Briefly explain why many corporations prefer to issue callable long-term corporate bonds rather than non-callable long-term bonds. There are three main reasons why a corporation may be interested in calling a bond. * Interest rates have fallen‚ so they can refinance at a lower rate. * Credit quality has improved‚ so they can refinance at a lower rate. * Assets have been sold‚ so money is available to pay off debt. If a bond issuer pays investors the going rate of 7% annually in interest‚ and then the
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_______________ 1. The invoice price of a bond is the ______. A. stated or flat price in a quote sheet plus accrued interest B. stated or flat price in a quote sheet minus accrued interest C. bid price D. average of the bid and ask price 2. A mortgage bond is _______. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured 3. You buy a TIPS at issue at par for $1‚000. The bond has a 3% coupon. Inflation turns
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Minimize capital gain tax on stock sale: new BHV based in BriOsh Virgin Islands will issue bonds and sell them at the book value ‐ AQract foreign investors ‐ Receive financing for company’s acOviOes 09/11/2011 8 Advantages for the shareholders: ‐ Minimizing bankruptcy costs ‐ in case of financial distress exchanging bonds to exchange property may stave off bankruptcy (this is the special feature of exchangeable bonds‚ converOble bonds do not bear this advantage) Dispose of the shares without paying 30% capital gain tax
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on the face of the bond. It is used to compute the amount of cash interest paid to the bondholder. The market rate is the rate of return expected by investors who purchase the bonds. The market rate determines the market price of the bond. It incorporates the current risk-free rate‚ expectations about the relative riskiness of the borrower‚ and the rate of inflation. In general‚ there is an inverse relation between the bond’s market rate and the bond’s market price. Q7-4. Bonds are reported at historical
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every $1.00 of interest paid by a corporation was allowed as a taxdeductible expense‚ it would probably encourage companies to use more debt financing than they presently do‚ other things held constant. 5. Financial asset markets deal with stocks‚ bonds‚ mortgages‚ and other claims on real assets with respect to the distribution of future cash flows. 6. The yield curve is downward sloping‚ or inverted‚ if the long-term rates are higher than the short-term rates. 7. American depository receipts are
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Problems (5-5) A Treasury bond that matures in 10 years has a yield of 6%. A 10-year corporate bond has a yield of 9%. Assume that the liquidity premium on the corporate bond is 0.5%. What is the default risk premium on the corporate bond? Maturity = 10 years rtbond = 6% rcbond = 9% liquidity premium = 0.5% rd= r* + IP + DRP + LP + MRP Default Risk Premium (DRP) = 9% - 6% + 0.5% = 2.5% (5-7) Renfro Rentals has issued bonds that have a 10% coupon rate‚ payable semiannually. The bonds mature in 8 years‚ have
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factors to desistance such as Social Control Theory‚ also known as Social Bond theory. According to the Social Bond Theory‚ the bond between individual and the people around them are important in the support of preventing and controlling the individual from reoffending (Hirschi‚ 1969). There are 4 factors in the social bond theory which are; attachment‚ commitment‚ belief and involvement (Vold et al.‚ 2002). Attachment is the bond between the individual and the people around such as family and friends
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VALUING A CORPORATE BOND ISSUE AMR is the parent company of American Airlines. In addition to its primary subsidiary‚ AMR also operates several airline support companies such as the SABRE group (reservations)‚ the Management Services Group‚ and American Eagle (a regional carrier). American Airlines is currently considering the issuance of a series of $1‚000 par bonds. The coupon rate offered‚ based on current market interest rates and the Standard & Poor’s based AMR bond rating‚ will be 10%
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------------------------------------------------- Chapter 5: Bonds‚ Bond Valuation‚ and Interest Rates (5–1) Bond Valuation with Annual Payments Jackson Corporation’s bonds have N=12 years remaining to maturity. Interest is paid annually‚ the bonds have a FV=$1‚000 par value‚ and the coupon interest rate is PMT=8%. The bonds have a yield to maturity of I=9%. What is the current market price of these bonds? $928.39 Calculator solution: Input: N = 12‚ I = 9‚ PMT = 80‚ FV = 1000‚ Solve for PV =
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1. Stiles Corporation issues a new series of bonds on January 1‚ 1982. The bonds were sold at part ($1000)‚ had a 12% coupon‚ and matured in 30 years‚ on December 31‚ 2011. Coupon payments are made semiannually (on June 30 and December 31). a) What was the YTM on January 1‚ 1982? - Explain b) What was the price of the bonds on January 1‚ 1987‚ 5 years later‚ assuming that interest rates had fallen to 10%? (Show in equation form‚ plug all the relevant numbers and without calculation‚ say whether
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