Chapter 18, Problem 2ST

Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 15 years to maturity, and a coupon rate of 6.5 percent paid annually. If the yield to maturity is 7.6 percent, what is the current price of the bond? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

One of the England’s largest corporations just expanded operations into the United States. At present, the firm has a 30 year, $10,000 par value bond outstanding, with a coupon rate of 4.3% percent paid semiannually and 15 years to maturity. The yield to maturity on this bond is 5.2 percent. What is the current value of the bond?  Once you have calculated the Present Value or the current price of the bond, what would be the Current Yield on this bond? Is it selling at a discount, par, or premium?

Even though most corporate bonds in the US make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of 1,000 euros, 27 years to maturity, and a coupon rate of 3.6% paid annually. If the yield to maturity is 3.2%, what is the current price of the bond in euros?

You are an exporter in possession of Banker’s Acceptance (B/A). You are considering holding the B/A until maturity or selling it in the Money Market (MM). If the face amount of the B/A is 10,000,000 USD, the acceptance commission is 2%, and the competitive MM rate for 90-day B/As is 5% What bond equivalent yield would make you indifferent between the MM and holding the B/A until maturity? Note: for B/A calculations you can assume a banker’s year (360 days), for bond calculations the convention is to use the actual number of days (365). Show and explain any intermediary calculations. Also interpret and explain your conclusion. I want the interpretation please.

Union Corp must make a single payment of €5 million in six months at the maturity of a payable to a French firm.  The finance manager expects the spot price   of the € to remain stable at the current rate of $1.60/€.  But as a precaution, the manager is concerned that the rate could rise as high as $1.70/€ or fall as low         as $1.50/€.  Because of this uncertainty, the manager recommends that Union Corp hedge the payment using either options or futures.  Six months Call and Put options with an exercise price of $1.60/€ are available.  The Call sells for $.08/€ and the Put sells for $.04/€.  A six month futures contract on € is trading at $1.60/€. Should the manager be worried about the dollar depreciating or appreciating? If Union Corp decides to hedge using options, should it buy Calls or Puts to hedge the payment?  Why? If futures are used to hedge, should the company buy or sell € futures? Why? What will be the net payment on the payable if an option contact was used?  assume…

PIMCO gives the following example of an Inflation Linked Bond (ILB), called a Treasury Inflation Protected Security (TIPS) in the US. "How do ILBs work? An ILB’s explicit link to a nationally-recognized inflation measure means that any increase in price levels directly translates into higher principal values. As a hypothetical example, consider a $1,000 20-year U.S. TIPS with a 2.5% coupon (1.25% on semiannual basis), and an inflation rate of 4%. The principal on the TIPS note will adjust upward on a daily basis to account for the 4% inflation rate. At maturity, the principal value will be $2,208 (4% per year, compounded semiannually). Additionally, while the coupon rate remains fixed at 2.5%, the dollar value of each interest payment will rise, as the coupon will be paid on the inflation-adjusted principal value. The first semiannual coupon of 1.25% paid on the inflation-adjusted principal of $1,020 is $12.75, while the final semiannual interest payment will be 1.25% of $2,208, which…

In the early 1980s, at a time when interest rates were at historical highs, investment banking firms introduced a security backed by US government bonds that paid no annual interest (referred to as zero-coupon bonds), with all of the interest to be paid at the bonds’ maturity date. The securities were given names such as TIGRS (Treasury Income Growth Receipts, a Merrill Lynch product), CATS (Certificates of Accrual on Treasuries, a Salomon Brothers product), and LIONS (Lehman Investment Opportunity Notes, a Lehman Brothers product). Why do you think securities with this feature were introduced at that time? Too often it was stated that these securities had no risk. What risks does an investor face when purchasing such securities?

Citibank has developed a way of creating a zero-coupon bond, called a strip, from the coupon bearing Treasury bond by selling each of cash flows underlying the coupon-bearing bond as a separate security. You as a treasurer working for Citibank, have a relatively simple trading strategy. You would buy strips and sell them in the forward market. Suppose for example, that the 3-month interest rate is 4% per annum and the spot price of a strip is $70. What will be the 3-month forward price?Assuming that actual forward price is 72, formulate an arbitrage strategy.

Sambuka, Inc. can issue annual coupon bonds in either U.S. dollars or in Euros that mature in threeyears. Dollar-denominated bonds would have a coupon rate of 5 percent; Euro-denominated bonds would have a coupon rate of 4 percent. Assuming that Sambuka can issue bonds worth $10,000,000 in US dollars or 8 million Euros, given that the current exchange rate is $1.25/1 Euro.   If the forecasted exchange rate for the Euro is $1.21for each of the next three years what is the annual cost of financing for the Euro-denominated bonds? Which type of bond should Sambuka issue?