FUNDAMENTALS OF CORPORATE FINANCE
11th Edition
ISBN: 9781307110869
Author: Ross
Publisher: MCG/CREATE
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Chapter 7, Problem 15CRCT
Bonds as Equity [LO1] The 100-year bonds we discussed in the chapter have something in common with junk bonds. Critics charge that, in both cases, the issuers are really selling equity in disguise. What are the issues here? Why would a company want to sell “equity in disguise”?
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4. Why would the company redeem the bonds prior to the maturity date if they weregoing to recognize a loss? Can you think of an example of such a decision we might facein our personal lives?5. The 10-year German and Japanese government bonds have recently traded at anegative yield (market rate of interest)! Why would an investor purchase a bond that,in effect, pays a negative interest rate?!
N1
Q21. Which of the following statements about bonds are true?
a.
The bond price and yield of the bonds are positively related.
b.
Long-term bonds are more responsive to interest rate change than short-term bonds.
c.
All other answers are correct.
d.
If interest rates are expected to decrease, more investors will prefer holding short-term bonds.
H5.
The bank have an incentive to value the new securities at a higher price because they will gain more. Is that a good or bad strategy? Explain why
Chapter 7 Solutions
FUNDAMENTALS OF CORPORATE FINANCE
Ch. 7.1 - What are the cash flows associated with a bond?Ch. 7.1 - What is the general expression for the value of a...Ch. 7.1 - Is it true that the only risk associated with...Ch. 7.2 - Prob. 7.2ACQCh. 7.2 - Prob. 7.2BCQCh. 7.2 - Prob. 7.2CCQCh. 7.3 - What does a bond rating say about the risk of...Ch. 7.3 - What is a junk bond?Ch. 7.4 - Prob. 7.4ACQCh. 7.4 - What do you think would be the effect of a put...
Ch. 7.5 - Why do we say bond markets may have little or no...Ch. 7.5 - Prob. 7.5BCQCh. 7.5 - What is the difference between a bonds clean price...Ch. 7.6 - What is the difference between a nominal and a...Ch. 7.6 - What is the Fisher effect?Ch. 7.7 - What is the term structure of interest rates? What...Ch. 7.7 - What is the Treasury yield curve?Ch. 7.7 - What six components make up a bonds yield?Ch. 7 - Prob. 7.1CTFCh. 7 - The 10-year bonds issued by KP Enterprises were...Ch. 7 - Prob. 7.4CTFCh. 7 - Prob. 7.6CTFCh. 7 - The term structure of interest rates is based on...Ch. 7 - Treasury Bonds [LO1] Is it true that a U.S....Ch. 7 - Interest Rate Risk [LO2] Which has greater...Ch. 7 - Treasury Pricing [LO1] With regard to bid and ask...Ch. 7 - Prob. 4CRCTCh. 7 - Call Provisions [LO1] A company is contemplating a...Ch. 7 - Coupon Rate [LO1] How does a bond issuer decide on...Ch. 7 - Prob. 7CRCTCh. 7 - Prob. 8CRCTCh. 7 - Prob. 9CRCTCh. 7 - Term Structure [LO5] What is the difference...Ch. 7 - Crossover Bonds [LO3] Looking back at the...Ch. 7 - Municipal Bonds [LO1] Why is it that municipal...Ch. 7 - Bond Market [LO1] What are the implications for...Ch. 7 - Prob. 14CRCTCh. 7 - Bonds as Equity [LO1] The 100-year bonds we...Ch. 7 - Prob. 1QPCh. 7 - Interpreting Bond Yields [LO2] Suppose you buy a 7...Ch. 7 - Prob. 3QPCh. 7 - Prob. 4QPCh. 7 - Coupon Rates [LO2] Essary Enterprises has bonds on...Ch. 7 - Bond Prices [LO2] Sqeekers Co. issued 15-year...Ch. 7 - Prob. 7QPCh. 7 - Coupon Rates [LO2] DMA Corporation has bonds on...Ch. 7 - Zero Coupon Bonds [LO2] You find a zero coupon...Ch. 7 - Valuing Bonds [LO2] Yan Yan Corp. has a 2,000 par...Ch. 7 - Valuing Bonds [LO2] Union Local School District...Ch. 7 - Calculating Real Rates of Return [LO4] If Treasury...Ch. 7 - Prob. 13QPCh. 7 - Prob. 14QPCh. 7 - Nominal versus Real Returns [LO4] Say you own an...Ch. 7 - Using Treasury Quotes [LO2] Locate the Treasury...Ch. 7 - Using Treasury Quotes [LO2] Locate the Treasury...Ch. 7 - Bond Price Movements [LO2] Bond X is a premium...Ch. 7 - Interest Rate Risk [LO2] Both Bond Sam and Bond...Ch. 7 - Interest Rate Risk [LO2] Bond J has a coupon rate...Ch. 7 - Prob. 21QPCh. 7 - Prob. 22QPCh. 7 - Accrued Interest [LO2] You purchase a bond with an...Ch. 7 - Prob. 24QPCh. 7 - Finding the Bond Maturity [LO2] Shinoda Corp. has...Ch. 7 - Prob. 26QPCh. 7 - Bond Prices versus Yields [LO2] a. What is the...Ch. 7 - Prob. 28QPCh. 7 - Zero Coupon Bonds [LO2] Suppose your company needs...Ch. 7 - Finding the Maturity [LO2] Youve just found a 10...Ch. 7 - Prob. 31QPCh. 7 - Components of Bond Returns [LO2] Bond P is a...Ch. 7 - Holding Period Yield [LO2] The YTM on a bond is...Ch. 7 - Valuing Bonds [LO2] Jallouk Corporation has two...Ch. 7 - Valuing the Call Feature [LO2] At one point,...Ch. 7 - Prob. 36QPCh. 7 - Real Cash Flows [LO4] When Marilyn Monroe died,...Ch. 7 - Prob. 38QPCh. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Prob. 7MCh. 7 - Prob. 8MCh. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Prob. 10M
