Carirac manners chapters [ERHl and registered bonds? ~peaference between term bonds ,amee ference Between term bonds andl serial bonds? xostis we eonertible wee ane bo? bond? Is a convertible bond more or less attractive to a bond holder than a ? is “sea callable bond? Is a call provision more or less attractive to a bond holder than a jae bone? adhe meaning of a sinking fund provision on a bond issue pi ati the difference between an investment grade bond and a junk bond? nats isthe ference between a Eurobondl and a foreign bond? otis gare Brady bonds created? i. iy pos st 92S aiowing Tnote and T-bond quotes eter Miaity Coupon | Bid Asked Chg ‘Ask yield 139 Nov 15 4.375 107:07 107:09 +11 3.9519 SitAug 15 5.000 10431 [ 10501 a 03205 . Whatis the asking price on the 4.375 percent November 2039 T-bond if the face value of the bond is $10,000? } Whatis the bid price on the 5.000 percent August 2011 T-note if the face value of the bond is ‘10,000? ‘Ans: a. $10,728.125; b. $10,496.875 | Maturity Coupon | Bid ‘Asked ‘Chg ‘Ask yield 2011 Mar 31 0.875 100:14 100:14 unch, 0.2374 23 Nov 30 2.0000 | 103:01 _, | 103:02 6 1.0734 * Verify the asked price on the 0.875 percent March 2011 T-note for Friday, July 16, 2010. The ‘shed yield on the note is 0.2374 percent and the note matures on March 31, 2011. Settlement “curs two business days after purchase; i.e., you would take possession of the note on i inday, July 19, 2010. ‘ty the asked yield on the 2,000 percent November 2013 T-note for July 16, 2011. The ‘ted price is 108:02 and the note matures on November 30, 2013. Ans: a. 100.4465566%; b. 1.0734 aa Hato - Trellowing Treasury stripped quotes: ~ Bid Asked Chg ‘Asked yield 91.163 91.173 0.260 1.83 86.813 86.823 0.349 225 DS hugis Nov igstitutions AND MARKETS 4 yield of 1.89% on the Treasury bond, sti ao | stripped Verity the July 16, 2010 ashe rst 2015. Use a twoeday settlement period from the day Prin snday, July 19,2010). The STRIP matures on Ay a 2 Bust ce (86.823) on the Treasury note, stripped principal sty al STRIP om imber 2016, ie. the STRIP matures on November 15, 2016. An f h Purch maturing Augu 15,29 ownership occurs on M bs Verify the asked Pr Nove! aay PROBLEM 5.4 75, 2013, you purchase 4 $10,000 T-note that matures on August 15, 2034 ga (sete ‘On October Ores two days after purchase, $0 YOU receive actual ownership of the bond on 3013). The coupon rate on the ‘Tenote is 4375 percent and the current price quoted ie hers ce value of the T-note). The last coupon payment occur ng red on is 105.08 (or 105.25% of the 15, 2013 (145 days before settlement), and the next coupon payment will be paid on No oven 15,2013 (9 days from settlement). 4. Calculate the accrued interest due to t Calculate the dirty price of this transaction. ‘he seller from the buyer at settlement. Ans: a. $172.38; suns; PROBLEM 5.5 ‘Consider an investor who, of $100,000, an 8 percent maturity. a. If the semiannual inflation rate during the fir principal amount used to determine the first cou purchases a TIPS bond with an original prince! on January 1, 2014, al) coupon rate, and 10 yeas annual (or 4. percent semiannu: st six months is 0.3 percent, calcul jpon payment and the first coupon payne! (paid on June 30, 2014). b. From your answer to part a, calculate the inflation adjusted principal at the beginning o® second six months. the second six-month period is 1 perce c. Suppose that the semiannual inflation rate for coat a oo adjusted principal at the end of the second six ie tenet on Payment to the investor for the second six-month pe! principal on this coupon payment date? ‘Ans: a. $100,300; $4,012; b. $100,300: « $10 ‘months (on Deen riod. Wa! 1,303. and PROBLEM 5.6 You can She in taxable bonds that are paying a 9.5 percent qnnual © percent, which paying a 7.75 percent annual rate of return. If your marBi security bond should you buy? ; ate nal tax rae PROBLEM 5.7 A municipal bond a — rate of retu You are considering as an inves a 675 Pe im. tment currently pays a. Calculate the tax equi equivalent rate of return if your marginal tax rate is 28 percent! b. Calculate the tax equivalent rate of ; “reba return if your marginal tax rate is 21 P° sea yaw ans: sfCAPITAL MARKETS Chapter 5 ie ast ‘ing quotation on muni; re following quotation on municipal bond published on Fi ut a Coupon [Maturity 7 ee Paty 16,2010 Soe ‘of Budget & Fin spec purp | 5.500 07-01-40 | 95.757 eases Dept of Transp | “5.000 01-01-35 | 705232 | ore | 4.33 ea Dev Fin Agcy rev bds | 5.000 01-01-40 |~ 97.736 | 0.148 515 Ss July 16, 2010, what were the coupon rate, price, and yield on municipal bonds issued by spe Hawaii Department of Budget & Finance? 