Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
10th Edition
ISBN: 9781337902571
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Question
Chapter 7, Problem 14Q
Summary Introduction
To identify: Whether the yield spread on corporate bond over a Treasury bond tend to be wider or narrower and change in spread be affected by the credit strength of the firm.
Introduction:
Yield Spread: It is the difference in the
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Students have asked these similar questions
Would the yield spread on a corporate bond over a Treasury bond with the same maturitytend to become wider or narrower if the economy appeared to be heading toward a recession?Would the change in the spread for a given company be affected by the firm’s creditstrength? Explain.
How would a financial institution with a large bond portfolio be affected by falling interest rates? Would it be affected by a greater degree than a financial institution with a greater concentration of bonds (and fewer short-term securities)?
Which of the following trends can be unfavorable from the viewpoint of a bondholder?
a. The issuing company’s debt ratio is steadily declining.b. The issuing company’s interest coverage ratio is steadily rising.c. Market interest rates are steadily rising.
d. The issuing company’s net cash flow from operating activities is steadily increasing.
Chapter 7 Solutions
Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
Ch. 7 - A sinking fund can be set up in one of two ways:...Ch. 7 - Can the following equation be used to find the...Ch. 7 - The values of outstanding bonds change whenever...Ch. 7 - If interest rates rise after a bond issue, what...Ch. 7 - Discuss the following statement: A bonds yield to...Ch. 7 - Prob. 6QCh. 7 - Assume that you have a short investment horizon...Ch. 7 - Indicate whether each of the following actions...Ch. 7 - Why is a call provision advantageous to a bond...Ch. 7 - Prob. 10Q
Ch. 7 - Prob. 11QCh. 7 - Why are convertibles and bonds with warrants...Ch. 7 - Prob. 13QCh. 7 - Prob. 14QCh. 7 - Prob. 15QCh. 7 - Which of the following bonds has the most price...Ch. 7 - Prob. 17QCh. 7 - Prob. 1PCh. 7 - YIELD TO MATURITY AND FUTURE PRICE A bond has a...Ch. 7 - Prob. 3PCh. 7 - YIELD TO MATURITY A firms bonds have a maturity of...Ch. 7 - BOND VALUATION An investor has two bonds in his...Ch. 7 - BOND VALUATION An investor has two bonds in her...Ch. 7 - INTEREST RATE SENSITIVITY. An investor purchased...Ch. 7 - Prob. 8PCh. 7 - Prob. 9PCh. 7 - Prob. 10PCh. 7 - BOND YIELDS Last year Carson Industries issued a...Ch. 7 - Prob. 12PCh. 7 - PRICE AND YIELD A 7% semiannual coupon bond...Ch. 7 - Prob. 14PCh. 7 - BOND VALUATION Bond X is noncallable and has 20...Ch. 7 - Prob. 16PCh. 7 - Prob. 17PCh. 7 - YIELD TO MATURITY AND YIELD TO CALL Kempton...Ch. 7 - Prob. 19SPCh. 7 - BOND VALUATION Robert Black and Carol Alvarez are...
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Similar questions
- Suppose that the yield of bonds issued by firms XYZ decreased. Which of the following the scenario is the LEAST likely one to have caused this decrease? 1(a) The firm's credit rating went up. (b) The firm's collateral value went up. (c) Investors’ demand for assets went up. (d) A lot of other firms started to issue bonds.arrow_forwardIf ABC Bank’s ALCO targets the market value of shareholders’ equity in its interest rate risk management, is the bank positioned to gain or lose if interest rates fall? If interest rates rise by 1% for all assets and liabilities, what is the approximate expected change in the bank’s economic value of equity? Provide a specific transaction that the bank could implement in order to immunize its interest rate risk exposure.arrow_forwardWould the market-value debt ratio tend to be higher than the book-value debt ratioduring a stock market boom or a recession? Explain.arrow_forward
- What comment or conclusion can be made about this? Large amounts of national debt can lead to higher interest rates and lower stock prices. Stocks are a reflection of investor confidence. If those investors lose confidence in where those companies operate then their stock price will take a hit.arrow_forward1. When the Fed purchases treasuries to supply market liquidity, does that increase, decrease, or have no effect on the credit spread for a corporate bond?arrow_forwardWhat would you expect to happen to the spread between yields on commercial paper and Treasury bills if the economy were to enter a steep recession?arrow_forward
- Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? Calculate the expected rate of return and standard deviation for each investment. Which investment would you prefer?arrow_forwardif we see an increase in default rates, what may that mean for the junk bond market and for companies that want/need to sell more junk bonds?arrow_forwardWhich of the following events would make it more likely that a company would call its outstanding callable bonds? State your reason for the answer. The company’s bonds are downgraded. Market interest rates rise sharply. The company's financial situation deteriorates significantly. Inflation increases significantly. Market interest rates decline sharplyarrow_forward
- Which of the following statements is CORRECT? a. If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices. b. The total yield on a bond is derived from dividends plus changes in the price of the bond. c. Bonds are generally regarded as being riskier than common stocks, therefore bonds have higher required returns. d. Bonds issued by larger companies always have lower yields to maturity (due to less risk) than bonds issued by smaller companies. e. The market price of a bond will always approach its par value as its maturity date approaches, provided the bond's required return remains constant. THE ANSWER IS NOT E OR B, apparently, but please let me know if you really think one of those choices are correct.arrow_forwardInterest rate risk is of concern to a firm's financial officer, because (Select the best choice below.) A. it is more difficult to issue securities when interest rates are low. B. changes in interest rates affect the expected return of financial instruments. C. federal government taxation increases as interest rates rise, reducing the cash available to the firm. D. inflationary periods may reduce the real earnings of the firm. E. B and Darrow_forwardA company with a poor credit rating needs to raise funds for expansion, but the bank will not give them a loan. In addition, their common stock prices are already low, so they do not want to issue more shares of common stock. What would be the best way for this company to raise funds for the expansion? Sell secured bonds. Sell callable bonds. Sell convertible bonds. Sell unsecured bonds.arrow_forward
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