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- Q No. 1 Explain why you agree or disagree with the following statements. Treasury bonds are riskier than corporate bonds. All other things held constant; the future value of an ordinary annuity is always having a higher future value than annuity due. All other things held constant, the price or interest rate risk of short-term bond is always lower than long-term bond.arrow_forwardWhich of the following events would make it more likely that a company would call its outstanding callable bonds? (Ch. 7) Group of answer choices Inflation increases significantly. The company’s bonds are downgraded. Market interest rates rise sharply. The company's financial situation deteriorates significantly. Market interest rates decline sharply.arrow_forwardQ No. 1 Explain why you agree or disagree with the following statements. The answer should not be more than 3 sentences. Treasury bonds are riskier than corporate bonds. All other things held constant; the future value of an ordinary annuity is always having a higher future value than annuity due. All other things held constant, the price or interest rate risk of short-term bond is always lower than long-term bond. Q No. 2 Being a newly appointed analyst at Credit Suisse, one of your prime role is to facilitate the Global head of valuations in providing detailed and timely analysis. The next meeting is being scheduled for the upcoming Saturday, and you are required to calculate the price of a few stocks and provide their valuations. The information is mentioned below: What would be the expected price of Travelers stock today, given the streams of future dividends of $4 for next 3 years, having ZERO growth rate, and 10% required rate of return? The Walgreens Boots Alliance Company…arrow_forward
- 11-Which of the following statement is false? a. Bond prices remain fixed over time b. A bond issuer must pay periodic interest c. A bond is financial contract d. Bonds carry no corporate ownership privilegesarrow_forwardQUESTION #4 the following “T-accounts” with the following data $100 million in mortgage-backed securities (MBS) $200 million demand deposits $20 million in reserves held by banks $100 million in Treasury securities held by banks $50 million in Treasury securities held by the Fed $5 million in overnight borrowing by banks from the Fed Suppose that the Fed wants to lower long-term interest rates and buys all the Treasury securities banks hold. Reflect those changes on the balance sheet (commitment to low long term interest rate environment, QE) and highlight in turquoise Households Banks Federal Reserve Firms ___A_______L___ ___A_______L___ ___A_____L___ ___A_____L___arrow_forward37. Statement 1: Everything else equal, an effective annual rate will be greater than the bond equivalent yield on the same security.Statement 2: Money markets exist to help reduce the opportunity cost of holding cash balances. a. Both statements are true b. Statement 1 is true; Statement 2 is false c. Statement 1 is false; statement 2 is true d. Both statements are falsearrow_forward
- 12. As bond ratings improve, bond yields go up. Is this true or false? Why?arrow_forwardJunk bonds earn their name because Question 7 options: a) they are riskier than higher rated bonds b) they are total investment junks c) they are considered untrustworthy d) investors will not be able to recoup their investment e) investors prefer other bonds over these bondsarrow_forward25. Which of the following statements is most correct?a. Junk bonds typically have a lower yield to maturity relative toinvestment grade bonds.b. A debenture is a secured bond that is backed by some or all of thefirm’s fixed assets.c. Subordinated debt has less default risk than senior debt.d. All of the statements above are correct.e. None of the statements above is correct.arrow_forward
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Bonds Explained for Beginners | Bond Types 101; Author: TommyBryson;https://www.youtube.com/watch?v=yuKmHTgqZ5o;License: Standard Youtube License