4 What was the price, on July 15, 2010, on Massachuse paturing on Janwary 1, 20352 « Use the bond pricing formula and calculate the number of year) between the Monday, tts Department of Transportation bonds years (to the nearest 1/1000 th of July 19, 2010, settlement date and the maturity date on the Massachusetts Development Finance Agency revenue bonds maturing on January 1, 2040. Ans: a. 8.500%; 95.757% and 5.80%; b, 105.154%;¢, 29.53816 years gost Tar the quotation of corporate bond published on July 16, 2016 Tavene | Sembal [coupon [matty | Ratngaoays, | igh [low [a | ange /S&P/Fitch * % “7 of | BACBP 5.625% | Jul 2020 A2/A/A+ 105.966 | 103.198 [105.266 [2372 N/A neato ‘MORGAN MSHPU | 5.500% | Jan 2020 AAJA 102.639 | 99.406 99.582 -0976 | 5557 suey soa [oken [Ts ners eames — Pires — Porras ere + What was the closing price on the Bank of America 5.625 percent coupon bonds on July 16, in 5 What was the S&P bond rating on Morgan Stanley 5.500 percent coupon bonds maturing in 200 on July 16, 20107 ‘ What was the closing price on Cox Communications 7.750 percent bonds on July 15, 2010? ‘Ans: a. 105.266% of the face; b. A; c.101.958% of the face value 0 S000 face value corporate bond with a 65 percent coupon as left efi . (paid semiannually) has 15 to maturity. It has had a credit rating of BBB and a yield to maturity of 7.2 percent. has recently gotten into some trouble and the rating agency is downgrading the bonds The new appropriate discount rate will be 8.5 percent. What will be the change in the ‘nds price in dollars and percentage terms? Ans:-11.29% ‘0 the 33 percent marginal tax bracket is comparing a municipal bond that offers a 45 hg Yield to maturity and a similar risk corporate bond that offers a 6.45 percent yield will give the client more profit after taxes? ‘Ans; ATY = 4.3215%; Municipal bond is more profitablews ano MARKLTS 110 Famancrae SE PROBLEM 5.12 ee corporate Fond with a 675 percent coupon (paid semiann, A Rs 1000 face VM as had a credit rating of BB and a yield to maturity of ally years left materi nore financially stable and the rating agency is upgradin, Petey 9 ate discount ral 8 the bong, firm recently CECE Te will be 7.1 percent. What will be the terms? ‘BBB. The new appropri Change a pond’ price in di AN ty jollars and percentage PROBLEM 5.13 = ‘What is the bond quote for a Rs 1,000 face value bond with an 8 percent coupon ray semiannually) and a required return of 735 percent if the bond is 6.48574, 847148, 195 4.87875 years from maturity? ‘Ans: Rs 102.17%; 103.03%; 103.19% an, 5 (ea 1a PROBLEM 5.14 Hilton Hotels Corp. hat Jond Issue outstanding. Each bond, witha fae vale Rs 1,000, can be converted into common shares at a rate of 61.2983 shares of stock per Rs1 the conversion rate), or Rs 16.316 per share. Hilton's common stock is share and the bonds are trading at Rs 975. s a convertible face value bond ( on stock exchange at Rs 15.90 per ‘a Calculate the conversion value of each bond. b. Determine if it is currently profitable for bond holders to convert their bonds into sha Hilton Hotels common stock. ‘Ansa RH PROBLEM 5.15 ‘You bought bond five years ago for Rs 935 per bond. The bond is no also paid Rs 75 in interest per year, which you reinvested in the bond. a. Calculate the realized rate of return earned on this bond. b. You expect to hold the bond for three more years, then sell it for Rs 990. If the bond expected to continue paying Rs 75 per year over the next three rate of return on the bond during this period? ww selling for Rs years, what is the e PROBLEM 5.16 Conside ler a 12-year, 12 percent annual coupon bond with a required return of 10 perce bond has a face value of Rs1,000. Mey is the price of the bond? interest rates rit ane e a Hag eee what is the price of the bond? ige change in price? Repeat ars (@), (b), and (c) for a Tear bond. repective changes in bond prices indicate? 136.27; b, Rs 1,064.92; . -6.28 percent; d. Rs 1,156.47; Rs 1.073 8 eange ond “7Cariran Manxers Chapters i) we ear, 15 percent bond f Ppaider 8 i “A eae annual coupon bond with a face value of Rs 1,000, The bond is ata ett picef ifthe rate of interest ee ; Percent, what will be the bond’s new price? ing your answers to Parts (a) and (b), what is ; s price as oe pane the percent increase in gee at is the percentage change inthe bond’ pri ry repergars and (¢) assuming a 1:percent decrease in interest rates. on what dathedifferehces tt your answers indicate about the price-rate relationships of fixed- Mate asseté? 