EBK CORPORATE FINANCE
11th Edition
ISBN: 8220102798878
Author: Ross
Publisher: YUZU
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Textbook Question
Chapter 15, Problem 8QP
- a. If the bonds are noncallable, what is the price of the bonds today?
- b. If the bonds are callable one year from today at $l,080, will their price be greater or less than the price you computed in (a)'/ Why'/
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The Chief Financial Officer of a company would like to raise money for new equipment by floating a new bond issue. The CFO would like to receive $1000 (full face value) for each of the bonds she sells. After collecting the below bond market data, and if the bonds carry a rating of A and have a term of 10 years, what coupon rate should be included in the bond contract? Assume an annual coupon payment.
Security& Rating Maturity Face Coupon Price
Treasury 1 $ 1,000 0.00% $ 965.00
Treasury 3 $ 1,000 1.90% $ 939.06
Treasury 5 $ 1,000 4.30% $ 932.42
Treasury 10 $ 1,000 6.80% $ 1,007.12
Treasury 15 $ 1,000 6.60% $ 908.25
CorpA A 5 $ 1,000 8.10% $ 990.00
CorpB BB 10 $ 1,000 7.90% $ 859.88
CorpC AA 15 $ 1,000 7.00% $ 660.00
Lantech investor is deciding between two bonds: Bond A pay $72 annual interest and has a market value of $925. It has 10 years to maturity. Bond B pays $62 annual interest and has a market value of $910. It has two years to maturity. Par value of the bonds is $1,000.
A. What is the current yield on both bonds?
B. Which bond should be chosen and why?
C. A drawback of current yield is that is doesn't consider the total life of the bond. E.g. Yield to maturity on Bond A is 8.33 percent. What is the yield to maturity on Bond B?
D. Is your answer changed from parts B and C based on which bond should be chosen?
Suppose that the prices of zero-coupon bonds with various maturities are given in the following table. The face value of each bond is
$1,000.
Maturity (Years)
1
2
3
4
5
Price
$983.78
865.89
797.92
732.00
660.24
Required:
a. Calculate the forward rate of interest for each year.
b. How could you construct a 1-year forward loan beginning in year 3?
c. How could you construct a 1-year forward loan beginning in year 4?
Chapter 15 Solutions
EBK CORPORATE FINANCE
Ch. 15 - Bond Features What are the main features of a...Ch. 15 - Prob. 2CQCh. 15 - Preferred Stock Preferred stock doesnt offer a...Ch. 15 - Preferred Stock and Bond Yields The yields on...Ch. 15 - Prob. 5CQCh. 15 - Call Provisions A company is contemplating a...Ch. 15 - Prob. 7CQCh. 15 - Preferred Stock Do you think preferred stock is...Ch. 15 - Long-Term Financing As was mentioned in the...Ch. 15 - Internal versus External Financing What is the...
Ch. 15 - Prob. 11CQCh. 15 - Classes of Stock Several publicly traded companies...Ch. 15 - Callable Bonds Do you agree or disagree with the...Ch. 15 - Bond Prices If interest rates fall, will the price...Ch. 15 - Sinking Funds Sinking funds have both positive and...Ch. 15 - Prob. 1QPCh. 15 - Prob. 2QPCh. 15 - Prob. 3QPCh. 15 - Prob. 4QPCh. 15 - Financial Leverage Kiedis, Corp., has...Ch. 15 - Financial Leverage Frusciante, Inc., has 290,000...Ch. 15 - Financial Leverage Harrison, Inc., has the...Ch. 15 - Valuing Callable Bonds KJC, Inc., plans to issue 5...Ch. 15 - Valuing Callable Bonds New Business Ventures,...Ch. 15 - Valuing Callable Bonds Bowdeen Manufacturing...Ch. 15 - Prob. 11QPCh. 15 - Prob. 12QP
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