son.1 3. Referring to the case “Bear Stearns and the Seeds of Its Demise.” Baa-rated corporate bonds had average five-year default rate of 2.2%, whereas Baa-rated CDOs had five-year default rate of 24%. Why are the default rates on the debt securities of the same rating so dramatically different?

son.1 3. Referring to the case “Bear Stearns and the Seeds of Its Demise.” Baa-rated corporate bonds had average five-year default rate of 2.2%, whereas Baa-rated CDOs had five-year default rate of 24%. Why are the default rates on the debt securities of the same rating so dramatically different?

Fundamentals of Financial Management, Concise Edition (MindTap Course List)

9th Edition

ISBN:9781305635937

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter10: The Cost Of Capital

Section: Chapter Questions

Problem 3DQ: Next, we need to calculate MMMs cost of debt. We can use different approaches to estimate it One...

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Which of the following events would make it more likely that a company would call its outstanding callable bonds? (Ch. 7) Group of answer choices Inflation increases significantly. The company’s bonds are downgraded. Market interest rates rise sharply. The company's financial situation deteriorates significantly. Market interest rates decline sharply.
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Refer to Table 12.2. a. What is the historical real return on long-term government bonds? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the historical real return on long-term corporate bonds? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) TABLE 12.2 Average Annual Returns: 1926-2019 Investment Average Return Large-company stocks 12.1% Small-company stocks 16.3 Long-term corporate bonds 6.4 Long-term government bonds 6.0 U.S. Treasury bills 3.4 Inflation 2.9 Source: 2020 SBBI Yearbook. Duff & Phelps.
Which of the following is FALSE regarding bonds? Long term bonds have greater interest rate risk than do short term bonds. A bond indenture describes the terms of the bond issue. Bonds represent ownership in the company. if interest rates in the market go up, the present value of existing bonds goes down. A bond issuer is legally required to make the interest payments and repay the par value at maturity. Previous Page Next Page Page 12 of 30
Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds? 1.Market interest rates decline sharply. 2.The company's bonds are downgraded. 3.Market interest rates rise sharply. 4.Inflation increases significantly. 5.The company's financial situation deteriorates significantly.
57. Which of the following statements is incorrect about bonds? In all ofthe statements, assume other things are held constant.a. Price sensitivity, that is, the change in price due to a given changein the required rate of return, increases as a bond’s maturityincreases.b. For a given bond of any maturity, a given percentage point increasein the interest rate (kd) causes a larger dollar capital loss thanthe capital gain stemming from an identical decrease in the interestrate.c. For any given maturity, a given percentage point increase in theinterest rate causes a smaller dollar capital loss than the capitalgain stemming from an identical decrease in the interest rate.d. From a borrower’s point of view, interest paid on bonds is taxdeductible.e. A 20-year zero coupon bond has less reinvestment rate risk than a 20-year coupon bond.
Which of the following observations is the most accurate? 38.a. When a big company is in financial trouble, it is nearly invariably liquidated.b. In comparison to mortgage bonds, debentures have a greater yield to maturity.c. Where two bonds with the same duration and credit risk, the callable bond would have a higher yield to maturity than the noncallable bond.d. All a and c are valid statements.e. Both b and c are valid statements.
46. One of the points below is the most accurate?a. After a company files for bankruptcy, the administrator liquidates it, using the money to compensate bondholders, overdue salaries, royalties, and legal fees.b. Where the price of the bond approaches the sinking fund call price, a company with a sinking fund payout due will typically opt to purchase back bonds on the open market.c. Income bonds incur dividends only after the amount of interest received by the corporation is directly earned. As a result, these securities cannot default a corporation, making them better for investors than traditional bonds.d. One drawback to zero coupon bonds being that the tax gains from selling securities are not realised before the bonds maturity.e. Callable bonds should have a lower yield to maturity than noncallable bonds, assuming all other factors remain stable.
Which of the following events would make it more likely that a company would call its outstanding callable bonds? State your reason for the answer. The company’s bonds are downgraded. Market interest rates rise sharply. The company's financial situation deteriorates significantly. Inflation increases significantly. Market interest rates decline sharply
Question 1 Indicate whether each of the following actions will increase or decrease a bondâ€™s yield tomaturity: a. A bondâ€™s price increase. b. The companyâ€™s bonds are downgraded by the rating agencies. c. A change in the bankruptcy code makes it more difficult for bondholders to receivepayments in the event a firm declares bankruptcy. d. The economy enters a recession. Question 2 .If a companyâ€™s beta were to double, would it expected return double? Question 3.Are there conditions under which a firm might be better off if it were to choose a machine with arapid payback rather than one with a larger NPV?
Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds? * Market interest rates rise sharply. The company's financial situation deteriorates significantly. Inflation increases significantly. Market interest rates decline sharply. The company's bonds are downgraded.