Concept explainers
a.
To calculate: The
Introduction:
Rate of Return (ROR):
It is the rate that shows the net profit or loss, an investor earns or loses on an investment over a particular time-period. It helps in measuring growth of an investment that took place in two periods.
b.
To calculate: The pure bond value when the nonconvertible bonds’ yield gets decreased to 8% at the time of sale and also explain its significant effect on valuation of Tulsa Drilling Company.
Introduction:
Bond:
It is a long term loan borrowed by the corporations, organizations, and the government for the
purpose of raising capital. It is issued at a fixed interest depending upon the reputation of the
corporations and also termed as fixed-income security.
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Chapter 19 Solutions
Loose Leaf for Foundations of Financial Management Format: Loose-leaf
- Ic raw Tulsa Drilling Company has $1.8 million in 10 percent convertible bonds outstanding. Each bond has a $1,000 par value. The conversion ratio is 30, the stock price is $34, and the bonds mature in 10 years. The bonds are currently selling at a conversion premium of $60 over the conversion value. Use Appendix B and Appendix D as an approximate answer, but calculate your final answer using the formula and financial calculator methods. a. Today, one year later, the price of Tulsa Drilling Company common stock has risen to $44. What would your rate of return be if you had purchased the convertible bond one year ago and sold it today? Assume that on the date of sale, the conversion premium has shrunk from $60 to $10. (Hint: Don't forget to include the interest payment for the first year) (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Rate of return b-1. Assume the yield on similar nonconvertible bonds has fallen to 6 percent at the…arrow_forwardVernon Glass Company has $30 million in 10 percent, $1,000 par value convertible bonds outstanding. The conversion ratio is 40, the stock price is $18, and the bond matures in 25 years. The bonds are currently selling at a conversion premium of $45 over their conversion value. If the price of the common stock rises to $24 on this date next year, what would your rate of return be if you bought a convertible bond today and sold it in one year? Assume on this date next year, the conversion premium has shrunk from $45 to $20. (Hint: Calculate rate of return as (Future bond price - Current bond price + Interest earnings) / Current bond price)) (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Rate of return %arrow_forwardBolivar Basic Industries (BBI) issued $1,000 face-value convertible bonds three years ago and BBI stock currently sells for $43 per share. The bonds have an original maturity of 10 years (7 years remaining), a coupon rate of 6.2% and make semi-annual coupon payments. The bonds have a yield-to-maturity of 5.6%. The bonds are also convertible to 50 shares of stock and the cost of conversion is 2% of face value ($20). What is the minimum BBI price per share that you would be willing to convert the bonds? Select one: a. $20.00 b. $20.40 c. $20.69 d. $21.09 e. None of the above.arrow_forward
- Six years ago the Templeton Company issued 19-year bonds with a 13% annual coupon rate at their $1,000 par value. The bonds had an 8% call premium, with 5 years of call protection. Today Templeton called the bonds. Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called. Round your answer to two decimal places. % Why should or should not the investor be happy that Templeton called them? 1. Investors should be happy. Since the bonds have been called, investors will receive a call premium and can declare a capital gain on their tax returns. II. Investors should be happy. Since the bonds have been called, investors will no longer need to consider reinvestment rate risk. III. Investors should not be happy. Since the bonds have been called, interest rates must have fallen sufficiently such that the YTC is less than the YTM. If investors wish to reinvest their interest receipts, they must do so at lower interest…arrow_forwardSeven years ago the Templeton Company issued 25-year bonds with an 11% annual coupon rate at their $1,000 par value. The bonds had a 7.5% call premium, with 5 years of call protection. Today Templeton called the bonds. Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called. Round your answer to two decimal places. % Why the investor should or should not be happy that Templeton called them. Since the bonds have been called, interest rates must have risen sufficiently such that the YTC is greater than the YTM. If investors wish to reinvest their interest receipts, they can now do so at higher interest rates. Since the bonds have been called, interest rates must have risen sufficiently such that the YTC is greater than the YTM. If investors wish to reinvest their interest receipts, they must do so at lower interest rates. Since the bonds have been called, investors will receive a call premium and can…arrow_forwardTen years ago the Templeton Company issued 17-year bonds with a 10% annual coupon rate at their $1,000 par value. The bonds had a 9% call premium, with 5 years of call protection. Today Templeton called the bonds. Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called. Round your answer to two decimal places. 11 % Why should or should not the investor be happy that Templeton called them? I. Investors should be happy. Since the bonds have been called, interest rates must have risen sufficiently such that the YTC is greater than the YTM. If investors wish to reinvest their interest receipts, they can now do so at higher interest rates. II. Investors should be happy. Since the bonds have been called, investors will receive a call premium and can declare a capital gain on their tax returns. III. Investors should be happy. Since the bonds have been called, investors will no longer need to consider reinvestment…arrow_forward
- Seven years ago the Templeton Company issued 20-year bonds with an 11% annual coupon rate at their $1,000 par value. The bonds had a 7.5% call premium, with 5 years of call protection. Today Templeton called the bonds. Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called. Round your answer to two decimal places. % Why should or should not the investor be happy that Templeton called them? Investors should be happy. Since the bonds have been called, interest rates must have risen sufficiently such that the YTC is greater than the YTM. If investors wish to reinvest their interest receipts, they can now do so at higher interest rates. Investors should be happy. Since the bonds have been called, investors will receive a call premium and can declare a capital gain on their tax returns. Investors should be happy. Since the bonds have been called, investors will no longer need to consider reinvestment rate…arrow_forwardSix years ago the Templeton Company issued 25-year bonds with a 15% annual coupon rate at their $1,000 par value. The bonds had a 9% call premium, with 5 years of call protection. Today Templeton called the bonds. Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called. Round your answer to two decimal places. % Why should or should not the investor be happy that Templeton called them? I. Investors should not be happy. Since the bonds have been called, interest rates must have fallen sufficiently such that the YTC is less than the YTM. If investors wish to reinvest their interest receipts, they must do so at lower interest rates. II. Investors should be happy. Since the bonds have been called, interest rates must have risen sufficiently such that the YTC is greater than the YTM. If investors wish to reinvest their interest receipts, they can now do so at higher interest rates. III. Investors should be happy.…arrow_forwardSeven years ago the Templeton Company issued 16-year bonds with an 11% annual coupon rate at their $1,000 par value. The bonds had a 7.5% call premium, with 5 years of call protection. Today Templeton called the bonds. Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called. Round your answer to two decimal places. % Why should or should not the investor be happy that Templeton called them? I. Investors should be happy. Since the bonds have been called, investors will receive a call premium and can declare a capital gain on their tax returns. II. Investors should be happy. Since the bonds have been called, investors will no longer need to consider reinvestment rate risk. III. Investors should not be happy. Since the bonds have been called, interest rates must have fallen sufficiently such that the YTC is less than the YTM. If investors wish to reinvest their interest receipts, they must do so at lower…arrow_forward
- Ten years ago the Templeton Company issued 19-year bonds with a 10% annual coupon rate at their $1,000 par value. The bonds had a 9% call premium, with 5 years of call protection. Today Templeton called the bonds. Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called. Round your answer to two decimal placesarrow_forwardCalgary Corp. issued 20-year bonds 3 years ago. The bonds have a face value of $1,000 and their coupon rate is 7.1% with semi- annual payments. The bonds currently sell for 115% of par value. What is the YTM? Provide a percentage. (Round your final answer to two decimals)..arrow_forwardBright Sun, Inc. sold an issue of 30-year $1,000 par value bonds to the public. The bonds had a 7.61 percent coupon rate and paid interest annually. It is now 12 years later. The current market rate of interest on the Bright Sun bonds is 11.08 percent. What is the current market price (intrinsic value) of the bonds? Round the answer to two decimal places.arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT