Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Chapter 8, Problem 32QAP
Summary Introduction
To analyze: If an individual would buy a stated treasury bond.
Introduction: Investors invest in bonds to ensure regular income (interest income) on their investments. Bondholders are the investors who are risk averse.
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Students have asked these similar questions
Which of the following is FALSE regarding bonds?
Long term bonds have greater interest rate risk than do short term bonds.
A bond indenture describes the terms of the bond issue.
Bonds represent ownership in the company.
if interest rates in the market go up, the present value of existing bonds goes
down.
A bond issuer is legally required to make the interest payments and repay the par
value at maturity.
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Page 12 of 30
7.
In recent news, the Bank of England (BOE) announced that it will raise interest rates as inflation in the UK reaches record highs.
Required
Given the expected increase in interest rates, what type of bond could a firm issue if they want the option of paying off their debt before maturity? Explain in detail. Would this type of bond be more or less desirable to the buyer of the bond? Why or why not?
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?
Chapter 8 Solutions
Corporate Finance
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 - Prob. 1QAPCh. 8 - Prob. 2QAPCh. 8 - Prob. 3QAPCh. 8 - Prob. 4QAPCh. 8 - Prob. 5QAPCh. 8 - Prob. 6QAPCh. 8 - Prob. 7QAPCh. 8 - Prob. 8QAPCh. 8 - Prob. 9QAPCh. 8 - Prob. 10QAPCh. 8 - Prob. 11QAPCh. 8 - Prob. 12QAPCh. 8 - Prob. 13QAPCh. 8 - Prob. 14QAPCh. 8 - Prob. 15QAPCh. 8 - Prob. 16QAPCh. 8 - Prob. 17QAPCh. 8 - Prob. 18QAPCh. 8 - Prob. 19QAPCh. 8 - Prob. 20QAPCh. 8 - Prob. 21QAPCh. 8 - Prob. 22QAPCh. 8 - Prob. 23QAPCh. 8 - Prob. 24QAPCh. 8 - Prob. 25QAPCh. 8 - Prob. 26QAPCh. 8 - Prob. 27QAPCh. 8 - Prob. 28QAPCh. 8 - Prob. 29QAPCh. 8 - Prob. 30QAPCh. 8 - Prob. 31QAPCh. 8 - Prob. 32QAPCh. 8 - Prob. 33QAPCh. 8 - Prob. 34QAPCh. 8 - Prob. 35QAPCh. 8 - Prob. 1MCCh. 8 - Prob. 3MCCh. 8 - Prob. 5MCCh. 8 - Prob. 6MCCh. 8 - Prob. 7MC
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- 8. Suppose one of the ratings agencies (S&P, Moody's, Fitch) upgrades the rating of a bond from BBB to AA. a. How will this affect demand for the bond? b. How will the affect the price of the bond? C. How will the affect the cost of borrowing for the company that issues those bonds? 9. Suppose the price of a $100,000 bond falls from $98,000 to $97,000. What is the interest rate on a one-year $100,000 bond that sells for $98,000? b. What is the interest rate on a one-year $100,000 bond that sells for $97,000? a.arrow_forwardExplain how does a bond par value differs from its market value? Are variable rate bonds attractive to investors who expect the interest rates to decrease? Explain. Would a firm that needs to borrow funds consider issuing variable rate bonds if it expects interest rates to decrease in the future? Explain.arrow_forwardYou are given the following details of three default free government bonds. Assume that one can take long (buy) and short (sell) positions in these bonds. CF stands for cash flow. Bond Current price Today CF Year 1 CF Year 2 A 95.24 100 0 B 89.85 0 100 C X 70 1070 Assuming that the current market prices of Bond A and Bond B are correct, then, what should be the current theoretical (fundamental) price of Bond C, as per the no-arbitrage principle, i.e., what is the value of X? [Do not round-off any numbers. If at all you want to round-off a number, round it off at 8 decimal places.]arrow_forward
- [Related to the Apply the Concept: "How to Follow the Bond Market: Reading the Bond Tables ] Consider the following information on two U.S. Treasury bonds Maturity July 31, 2024 Coupon 1.625 July 31, 2024 2.000 Briefly explain how two securities that have the same yield to maturity can have different asked prices OA. Bond A has a low coupon rate and a lower price. Bond B has a higher coupon rate and a higher price. Because of the bond price formula, if coupon rates rise, the yield will fall, which requires prices to fall to keep the yield the same. If both bonds have the same risk profile, the law of one price brings bond yields to the same level Bond A Bond B Bid 101.8984 103.4141 Asked 101.9141 103.4297 Chg 0:5000 0.5000 Asked yield 1.151 1.151 OB. Bond A has a low coupon rate and a lower price. Bond B has a higher coupon rate and a higher price, Because of the bond price formula, if coupon rates fall, the yield will rise, which requires prices to rise to keep the yield the same. If…arrow_forwardJunk bonds are very poorly rated bonds with a high probability of default. The yield to maturity on a junk bond is 0.20. The probability of default on the bond is 0.141. Investors expect to lose 60% of their investment in the event of default. What is the appropriate cost of debt for the firm that issued these junk bonds?arrow_forwardN1 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.arrow_forward
- You are given the following prices and cash flows associated with bonds. CF stands for cash flow. Bond Price Today CF Year 1 CF Year 2 CF Year 3 A 105.185 10 10 110 B 90.371 100 0 0 C 91.784 5 105 0 D X 15 15 115 What is the current price of Bond D as per the no-arbitrage principle? In other words, what is the value of X?arrow_forwardAssume that inflation is expected to rise soon. How could this affect future bond prices? Would you recommend that financial institutions increase or decrease their concentration in long-term bonds based on this expectation?arrow_forwardI-Bonds Adjust for InflationOne of the disadvantages of bonds is that they usually offer a fixed interest rate. Once a bond isissued, its interest rate typically cannot adjust as expected inflation changes. This presents aserious risk to bond investors because if inflation rises while the nominal rate on the bondremains fixed, the real rate of return falls. The U.S. Treasury Department now offers the I-bond,which is an inflation adjusted savings bond. A Series-I bond earns interest through theapplication of a composite rate. The composite rate consists of a fixed rate that remains thesame for the life of the bond and an adjustable rate equal to the actual rate of inflation. Theadjustable rate changes twice per year and is based on movements in the Consumer PriceIndex for All Urban Consumers (CPI-U). This index tracks the prices of thousands of goods andservices, so an increase in this index indicates that inflation has occurred. As the rate of inflationmoves up and down, I-bond…arrow_forward
- if we see an increase in default rates, what may that mean for the junk bond market and for companies that want/need to sell more junk bonds?arrow_forwardWhat effect do you think this inflation adjusted rate has on the price of an I-bond in comparison with similar bonds with no allowance for inflation?arrow_forwardWhich of the following is true about a bond's interest rate risk relative to its time-to-maturity? Multiple Choice A 10-year U.S. Treasury bond is not exposed to interest rate risk due to the "risk-free" nature of U.S. Treasury investments. Time-to-maturity and interest rate risk are directly correlated. The higher a bond's time-to-maturity, the less variation in the bond's value from potential changes in interest rates. All of the above.arrow_forward
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