Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 24, Problem 16PS
Summary Introduction
To determine: The manner in which a sharp variation in rates of interest, newly issued bonds usually sell at yield vary from those of outstanding bonds of the same quality.
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Which of the following is not an effect of a call provision?
A. Issuer can refund the bond issue if rates decline.
B. Requires the issuer to pay off the loan over its life rather than all at maturity.
C. Bond investors require higher yields on callable bonds
D. Upon calling bonds the issuer must pay call premium to bond holder
E. All of the above are effects of a call provision
Explain the impact of a decline in interest rates on the prices of existing bonds.
Explain why bond prices fluctuate in response to changing interest rates. What adverse effect might occur if bond prices remain fixed prior to their maturity?
Chapter 24 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 24 - Bond terms Select the most appropriate term from...Ch. 24 - Sinking funds For each of the following sinking...Ch. 24 - Security and seniority a. As a senior bondholder,...Ch. 24 - Prob. 4PSCh. 24 - Prob. 5PSCh. 24 - Private placements Explain the three principal...Ch. 24 - Prob. 7PSCh. 24 - Prob. 8PSCh. 24 - Convertible bonds True or false? a. Convertible...Ch. 24 - Prob. 10PS
Ch. 24 - Bond terms Bond prices can fall either because of...Ch. 24 - Prob. 13PSCh. 24 - Prob. 14PSCh. 24 - Security and seniority a. Residential mortgages...Ch. 24 - Prob. 16PSCh. 24 - Prob. 17PSCh. 24 - Call provisions a. If interest rates rise, will...Ch. 24 - Prob. 19PSCh. 24 - Covenants Alpha Corp. is prohibited from issuing...Ch. 24 - Prob. 21PSCh. 24 - Convertible bonds The Surplus Value Company had 10...Ch. 24 - Prob. 23PSCh. 24 - Convertible bonds Iota Microsystems 10%...Ch. 24 - Prob. 25PSCh. 24 - Convertible bonds Zenco Inc. is financed by 3...Ch. 24 - Tax benefits Dorlcote Milling has outstanding a 1...Ch. 24 - Convertible bonds This question illustrates that...Ch. 24 - Prob. 29PS
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- A call provision on a bond allows the issuer to redeem the bond at will. Investors do not like call provisoion and so require higher interest on callable bonds. Why do issuers continue to issue callable bonds anyway?arrow_forward“Short-term interest rates are more volatile than long-term interest rates, soshort-term bond prices are more sensitive to interest rate changes than arelong-term bond prices.” Is this statement true or false? Explain.arrow_forwardWhich 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.arrow_forward
- Bonds are a common long-term debt instrument. They are interesting because they are issued with a stated interest rate. Unlike the market interest rates, a bond's stated interest rate will never change. The stated interest rate is what will be paid to the investor over the bond's life. This means that the only way to manipulate the total amount earned or paid from bonds is by adjusting the selling price: What does it mean when a bond is issued at a premium or a discount? How does the issuance cost affect the investor's earnings from the bond purchases? How is the company's recognized interest expense affected? Reminder: Use specific examples to support your analysis.arrow_forwardShort-term interest rates are more volatile than long-term interest rates. Despite this, rates of return on long-term bonds are more volatile than rates of return on short-term securities. How can these two empirical observations be reconciled?arrow_forwardOver the term of the bonds, the amount of unamortized discount will a. be unaffected until the bonds mature. b. decrease. c. fluctuate up and down if the market is volatile. d. increase.arrow_forward
- Which one of the following is the reason that bonds may sell at a discount or premium? Select one: a. Market conditions caused the coupon rate of interest to change between the time the bond agreement was written and the date the bonds were actually issued to investors b. The bond issuer failed to consider the market yield rate when the bond agreement was created c. The bond issuer adjusted the coupon rate to match that of other bond issues d. The market yield rate fluctuated between the time the bond agreement was written and the date the bonds were actually issued to investorsarrow_forwardConvexity is a desirable feature of bonds because as interest rates decline, the price of a low convexity bond a. increases at an increasing rate. b. decreases at an increasing rate. c. decreases at a decreasing rate. d. increases at a decreasing rate. e. None of these choices are correct.arrow_forwardSelect the correct statement: The value of a premium bond will fall over time, if cost of debt (rd) decreases The value of a discount bond will fall over time, if cost of debt (rd) does not change The value of a discount bond will increase ove time, if cost of debt (rd) does not change The value of a premium bond will increase over time, if cost of debt (rd) does not changearrow_forward
- Firms generally decide to call their bonds when interest rates rise drop remain the same there is no relationship between interest rates and the call provisionarrow_forwardExplain 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_forwardHow are investors of zero-coupon bonds compensated for making such an investment? A. Such bonds have a lower face value as compared to other bonds of similar term. B. Such bonds are purchased at their face value and sold at a premium on a later date. C. Such bonds are purchased at a discount and repaid at face value on maturity. D. Such bonds make regular interest payments.arrow_forward
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What happens to my bond when interest rates rise?; Author: The Financial Pipeline;https://www.youtube.com/watch?v=6uaXlI4CLOs;License: Standard Youtube License