PRIN.OF CORPORATE FINANCE >BI<
12th Edition
ISBN: 9781260431230
Author: BREALEY
Publisher: MCG CUSTOM
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Question
Chapter 18, Problem 20PS
a)
Summary Introduction
To discuss: The person who benefits from the fine print in a bond contract when a firm is into financial troubles.
b)
Summary Introduction
To discuss: The person who benefits from the fine print when the bonds are issued and bond the firm expects to issue.
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Discuss the functioning and merits of callable and puttable bonds from an investor’s perspective.
Discuss how the price of a puttable bond will differ from the price of a similar, plain vanilla bond and the main determinants of this price difference.
In which market environment does the issuance of a callable bond make more sense from a corporate issuer’s perspective?
____ occurs when a firm calls a relatively high interest rate issue and replaces it with a lower interest rate issue.
a.
Bond refunding
b.
A call feature
c.
A sinking fund
d.
Indenture refinancing
1. Under what conditions would the yield-to-maturity and current yield of a bond be equal?
Group of answer choices
a. The bond is priced at par
b. The bond is priced at a discount
c. Insufficient information
d. The bond is priced at a premium
2. Which of the following is correct about the risk-free rate as used in valuing equity instruments?
Group of answer choices
a. The risk-free rate accounts for the rate of return or yield of a government instrument which does not carry any risk.
b. The risk-free rate used for valuing equity instruments is normally the yield of a long-term government security.
c. The risk-free rate used for valuing equity instruments is the same as that used for valuing short-term debt instruments.
d. The risk-free rate accounts for the risks related to government securities which is composed of credit-spread, maturity risk premium and the real risk-free rate.
3. Berg Inc. has just paid a dividend of P2.00. Its stock is now selling…
Chapter 18 Solutions
PRIN.OF CORPORATE FINANCE >BI<
Ch. 18 - Prob. 1PSCh. 18 - Tax shields Here are book and market value balance...Ch. 18 - Prob. 3PSCh. 18 - Tax shields The firm cant use interest tax shields...Ch. 18 - Financial distress This question tests your...Ch. 18 - Prob. 6PSCh. 18 - Prob. 7PSCh. 18 - Debt ratios Rajan and Zingales identified four...Ch. 18 - Prob. 9PSCh. 18 - Pecking-order theory Fill in the blanks: According...
Ch. 18 - Financial slack For what kinds of companies is...Ch. 18 - Tax shields Compute the present value of interest...Ch. 18 - Tax shields Suppose that Congress sets the top...Ch. 18 - Tax shields The trouble with MMs argument is that...Ch. 18 - Tax shields Look back at the Johnson Johnson...Ch. 18 - Agency costs Let us go back to Circular Files...Ch. 18 - Agency costs The Salad Oil Storage (SOS) Company...Ch. 18 - Prob. 20PSCh. 18 - Agency costs The possible payoffs from Ms....Ch. 18 - Leverage targets Some corporations debtequity...Ch. 18 - Prob. 25PSCh. 18 - Trade-off theory The trade-off theory relies on...
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- 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.arrow_forwardCan I use the yield to maturity (YTM) on a bond issued by the company as the cost of debt? A Yes, you can use the YTM B No, you cannot use the YTM C Only if the bond is liquid and has not special feature embedded in it D There is not enough information to answer this problemarrow_forwardUnder which of the following situation, would a firm most likely to call its outstanding callable bonds? Group of answer choices a)The firm has financial distress. b)The company’s bonds are downgraded. c)The market interest rate increases d)The market interest rate declinesarrow_forward
- Explain how does a bond par value differs from its market value? Are variable rate bonds attractive to investors who expect the interest rates to decrease? Explain. Would a firm that needs to borrow funds consider issuing variable rate bonds if it expects interest rates to decrease in the future? Explain.arrow_forward1. Types of bonds Fixed-income securities consist of debt instruments and preferred stock. Bonds are debt securities in which a borrower promises to pay a specified interest rate and principal at a future date. A. Which of the following statements about Treasury bonds is the most accurate? Treasury bonds have a very small amount of default risk, so they are not completely riskless. Treasury bonds are completely riskless. Treasury bonds are not completely riskless, since their prices will decline when interest rates rise. B. Based on the information given in the following statement, answer the questions that follow: In July 2009, Hungary successfully issued 1 billion euros in bonds. The transaction was managed by Citigroup. Who is the issuer of the bonds? The Hungarian government Hungary Bank Citigroup C. What type of bonds are these? Municipal bonds Corporate bonds Government bondsarrow_forward1. Statement I - Before a bond is issued, the issuer must have to consider or study the current market interest rate to arrive at a quoted interest rate. Statement II - At the final issue of bonds, the quoted Interest rate will become fixed and is termed as coupon rate. -Only statement II is correct -Both statements are incorrect -Only statement I is correct -Both statements are correct 2. The liquidity function of the financial market provides for an opportunity for the investors to sell their financial instruments at its prevailing fair value. Is it true or false? 3. Which of the following is not a role of a financial manager? -Supervises employees who do accounting and budgeting reports department. -Makes sure that legal requirements affecting financial aspects are met. -Makes financial decision -Prepares financial reports 4. Which of the following statements is incorrect? -Liquidity premium is required by investors to compensate them in case there is a decrease in the purchasing…arrow_forward
- 1. Statement I - Before a bond is issued, the issuer must have to consider or study the current market interest rate to arrive at a quoted interest rate. Statement II - At the final issue of bonds, the quoted Interest rate will become fixed and is termed as coupon rate. -Only statement II is correct -Both statements are incorrect -Only statement I is correct -Both statements are correct 2. The liquidity function of the financial market provides for an opportunity for the investors to sell their financial instruments at its prevailing fair value. Is it true or false? 3. Which of the following is not a role of a financial manager? -Supervises employees who do accounting and budgeting reports department. -Makes sure that legal requirements affecting financial aspects are met. -Makes financial decision -Prepares financial reports 4. Which of the following statements is incorrect? -Liquidity premium is required by investors to compensate them in case there is a decrease in the purchasing…arrow_forwardBeacuase the conversion feature in a convertible bond is valuable to bondholders, convertible bond issues have lower coupon payments than otherwise similar bonds that are not convertible. Does this mean that a company can lower its cost of borrowingby selling convertible debt? explainarrow_forward
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