In the past, Abbott Labs had two bond issues outstanding with the following characteristics. Issue Interest Rate Maturity Current Price A 6% 2008 115 B 6% 2012 118 Answer the following the questions regarding these bond issues. Note that both issues are by the same company, have the same contract rate of interest, and have identical credit ratings. In view of these facts, explain the current price difference of each issue

In the past, Abbott Labs had two bond issues outstanding with the following characteristics. Issue Interest Rate Maturity Current Price A 6% 2008 115 B 6% 2012 118 Answer the following the questions regarding these bond issues. Note that both issues are by the same company, have the same contract rate of interest, and have identical credit ratings. In view of these facts, explain the current price difference of each issue

Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)

7th Edition

ISBN:9780357033609

Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Publisher:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Chapter12: Investing In Stocks And Bonds

Section: Chapter Questions

Problem 9FPE: Which of these two bonds offers the highest current yield? Which one has the highest yield to...

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In the past, Abbott Labs had two bond issues outstanding with the following characteristics.           Issue                              Interest Rate                 Maturity                    Current Price           A              6%         2008           115           B               6%          2012           118 Answer the following the questions regarding these bond issues. Which issue, A or B, has the higher effective rate of interest? How can you tell?
Assume that interest rates on 30-year Treasury and corporate bonds with different ratings, all of which are non-callable, are as follows: State your reason for the answer. T-bond = 7.72%           A = 9.64% AAA = 8.72%           BBB = 10.18% The differences in rates among these issues were most probably caused primarily by: Real risk-free rate differences. Tax effects. Maturity risk differences. Inflation differences. Default and liquidity risk differences.
In the past, Abbott Labs had two bond issues outstanding with the following characteristics.           Issue                              Interest Rate                 Maturity                    Current Price           A              6%         2008           115           B               6%          2012           118 Answer the following the questions regarding these bond issues. Assume that the bonds of both issues had a face value of $1000 each. How much cash did each bond from issue A provide investors in 12 months? How much cash did each bond from issue B provide in 12 months?
Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows: T-bond = 7.72% A = 9.64%AAA = 8.72% BBB = 10.18% The differences in rates among these issues were most probably caused primarily by: a. Tax effects. b. Inflation differences. c. Maturity risk differences. d. Default risk and liquidity differences. e. Real risk-free rate differences.
Consider the following information regarding corporate bonds: Rating AAA AA A BBB BB B CCC Average Default Rate 0.0% 0.1% 0.2% 0.5% 2.2% 5.5% 12.2% Recession Default Rate 0.0% 1.0% 3.0% 3.0% 8.0% 16.0% 48.0% Average Beta 0.05 0.05 0.05 0.10 0.17 0.26 0.31 Nielson Motors plans to issue 10-year bonds that it believes will have an BBB rating. Suppose AAA bonds with the same maturity have a 4.1% yield. Assume that the market risk premium is 4% and the expected loss rate in the event of default on the bonds is 73%. The yield that these bonds will have to pay during a recession is closest to (%) (2 decimal places):
From page 9-2 of the VLN, what is the first thing you want to identify when approaching a bond problem? Group of answer choices A. Annual bond or semiannual bond B. Whether the market rate is different from the stated rate. C. The cash flows provided by the bond. D. The company's debt to equity ratio.
The tables below show, respectively, the characteristics of two annual-pay bonds from the same issuer with the same priority in the event of default, and spot interest rates. Neither bond’s price is consistent with the spot rates. Using the information in these tables, recommend either bond A or bond B for purchase. Bond Characteristics Bond A Bond B Coupons Annual Annual Maturity 3 years 3 years Coupon rate 10% 6% Yield to maturity 10.65% 10.75% Price 98.40 88.34 Spot Interest Rates Term (Years) Spot Rates (Zero-Coupon) 1 5% 2 8 3…
D. Standard and Poor’s has issued Orchid Plc with a credit rating of AA and Petunia Plc with a credit rating of BB. The corporate bond issued by Orchid Plc currently has a yield of 3% and the corporate bond issued by Petunia Plc currently has a yield of 4.5%. Based on this information, from which company would an investor buy a bond? Explain your answer..
he following information is about the spot rates on Treasury securities and BBB corporate bond: Spot 1 Year Spot 2 Year Spot 3 Year Treasury 3% 4.75% 5.5% BBB Corporate Debt 7.5% 9.15% 10.5% Question: What is the implied forward rates on one-year maturity BBB corporate debt to be delivered in year 3?
Which of the following statements is CORRECT? Group of answer choices The bond-yield-plus-risk-premium approach to estimating the cost of common equity involves adding a risk premium to the interest rate on the company’s own long-term bonds. The size of the risk premium for bonds with different ratings is published daily in The Wall Street Journal or is available online. The WACC is calculated using a before-tax cost for debt that is equal to the interest rate that must be paid on new debt, along with the after-tax costs for common stock and for preferred stock if it is used. An increase in the risk-free rate is likely to reduce the marginal costs of both debt and equity. The relevant WACC can change depending on the amount of funds a firm raises during a given year. Moreover, the WACC at each level of funds raised is a weighted average of the marginal costs of each capital component, with the weights based on the firm’s target capital structure. Beta measures market risk,…
You are given the following details of three default free government bonds. Assume that one can take long (buy) and short (sell) positions in these bonds. CF stands for cash flow. Bond Current price Today CF Year 1 CF Year 2 A 95.24 100 0 B 89.85 0 100 C X 70 1070 Assuming that the current market prices of Bond A and Bond B are correct, then, what should be the current theoretical (fundamental) price of Bond C, as per the no-arbitrage principle, i.e., what is the value of X? [Do not round-off any numbers. If at all you want to round-off a number, round it off at 8 decimal places.]
You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 1.35 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds: Real risk-free rate = 0.65% Default risk premium = 1.25% Liquidity risk premium = 0.70% Maturity risk premium = 1.85% What is the inflation premium? What is the fair interest rate on Moore Corporation 30-year bonds? ( explain all with proper address ) .