One often finds that a company’s bonds have a higher yield than its preferred stock, eventhough an investor considers the bonds to be less risky than the preferred. What causes thisyield differential?
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One often finds that a company’s bonds have a higher yield than its preferred stock, even
though an investor considers the bonds to be less risky than the preferred. What causes this
yield differential?
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- The yield to maturity of a company’s bonds can be higher than its cost of preferred stock TRUE FALSEWhich of the following statements is CORRECT? a. Convertible bonds generally have lower coupon rates than non-convertible bonds of similar default risk because they offer the possibility of capital gains. b. A debenture is a secured bond that is backed by some or all of the firm's fixed assets. c. Junk bonds typically provide a lower yield to maturity than investment-grade bonds. d. A company's subordinated debt has less default risk than its senior debt. e. Senior debt is debt that has been more recently issued, and in bankruptcy it is paid off after junior debt because the junior debt was issued first.Explain whether the following statements are true or false. Justify your answer. a) If interest rate increase the price of a shorter maturity bond will decrease more then a longer maturity bond. b) If rating agencies downgrade a bond, the yield to maturiy on the bond will increase. c) the longer the duration of the bond, the higher will be the reinvestment risk d) The income from bond is more uncertain compared to the income from shares e) Managers want to maximize the intrisic value of the stock not the market price of the stock.
- Which of the following events would make it more likely that a company would choose to call it’s outstanding callable bonds? An increase in market interest rates. An increase in the call premium. All the other statements are correct. The company’s bonds are downgraded. A reduction in market interest rates.What are the most significant differences between stocks and bonds? A day would come when bonds would be a superior investment option than ordinary shares.If a company’s newest product flops in the marketplace, what effect is thatlikely to have on the current yield of the company’s bonds?
- A bond trader observes the following information:• The Treasury yield curve is downward sloping.• Empirical data indicate that a positive maturity risk premium applies to both Treasury and corporate bonds.• Empirical data also indicate that there is no liquidity premium for Treasury securities but that a positive liquidity premium is built into corporate bond yields.On the basis of this information, which of the following statements is most CORRECT? a. The corporate yield curve must be flat. b. Since the Treasury yield curve is downward sloping, the corporate yield curve must also be downward sloping. c. A 10-year Treasury bond must have a higher yield than a 10-year corporate bond. d. A 10-year corporate bond must have a higher yield than a 5-year Treasury bond. e. A 5-year corporate bond must have a higher yield than a 10-year Treasury bond.If a firm increases its financial risk by selling a large bond issue that increases its financial lewverage explain this assumption?Also what is the relationshipbetween risk and return. Explain with examples bold examples.Which of the following statements is the least accurate? a. Security returns are composed of cash returns and capital gains. b. When the shareholder’s required rate of return is higher than ROE, a company can increase the stock price by retaining and reinvesting more. c. The geometric average return is always smaller than or equal to the arithmetic average return. d. When the coupon rate is smaller than the yield to maturity, a bond sells below par (discount).
- True or False: Corporations are very interested in their potential bond rating as it impacts their cost of capital. The spread of a bond is common term used by investors. The spread of a bond is that additional compensation for the risk of a bond (relative to a risk free rate). The spread on Junk or High Yield Bonds is generally higher than the spread on bonds rated BBB or higher.Rate the following statement as True of False: "Although, Convexity is listed as a 'risk' to bond investors, it is actually a benefit to investors who own bonds. This is because when a bond has high convexity an investor will make more money for a given drop in interest rates, than he or she will lose given the same magnitude increase in interest rates. Thus, more convexity means more potential upside relative to downside for a bond investor, given that yields are equally likely to move up or down by the same amount." True of False?A firm is planning to issue bonds to make an equity repurchase to increase its stock price. It is basing its analysis on the fact that there will be fewer shares outstanding after the repurchases, and higher earnings per share. Will the higher earnings per share always translate into a higher stock price? a. No b. Depends on stock price c. Yes d. Indifferent
