Your business associate mentions that she is considering investing in corporate bonds currently selling at a premium. She says that because the bonds are selling at a premium, they are highly valued and her investment will yield more than the going rate of return for the risk involved. Reply with a memorandum to confirm or correct your associate’s interpretation of premium bonds.

Your business associate mentions that she is considering investing in corporate bonds currently selling at a premium. She says that because the bonds are selling at a premium, they are highly valued and her investment will yield more than the going rate of return for the risk involved. Reply with a memorandum to confirm or correct your associate’s interpretation of premium bonds.

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter5: Bond, Bond Valuation, And Interest Rates

Section: Chapter Questions

Problem 1mM

See similar textbooks

Similar questions

Mr. Jackson is considering investing in corporate bonds. He has talked to an investment analyst who has advised him to choose between company A or company B bonds. The possible rates of return for the two bonds, which are subject to the state of the economy are given below: State of theeconomy Probability for State ofthe economy Possible rate of returnfor Company A bond Possible rate ofreturn for CompanyB bond Expansion 0.2 17% 20% Normal 0.1 13% 15% Recession 0.4 10% 11% Required:i. Calculate the expected return for each corporate bond ii. Calculate the variance and standard deviation for each bond. iii. Compute the coefficient of variation for each bond iv. Advice Mr. Jackson on the best bond to invest in.
Frank Meyers, CFA, is a fixed-income portfolio manager for a large pension fund. A member of the Investiment Committee, Fred Spice, is very interested in learning about the management of fixed-income portfolios. Spice has approached Meyers with several questions. Specifically, Spice would like to know how fixed-income managers position portfolios to capitalize on their expectations of future interest rates. Meyers decides to illustrate fixed-income trading strategies to Spice using a fixed-rate bond and note. Both bonds have samiannual coupon periods. Unless otherwise stated, all interest rate (yield curve) changes are parallel. The characteristic of these securities are shown in the following table. He also considers a nine-year floating-rate bond (floater) that pays a floating rate semiannually and is currently yielding 5%. Fixed-rate bond: price 107.18, YTM 5%, TMT (years) 18, modified duration (years) 6.9848. Fixed-rate note: price 100, YTM 5%, TMT (years) 8, modified duration…
Frank Meyers, CFA, is a fixed-income portfolio manager for a large pension fund. A member of the Investment Committee, Fred Spice, is very interested in learning about the management of fixed-income portfolios. Spice has approached Meyers with several questions.Meyers decides to illustrate fixed-income trading strategies to Spice using a fixed-rate bond and note. Both bonds have semiannual coupon periods. Unless otherwise stated, all interest rate changes are parallel. The characteristics of these securities are shown in the following table. He also considers a 9-year floating-rate bond (floater) that pays a floating rate semiannually and is currently yielding 5%. Characteristics of Fixed-Rate Bond and Fixed-Rate Note Fixed-Rate Bond Fixed-Rate Note Price 107.18 100.00 Yield to maturity 5.00% 5.00% Time to maturity (years) 18 8 Modified duration (years) 6.9848 3.5851 Spice asks Meyers to quantify price changes from changes in interest rates. To illustrate, Meyers…
an investment analysis advised a friend that long term bonds are excellent investments because they offer an interest rate as high as 11%. Is the consultant definitely correct? provide your reasoning to support your answer.
Which of the following is FALSE regarding bonds? The yield to maturity is the return an investor would earn if she buys the bond at the current price and holds it to maturity, collecting all of the promised coupon payments and the par value at maturity bond holders vote to elect members to the board of directors a bond indenture includes all of the basic terms of a bond issue bondholders have legal recourse if a company fails to make the promised interest payments or the par value at maturity corporate bonds usually have a fixed coupon rate with semi-annual interest payments.
From an investment point of view, bonds are generally considered to be safer investments than stocks. They are generally low risk low return investments, unlike stocks. As an investor in bonds, you would lend money to the issuer of the bonds. It is important to understand what bonds are and how they work as investment vehicles. Suppose a friend of yours is looking to invest $5,000 such that it will provide current income and increase the diversification of his assets. He has heard a lot about corporate bonds but wants to learn more before purchasing them. Fill in the blanks in the following conversation to give your friend the appropriate information regarding corporate bonds. FRIEND: Can you explain to me the basics of how investing in a corporate bond will increase my current income? YOU: Under a standard bond agreement, if you were to purchase a 10-year, $5,000 corporate bond with a 9% coupon, you would receive _______________in interest each year, and at the end of…
Matilda has recently been appointed as an analyst within the Waltzing Investment Co. Part of her role is to advise fund managers on the fixed income portion of their portfolio. a. One of Matilda’s colleagues suggests that analyzing the bonds issued by foreign governments is more complex than for the bonds issued by domestic corporate bonds. The colleague states that this difficulty is a result of the intangible and non-quantitative elements involved in analyzing the foreign bonds. Discuss whether you agree with this argument.
Your uncle would like to avoid both his interest rate price risk (the risk that rising rates will cause the value of his bonds to decline) and to avoid his default risk, but he would still like to invest in corporate bonds. He is considering the following bonds. Which of these bonds would best meet his criteria? BBB perpetual bonds BBB bonds with 2 years to maturity AAA bonds with 10 years to maturity AAA bonds with 2 years to maturity BBB bonds with 10 years to maturity
Mark buys a financial asset from the DBA. This financial asset is an instrument of short term borrowing. He hasbought it because he doesn’t want to take risk and wants an assured return. This instrument is promissory note. It ishighly liquid. The instrument is also known as zero coupon bonds. On this instrument it is written T-91. Based onthe above case study, answer the following:a. Which financial asset is indicated in the above case?b. On whose behalf does the DBA issue this instrument?c. Why is this instrument called as the zero coupon bond?d. What does T-91 denote here?e. What is the minimum amount for which this instrument bond?
Richard would like to invest on long-term debt securities, specifically bonds. Instruct Richard to go to the a. Money Market - Bond Market b. Money Market - Stock Market c. Capital Market - Bond Market d. Capital Market - Stock Market
The company's bank won't lend it any more money than it already has, and investment bankers have said that debentures are out of the question. The treasurer has asked you to do some research and suggest a few ways in which bonds might be made attractive enough to allow the company to borrow. Please provide a detail explanation for each Explain how to secure the bonds with owned assets in great detail. In what ways does it make the bonds more attractive to allow the company to borrow? What is the agreement to subordinate future debt? How does it make the bonds more attractive?
Consider the case of an investor, Nazim: Nazim wants to include putable bonds in his investment portfolio. Nazim is likely to put the bonds when: He is in need of cash. He expects to use the cash when the bond matures. Nazim also recently bought bonds with a clause stating that interest will be paid based on the inflation rate. When the inflation rate increases, the interest on the bonds will also increase. Nazim has invested in .