Chapter 7, Problem 3BIC

Which of the following statements is false? A.   The sovereign credit rating is a risk of a national government becoming unable to satisfy its loan obligations.   B.   Bond prices are inversely related to spreads.   C.   Issuer credit ratings are based on the overall creditworthiness of the firm.   D.   Liquidity is observed when there is a large difference between the offered sale price and the bid price.

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…

Which of the following statements about Floating-Rate Debt is NOT true?  A) Floating-rate debt has a stated interest rate that fluctuates in tandem with some interest rate benchmark (for instance, LIBOR). B)Floating-rate bonds allow companies to keep reported book value and fair value at the same level that protects investors from losses. C)The issuing company benefits from floating-rate debt when market interest rates increase. D)Floating-rate debt is issued at par.

The use of fair value to account for debt investments allows for more relevance of accounting figures because they would reflect the latest market assessment and opinion regarding these instruments. b. What are the possible disadvantages’ of using the fair value accounting?

When bonds and other debt securities are issued, payments such as legal costs, printing costs, and underwriting fees, are referred to as debt issuance costs (called transaction costs under IFRS). If Rushing International prepares its financial statements using IFRS: a. the recorded amount of the debt is increased by the transaction costs. b. the decrease in the effective interest rate caused by the transaction costs is reflected in the interest expense. c. the transaction costs are recorded separately as an asset. d. the increase in the effective interest rate caused by the transaction costs is reflected in the interest expense.

Sovereign debt (issued bonds) are typically considered as proxies for risk free. 1. Discuss the reasons why sovereign debt may not be risk free. 2. Why might credit ratings agencies give different credit ratings to sovereign debt issued by the same country, depending on coupons denominated in domestic or foreign currency.

Discuss the similarities and differences between a bond repurchase agreement anda sale and buyback transaction. How do repos done by securities dealers differ from those done by central banks?

Discuss 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?

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 declines