3 PT ee : 7, janaki Moters's bonds have 10 years remaining to maturity. Interest is paid annually, the Ssyonds have aRs 1,000 par value, and the coupon rate is 8 percent. The bonds have a yield to maturity of 9 percent. What is the cutrent market price of these bonds? ‘ig What is the value of a Rs 1,000 bond with a 12-year maturity and an 8 percent coupon’ rate (paid semiiahnually) if the required return is 5 percent, 6 percent, 8 percent, and 10 percent? WW Coiporation'has a bond issue outstanding with an annual coupon rate of 7 percent ‘Sue quatterly ‘and four years. remaining until maturity. The par value of the bond. is Rs *"¥1200, Deterinine the fair present value of the bond if market conditions justify a 14 percent, the price of the bond? Ains:a. Rs 1,108.14; b. Rs 1,070.34; c, -3.41 percent, d. Rs 1,147.84 and 3.58 percent ‘saufpontnded quarterly, required rate of return. faite “Aris: a: Rs 935.82; b. Rs 1,268.27; Rs 1,169.36; Rs 1,000; and Rs 862.01; c. Ans: Rs 788.35 Gia S18 pi [email protected] year, 12: percent semiannual coupon bond, with a par value of Rs 1,000 sells for Rs '. .” f-100. What is the bond’s yield to maturity? (HA Rs 1,000 par value bond with seven years left to maturity has a 9 percent coupon rate _ {pid semiannually) and is selling for Rs 945.80. What is its yield to maturity? ‘ ‘Ans: a 10.37%; b. 10.09% Mae You have jist been offered a bond fot RS 863.73. The coupon rate is 8 percent payable annually, \) sand intefest rates on new issues with the same degree of risk are 10 percent. You want to know how’mary inore interest payments you will receive, but the party selling the bond cannot “teaember, If the par value is Rs 1,000, how many interest payments remain? Yuasa, ” (000 face valixg, and is 10 years from maturity. 4 df the required rate of teturn on the bond is 6 percent, ». Ifthe required rate of return on the bond is 8 percent, what is its fair present value? ® What do your answers to parts (a) and (b) say about the relation between required rates of teturn and fair values of bonds? Ans: 12 years what is its fair present value? ‘Ans: a Rs 1,297.55; b. Rs 1,135.90; c. Negative.SS PROBLEM 5.22 es Talculate the yield to maturity on the following bones semiannually) bond, with a Rs 1,000 face yay a. A9 percent coupon (paid ue remaining to maturity. The bond is selling at Rs 985. and 15 me b. An 8 percent coupon (paid quarterly) bond, with a Rs 1,000 face value remaining to maturity. The bond is selling at Rs 915. «An 11 percent coupon (paid annually) bond, with a Rs 1,000 face value remaining to maturity. The bond is selling at Rs 1,065: and 19 Yeam " nd 6 Ans: a. 9.186%; b& 93165 Beg PROBLEM 5.23 ; i Calculate the fair present values of the following bonds, all of which pay interest rina have a face value of Rs 1,000, have 12 years remaining to maturity, and have a Tequire; return of 10 percent. a. The bond has a 6 percent coupon rate. b. The bond has a 8 percent coupon rate. ¢, The bond has a 10 percent coupon rate. d. What do your answers to parts (a) through (c) say about the relation between coupon ra and present values? e. Repeat parts (a) through (c) using a required rate of return on the bond of 8 percent. Wi do your calculations imply about the relation between the coupon rates and bond pre volatility? ¥. rate ‘Ans: a.Rs 724.03; b, Rs 862.01; ¢. Rs 1,000; d Positive; e. Rs 647.53; Rs 1,000; Rs 1,152.47; andopost PROBLEM 5.24 Calculate the fair present value of the following bonds, all of which have a 10 percent coup rate (paid semiannually), face value of Rs 1,000, and a required rate of return of 8 percent. a. The bond has 10 years remaining to maturity. b. The bond has 15 years remaining to maturity. c. The bond has 20 years remaining to maturity. 