Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
11th Edition
ISBN: 9780077861759
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Question
Chapter 8, Problem 7CQ
Summary Introduction
To explain: The reason of rating the bonds by the companies.
Bond Rating:
The bond rating refers to assigning the grade to the bonds. The grade which is assigned represents the quality of credit related to the bonds. This rating helps in evaluating the financial strength of the issuer.
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Students have asked these similar questions
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…
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?
when are corporations likely they called the Bonds? A. When the market interest rate is higher than the contract rate, b. When the contract rate is higher than the market rate. C. When their bonds at selling at par with market d. When standard and poor are bullish about treasury bills E. None of the above
Chapter 8 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 8 - Prob. 1CQCh. 8 - Prob. 2CQCh. 8 - Prob. 3CQCh. 8 - Yield to Maturity Treasury bid and ask quotes are...Ch. 8 - Coupon Rate How does a bond issuer decide on the...Ch. 8 - Real and Nominal Returns Are there any...Ch. 8 - Prob. 7CQCh. 8 - Prob. 8CQCh. 8 - Term Structure What is the difference between the...Ch. 8 - Crossover Bonds Looking back at the crossover...
Ch. 8 - Municipal Bonds Why is it that municipal bonds are...Ch. 8 - Prob. 12CQCh. 8 - Treasury Market Take a look back at Figure 8.4....Ch. 8 - Prob. 14CQCh. 8 - Bonds as Equity The 100-year bonds we discussed in...Ch. 8 - Bond Prices versus Yields a. What is the...Ch. 8 - Interest Rate Risk All else being the same, which...Ch. 8 - Valuing Bonds What is the price of a 15-year, zero...Ch. 8 - Valuing Bonds Microhard has issued a bond with the...Ch. 8 - Prob. 3QPCh. 8 - Coupon Rates Rhiannon Corporation has bonds on the...Ch. 8 - Valuing Bonds Even though most corporate bonds in...Ch. 8 - Prob. 6QPCh. 8 - Zero Coupon Bonds You find a zero coupon bond with...Ch. 8 - Valuing Bonds Yan Yan Corp. has a 2,000 par value...Ch. 8 - Prob. 9QPCh. 8 - Prob. 10QPCh. 8 - Inflation and Nominal Returns Suppose the real...Ch. 8 - Prob. 12QPCh. 8 - Prob. 13QPCh. 8 - Prob. 14QPCh. 8 - Prob. 15QPCh. 8 - Prob. 16QPCh. 8 - Bond Price Movements Miller Corporation has a...Ch. 8 - Interest Rate Risk Laurel, Inc., and Hardy Corp....Ch. 8 - Interest Rate Risk The Faulk Corp. has a 6 percent...Ch. 8 - Bond Yields Hacker Software has 6.2 percent coupon...Ch. 8 - Prob. 21QPCh. 8 - Prob. 22QPCh. 8 - Prob. 23QPCh. 8 - Prob. 24QPCh. 8 - Prob. 25QPCh. 8 - Prob. 26QPCh. 8 - Prob. 27QPCh. 8 - Prob. 28QPCh. 8 - Prob. 29QPCh. 8 - Holding Period Yield The YTM on a bond is the...Ch. 8 - Prob. 31QPCh. 8 - Prob. 32QPCh. 8 - Prob. 33QPCh. 8 - Prob. 34QPCh. 8 - Real Cash Flows Paul Adams owns a health club in...Ch. 8 - FINANCING EAST COAST YACHTS'S EXPANSION PLANS WITH...Ch. 8 - Prob. 2MCCh. 8 - Prob. 3MCCh. 8 - Prob. 4MCCh. 8 - Prob. 5MCCh. 8 - Are investors really made whole with a make-whole...Ch. 8 - After considering all the relevant factors, would...
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Similar questions
- Which of the following is FALSE regarding bonds? The yield to maturity is the return an investor would earn if she buys the bond at the current price and holds it to maturity, collecting all of the promised coupon payments and the par value at maturity bond holders vote to elect members to the board of directors a bond indenture includes all of the basic terms of a bond issue bondholders have legal recourse if a company fails to make the promised interest payments or the par value at maturity corporate bonds usually have a fixed coupon rate with semi-annual interest payments.arrow_forwardWhich of the following statements is correct about corporate bond/ A.The corporate bond with AAA rating has zero default risk.All else equal,the corporate bond with better credit rating has lower yield to maturity B.Corporate bonds bonds have zero default risk and fixed coupon payments C.The corporate bond credit risk is assessed by the credit rating agency D.Default risk referto the likelihood that firm will walk away from the its bond obligations involuntarilyarrow_forwardWhich 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_forward
- Does governance of firms affect the prices of their bonds?Point: No. Bond prices are primarily determined by interest rate movements and therefore are not affected by the governance of firms that issue the bonds.Counter-Point: Yes. Bond prices reflect the risk of default. Firms with more effective governance may be able to reduce their default risk and thereby increase the prices of their bonds.Who is correct?arrow_forwardWhy the existence of rating agencies has lowered returns on corporate bonds?arrow_forwardWhen a corporate bond receives a rating of "BBB" from a credit rating agency, how is this rating typically classified? O Subprime grade Investment grade O Junk grade O Speculative gradearrow_forward
- Assume you are working with a portfolio management company; you have to educate some prospects because they are not convinced with some bonds suggested for investment by you, they have so many doubts about the rating of bonds. So how you can convince them that bond rating has a proper process by giving examples of some agencies and list of fixed income securities.arrow_forwardIndicate 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.arrow_forwardBonds that are rated less than investment grade by bond-rating agencies is: a. Sovereign bonds b. Corporate bonds c. Junk bonds d. Contingency bondsarrow_forward
- If a bond has a credit rating of A, which of the following is not true: A. The bond has more risk than a government bond B. The bond is considered a junk bond C. The bond is less risky than a BBB bond D. The bond is currently making all of its debt payments Is it junk bond? Because they are riskier bonds and will provide more returns?arrow_forwardTo 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.arrow_forwardInflation-linked bonds, also known as treasury inflation-protected securities (TIPS), are used to protect against inflation. What are the benefits and drawbacks of buying TIPS?arrow_forward
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