Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
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…
1. Should financial institutions invest in junk bonds? 2. Explain the use of call provisions on bonds. How can a call provision affect the price of the bond?3. What are protective covenants? Are they needed? Explain why.
To 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.
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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Similar questions
- 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.arrow_forwardDiscuss 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?arrow_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_forwardDebt Securities - These securities are in the form of debt or borrowings which have to be repaid by the issuer to the holder of the securities. The issuers of debt securities have to pay interest in the form of coupons at a rate of interest. Debt securities are a means of diversification and provide a predictable income stream to the holders. You mention "coupons" in you debt instrument discussion. Can you tell us more about these coupons? How do they work, where do we find them? Are they registered?arrow_forwardInvestment Banks operate and earn profits by: a) Purchasing undervalued securities on the market b) Creating and marketing new financial securities for issuers. c) Underwriting existing security issues, and selling them at a discount. d) Issuing stocks and bonds based on their own credit. e) Purchasing and reselling existing undervalued stocks and bonds. f) None of the other answers.arrow_forward
- 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?arrow_forwardWhich of the following lowers the required interest rate that firms have to pay on their bonds? Which of the following raise the interest that firms have to pay? Private placements Public offerings Sinking fund provisions Protective Covenants Call provisions Collateral An active secondary market A low credit ratingarrow_forwardAssume 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_forward
- Why do at least some investors like to invest in asset-backed securities? Check all that apply: ABS are less risky than bonds with the same rating. It lowers their capital requirements. It gives them control over more assets. ABS often pay higher interest rates than bonds with the same rating.arrow_forwardNhich of the below statements is TRUE? O a. Frequently, the ability of an issuer to make interest and principal payments is seriously and unexpectedly changed by a naturai or industrial accident or some regulatory change. O b. The lowest-grade bonds are designated by Moody's by the symbol Aaa and by the other three rating systems by the symbol AA O . Fixed-rate securities are attractive to some institutionial investors because they allow them to buy an asset with an income stream that closely matches the floating nature of the income of some of their liabilities. O d. Each rating agency periodicalily publishes a table showirig the upgrade and downgrade history of the issues that it rated.arrow_forwardIf bonds payable are not callable, the issuing corporation a.can exchange them for common stock b.can repurchase them in the open market c.is more likely to repurchase them if the interest rates increase d.must get special permission from the SEC to repurchase themarrow_forward
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