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 7PS
Summary Introduction
To determine: The true and false statements.
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Indicate whether each of the following actions will increase or decrease a bond’s yield tomaturity:a. The bond’s price increases.b. The bond is downgraded by the rating agencies.c. A change in the bankruptcy code makes it more difficult for bondholders to receivepayments in the event the firm declares bankruptcy.d. The economy seems to be shifting from a boom to a recession. Discuss the effects ofthe firm’s credit strength in your answer.e. Investors learn that the bonds are subordinated to another debt issue.
Bonds are fixed income securities issued by public authorities, credit institutions,
companies and supranational institutions in the primary markets. The most common
process for issuing bonds is through underwriting. When a bond issue is underwritten,
one or more securities firms or banks, forming a syndicate, buy the entire issue of
bonds from the issuer and re-sell them to investors. The security firm takes the risk of
being unable to sell on the issue to end investors. Securitized bank lending such as
credit card debt, car loans or mortgages can be structured into other types of fixed
income products such as asset-backed securities which can be traded on exchanges
just like corporate and government bonds.
Required:
Compute the dirty value or price of a bond five years after it had been issued with
the following structures: market rate for bonds is 15%, coupon rate is 10%, maturity
period is 10 years and face value is K2000.
2. Explain what it means, to a Treasurer, when a bond is…
To what extent does the company’s bond issuance policies support or hinder their strategies? For example, if the company is attempting to fund operating expenses, refinance old debt, or change its capital structure, are they issuing sufficient bonds to achieve these goals? Be sure to substantiate claims.
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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- Which of the following is most correct? Treasury bonds carry high default risk because government has the option not to pay its indebtedness. Corporate bonds have lower interest rates compared with treasury bonds because bonds were issued with the aid of financial intermediaries. Corporate bonds have no default risk because they are backed by their corporate assets. Treasury bonds have lower interest rates because they are assumed to carry no default risk.arrow_forwardWhich of the following is a disadvantage to a corporation issuing bonds? Group of answer choices A)The required interest payment must be met each period. B)The liquid nature of the bonds makes them attractive to investors who may not want to hold them to maturity. c)The large principal payment due at maturity. d)Both the first and third answers above are both disadvantages. e)The first, second and third answers above are all disadvantages.arrow_forwardWhich of the following securities has a component of liquidity risk premium? Long-term government bonds only since all entities that issued long-term securities may be default in payment. All types of government or corporate security because these constituted to be a liability in the part of the issuer. Long-term corporate security because corporations may find it hard to convert assets to cash for payment. All government bond because this type of security is presumed to be always liquid.arrow_forward
- Which of the following statements is most correct? Why?* choices: a. The expected return on corporate bonds will generally exceed the yield to maturity. b. Firms that are in financial distress are forced to declare bankruptcy. c. All else equal, senior debt will generally have a lower yield to maturity than subordinated debt. d. Statements a and c are correct. e. None of the statements above is correct.arrow_forwardWhich of the following statements correctly describes aspects of simple interest as discussed in lectures? Group of answer choices A. More than one of the other statements are correct B. None of the other statements are correct C. loan that has been created that pays simple interest, will involve interest payments that are calculated on the basis of both the principal amount borrowed as well as any interest that has accumulated to date. D. By convention, simple interest is the main method used for the pricing of short-term debt securities like Treasury Notes. E. With simple interest, the future value of any cash flow is simply its current value discounted back at a rate of r% per period for n periods. I already know that C and D are compound interests however I am not sure about option E.arrow_forwardWhich of the following statements regarding the private debt market is FALSE? A) Private debt has the advantage that it avoids the cost of registration. B) Bank loans are an example of private debt—debt that is not publicly traded. C) Private debt has the disadvantage of being illiquid. D) The public debt market is larger than the private debt market.arrow_forward
- You are required to identify and give reasons for the appropriate classification of the debt instruments A and B below: Part A.Macaroon holds certain debt investments to collect their contractual cash flows of interest and principle. The funding needs of the company are predictable and the maturity of such financial assets is matched to Macaroon’s estimated funding needs. Macaroon performs credit risk management activities with the objective of minimising credit losses.In the past, Macaroon has sold some of its debt investments when the credit risk of the financial assets increased beyond the acceptable levels of risk as documented in the company’s investment policy. In addition, infrequent sales have occurred as a result of unanticipated funding needs. The managers reports to key management personnel focus on the credit quality of the financial assets and the contractual return. Part B.Macaroon holds certain debt investments with specified contractual cash flows of interest and…arrow_forwarda). Companies pay rating agencies to rate their bonds, and the costs can be substantial. However, companies are not required to have their bonds rated in the first place; doing so is strictly voluntary. So, why do they do it? b). Do bond ratings agencies have any conflict of interest when they rate bonds? Clearly explain your answer.arrow_forwardDiscuss 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?arrow_forward
- Under 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_forwardWhich of the following statements is CORRECT? a. Sinking fund provisions never require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time. b. Most sinking funds require the issuer to provide funds to a trustee, who holds the money so that it will be available to pay off bondholders when the bonds mature. c. Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest rates decline after the bond was issued. d. If interest rates increase after a company has issued bonds with a sinking fund, the company will be less likely to buy bonds on the open market to meet its sinking fund obligation and more likely to call them in at the sinking fund call price. e. A sinking fund provision makes a bond more risky to investors at the time of issuance.arrow_forwardTo be effective issuing and investing in bonds, knowledge of their terminology, characteristics, and features is essential. For example: • A bond’s refers to the interest payment or payments paid by a bond. • A bond issuer is said to be in if it does not pay the interest or the principal in accordance with the terms of the indenture agreement or if it violates one or more of the issue’s restrictive covenants. • The contract that describes the terms of a borrowing arrangement between a firm that sells a bond issue and the investors who purchase the bonds is called . • A bond’s gives the issuer the right to call, or redeem, a bond at specific times and under specific conditions. Suppose you read an article about the Golden Gate Bridge and Highway District bonds. It includes the following information: Bridge Bonds Series A Dated 7-15-2005 4.375% Due 7-15-2055 @100.00 What is the issuing date of this bond? 7-15-2005 7-15-2055…arrow_forward
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