4. What do your answers to parts (a) through (c) say about the relation between time ® maturity and present values? ©. Repeat parts (a) through (c) using a required rate of return on the bond of 11 percent. Wit do your calculations imply about the relation between time to maturity and bond prtt volatility? Ans: a. Rs 1,135.90; b. Rs 1,172.92; c. Rs. 1,197.93; d. Positive; . Rs 940.25; % change = -17.22%; Rs 92733: % ot 919,732 PROBLEM 5.25 20.94%; Rs ie ee Par value bond with five years left to maturity pays an interest payment interest ae with a6 percent coupon rate and is priced to have a 5 percent yield tomatur surprisingly increase by 0.5 percent, by how much would the bond's price MM, “Ans: Rs 1,043.76 and RS PROBLEM 5.26 0 aul (a) A preferred stock from Duquesne L ight Company (DQUPRA) pays Rs 2 alue of stock? on the preferred stock is 5.4 percent, what is thcara ances cones JBC pays Rs 3.50 in annual dividends. If the cent, what is the value of the stock? Ans: a. Rs jy apmeerted stock from Hecla Mining Co. (HILPRB) Ned returmlon the preferred stock i 68 pe ef 38.89, ». Rs 5147 en 527 e “Calculate the present value on a stock that p see ays Rs 5 in di is ith no growth) Wasa required rate of return of 10 percent 'ys Rs 5 in dividends per year (with no Br’ ip)Financial analysts forecast Safeco Corp, (SAF) growth for the future to be 10 percent. Safeco’s rent dividend was Rs 1.20. What is the value of Safeco stock if the required return is 12 percent? t) Financial analysts forecast Limited Brands (LTD) growth for the future to be 125 percent. [10's most recent dividend was Rs 0.60. What is the value of Limited Brands's stock when the suid roturn is 145 percent? ‘Ans: a Rs 50; b Re 66; ¢.R6 33.75 apBLEM 5.28 ‘stock you are evaluating just paid an annual dividend of Rs 2.50. Dividends have grown at a constant rate of 1.5 percent over the last 15 years and you expect this to continue. a. Ifthe required rate of return on the stock is 12 percent, what is its fair present value? bh If the required rate of return on the stock is 15 percent, what is its expected price four years from today? ‘Ans: a. Rs 24.167; 6. Rs. 19.95 LEM 5.29 You are considering the purchase of a stock that is currently selling at Rs 64 per share. You expect the stock to pay Rs 4.50 in dividends next year. a. If dividends are expected to grow at a constant rate of 3 percent per year, what is your expected rate of return on this stock? If dividends are expected to grow at a constant rate of 5 percent per year, what is your expected rate of return on this stock? © What do your answers to parts (a) and (b) say about the impact of dividend growth rates on expected rate of returns on stocks? Ans: a, 10.03%; b. 12.03%; c. Positive Ms _________— 4 slock you are evaluating is expected to experience supernormal growth in dividends of 8 percent over the next six years. Following this period, dividends are expected to grow at a constant rate of 3 percent. The stock paid a dividend of Rs 5.50 last year and the required rate of Tetum on the stock is 10 percent. Calculate the stock’s fair present value Ans: Rs 103.455 AORN ile © Ecolp Inc (ECL) recently paid a Rs O46 dividend. The dividend is expected to grow at a US percent rate. At a current stock price of Rs 4412, what return are shareholders expecting? ». Paychex inc. (PAYX) recently paid a Rs 0.84 dividend. The dividend is expected to grow ata 15 percent rate, At a current stock price of Rs 40.11, what return are shareholders expecting?as FImANcrAL INSTITUTIONS ano MARK reent growth rate of dividends expected in the f ~ 2. What is the fair present value ture OF the stack y te Consider a firm with a 9.5 pe current year's dividend was Rs 1.3 required return is 13 percent? A company recently paid a Rs 0.35 div percent rate. At a current stock price of Rs 24.25, idend. The dividend is expected to what return are shareholders Ans: a. 15.54%; b. 17.09%: ¢. R. Brow at 3 1p EXPectings $304 I1y PROBLEM 5.32 . . @ Rs 1,000,000 which you are planning to invest in one of the follow > ’ ‘Suppose that you hav investment opportunities. Bond: A bond that is selling in the interest at 12 percent, and matures class is 14 percent. Common stock: A common stock with Rs 100 par value that recently paid a Rs 20 dividend p, = Rs 20). The growth rate of dividend is 6 percent per year forever. The stock is selling for Rs and you think that the required rate of return on such stock is 20 percent. Preferred stock: A 10 year preferred stock with Rs 100 par value has dividend rate of 8 perce per year. The market price of preferred stock is Rs 150 per share. The required rate of retumon such stock is 10.50 percent. a. Calculate the value of each security and determine the one in which you would invest. Give reasons for your choice. b. Describe how is the value of bond, common stock and preferred stock calculated in practice market at Rs 1,100. The bond has a Rs 1,000 par value in 15 years. Your required rate of return for the bond fa is oe