GIVE ME A CALL Bond Loving Company LLC ("BLC") is a telecom company located in the US. BLC has one of the first companies in the US to issue debt in the public markets in the form of corporate bonds. Many others have followed this path after BLC and therefore the bond market in the US has become one of the most profitable and liquid markets in the world. BLC has one of the most sophisticated trading desks in the world, with the ability to trade its own bonds and squeeze results You are part of a new team inside BLC, a structuring team that is in charge of designing the structure of new bonds. You have come across a new idea, "callable bonds". This new type of bonds will allow BLC to redeem the bond at any time before its maturity by paying the bond's principal (i.e. USD 100) Additionally, you have included in the bond the following characteristics: Coupon - 5% (annual payments) Term -4 years Interest rates for similar bonds in the market are 6.5% right now First, you want to show your boss how good an analyst you are and all you have learned in your Eng Economy classes, so without taking into account the call option: What is the price of the bond without taking into account the call option? What will be the price of the bond now if interest rates increase to 7% ? To 8% ? And what if they decrease to 6% ?5% ?4%? (Make a graph showing how the price changes depending on different interest rates) Assuming interest rates do not change, what will be the price in one year? In two? In three? Make a graph to show how the price of the bond changes once it approaches maturity Now, that you dominate the "normal" bonds, you want to really impress your boss with this new innovative idea you have. So now taking into account the call option: What is the price of the bond? 2. What will be the price of the bond now if interest rates increase to 7% ? To 8% ? And what if they decrease to 6% ? 5% ? 4% ? (Make a graph showing how the price changes depending on different interest rates) 3. Assuming interest rates do not change, what will be the price in one year? In two? In three? Make a graph to show how the price of the bond changes once it approaches maturity Hint: Your intuition is that the price of this bond will be "capped" at 100 (as nobody will acquire a bond for more than 100 that you can automatically redeem at any time at 100)

GIVE ME A CALL Bond Loving Company LLC ("BLC") is a telecom company located in the US. BLC has one of the first companies in the US to issue debt in the public markets in the form of corporate bonds. Many others have followed this path after BLC and therefore the bond market in the US has become one of the most profitable and liquid markets in the world. BLC has one of the most sophisticated trading desks in the world, with the ability to trade its own bonds and squeeze results You are part of a new team inside BLC, a structuring team that is in charge of designing the structure of new bonds. You have come across a new idea, "callable bonds". This new type of bonds will allow BLC to redeem the bond at any time before its maturity by paying the bond's principal (i.e. USD 100) Additionally, you have included in the bond the following characteristics: Coupon - 5% (annual payments) Term -4 years Interest rates for similar bonds in the market are 6.5% right now First, you want to show your boss how good an analyst you are and all you have learned in your Eng Economy classes, so without taking into account the call option: What is the price of the bond without taking into account the call option? What will be the price of the bond now if interest rates increase to 7% ? To 8% ? And what if they decrease to 6% ?5% ?4%? (Make a graph showing how the price changes depending on different interest rates) Assuming interest rates do not change, what will be the price in one year? In two? In three? Make a graph to show how the price of the bond changes once it approaches maturity Now, that you dominate the "normal" bonds, you want to really impress your boss with this new innovative idea you have. So now taking into account the call option: What is the price of the bond? 2. What will be the price of the bond now if interest rates increase to 7% ? To 8% ? And what if they decrease to 6% ? 5% ? 4% ? (Make a graph showing how the price changes depending on different interest rates) 3. Assuming interest rates do not change, what will be the price in one year? In two? In three? Make a graph to show how the price of the bond changes once it approaches maturity Hint: Your intuition is that the price of this bond will be "capped" at 100 (as nobody will acquire a bond for more than 100 that you can automatically redeem at any time at 100)

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter11: Risk-adjusted Expected Rates Of Return And The Dividends Valuation Approach

Section: Chapter Questions

Problem 11PC: Whirlpool manufactures and sells home appliances under various brand names. IBM develops and...

See similar textbooks