 10 percent required nominal rate or return.

Inflation erodes the purchasing power of a bond 's future cash flows. A rise in inflation will cause investors to demand higher yields to compensate for inflation rate risk. Also, prices will tend to drop because the bond will be paying interest with less purchasing power.

2. Jordan, Bradford D., Susan D. Jordan, and David R. Kuipers. "The Mispricing of    Callable U.S. Treasury Bonds: A Closer Look." Journal of Futures Markets 18.1 (1998): 35-51. Web.

The T- bills are less risky as compared to the T-bonds. T-bonds have a price risk premium

What was the firm’s historical dividend growth rate using the point-to-point method? Using the linear regression method?

As a result, bond rates tend to rise in order to create demand for them. Conversely, when investors are afraid of indicators in the financial sector, they turn to safer investments like bonds. The rate of return on these bonds drops in parallel with the increased demand for them.

35) The correlation between an interest rate on a debt instrument and the level of security is: C

a. What was TECO’s expected rate of return at the beginning of 1992? Value Line estimate

The bonds have 20 years to maturity, pay interest at 9.3%, have a par value of $1,000 and are currently selling for $890.

2. Miller Corp. has a premium bond making semiannual payments. The bond pays an 8% coupon, has a YTM of 6%, and has 10 years to maturity. The Modigliani Corp. has a discount bond making annual payments. The bond pays a 6% coupon, has a YTM of 8%, and also has 10 years to maturity. If interest rates remain unchanged, what do you expect the price of these bonds to be 1 year from now? In 5 years? In 10 years? Please also illustrate your answers by graphing bond prices versus time to maturity.

Wells Fargo can sell for example $750 million worth of future mortgage to Goldman Sac in July 2013 which will should originate in October 2013. Wells Fargo has an idea of volume of loan they produce in quarter. The typical sales price Goldman will pay, in this case “the 22+ means 22 and a half/32nds, or 45/64ths, or .703125. This quote assume everyone knows on the buying and selling side knows the ‘handle,’ which is the main price, near par, that the bond will trade at during origination” (The Bankers, 2013, para. 6). In October 2013, Wells Fargo will be buddle 2000 mortgage worth $750 million securitization for an average loan balance of $375,000. The 2000 homeowner will close the loans at interest rate from 4.375% to 4.5% in October 2013 which shows 0.375% to 0.5% difference between the homeowner rate and the bond rate. The majority of the extra interest is paid monthly to the mortgage bond service and mortgage insurer such as Fannie Mea or Freddie Mac. Now the Mortgage bond is grouped together, assigned a structure, assigned mortgage service and guaranteed by the mortgage insurer it becomes a tradable bond. Goldman Sac can sell the bond to Vanguard fund which can earn 4% on its investment. If the interest rate goes down and people refinance at the lower rate that will impact the value of bond (The Banker,

Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

A tax-exempt bond was recently issued at an annual 8 percent coupon rate and matures 20 years from today. The par value of the bond is $1,000. If a required market rates are 8 per cent, then the market price of a bond will be $1000. In case of falling in the required market rates fall to 5 per cent, then the market price of the bond will be $1,373.87. In another situation, Charles City Hospital plans on issuing a tax-exempt bond at the bond is $1,000. If required market rates are 6 per cent, the value of the bond will be $1229.40. In same case, if the required market rates fall to 12 per cent then the value of the bond will be $701.22. The above bond sells at a discount at the 3 per cent market rate and the same bond will be sold at a premium at 12% market rate of interest (Gapenski,

Assuming that all the bonds make only annual payments, what spot rates are imbedded in these prices?

Sun co.’s bonds, maturing in 7 years, pay 8% interest on a $1,000 face value. However, interest is paid semi-annually. If your required rate of return is 10%, what is the value of the bond? How would your answer change if the interest were paid annually?