lOMoARcPSD| 50205883
Câu 1: Contrast investors use of capital markets with their use of money markets
Investors use capital markets for long term investment purposes. They use money
markets, which have lower yields, primarily for short term transaction purposes
Câu 3: Distinguish between the primary market and the secondary market for securities
The primary market is for securities being issued for the first time, and the issuer receives
the funds paid for the security. the secondary market is for securities that have been issued
previously but are being traded among investors.
Câu 4: A bond provides info about its par value, coupon interest rate, and maturity date. define each of these.
The par value is the amount the issuer will pay the holder when the bond matures. the
coupon interest rate is multiplied times the the par value to determine the interest payment
the issuer must make each year. the maturity date is when the issuer must bay the holder the par value.
Câu 6: As interest rates in the market change over time, the market price of bonds rises
and falls. the change in the value of bonds due to change in interest rates is a risk incurred
by bond investors. what is this risk called? This risk is called interest risk rate.
Câu 8: A call provision on a bond allows the issuer to redeem the bond at will. Investors do
not like call provisions and so require higher interest on callable bonds. Why do issuers
continue to issue callable bonds anyway?
Firms like having the flexibility to adjust their capital structure by paying off debt they no
longer need. they also need to pay off debt to remove restrictive covenants. call provisions
permit both these actions at the issuers discretion.
Câu 9: What is a sinking fund? do investors like bonds that contain this feature? A sinking
fund contains funds set aside by the issuer of the bond to pay for the redemption of the
bond when it matures. because a sinking fund increases the likelihood that a firm will have
the funds to pay off the bonds as required, so investors like the feature. Quantitative
Câu 1. A bond makes an annual $80 interest payment (8% coupon). The bond has five years
before it matures, at which time it will pay $1,000. Assuming a discount rate of 10%, what
should be the price of the bond? (Review Chapters 3 and 12.) C = Facevalue x = 1000 . = 80 PV = C . + = 80 . + = $924,18 lOMoARcPSD| 50205883
Câu 2. A zero-coupon bond has a par value of $1,000 and matures in 20 years. Investors
require a 10% annual return on these bonds. For what price should the bond sell? (Note:
Zero-coupon bonds do not pay any interest. Review Chapter 3.) PV = = = $148,64
Câu 3. Consider the two bonds described below:
a. If both bonds had a required return of 8%, what would the bonds’ prices be?
b. Describe what it means if a bond sells at a discount, a premium, and at its face amount
(par value). Are these two bonds selling at a discount, premium, or par?
c. If the required return on the two bonds rose to 10%, what would the bonds’ prices be?a.
Required return 8% per year 4% per 6 months Bond A: C = Facevalue x = 1000 . = 50
PV = C . + = 50 . + = $1172,92 Bond B: C = Facevalue x = 1000 . = 30 PV = C . + = 30 . + = $802,07 b.
Bond A is selling at a premium
Bond B is selling at a discount
c. Required return 10% per year 5% per 6 months Bond A: PV = C . + = 50 . + = $1000 Bond B: PV = C . + = 30 . + = $656,82
Câu 4. A two-year $1,000 par zero-coupon bond is currently priced at $819.00. A two-year
$1,000 annuity is currently priced at $1,712.52. If you want to invest $50,000 in one of the
two securities, which is a better buy? (Hint: Compute the yield of each security) Zero-coupon bond: lOMoARcPSD| 50205883 PV = FV . 819 = 1000 . i = 10,5% Annuity: PV = ∑ FV . 1712,52= 1000 . + 1000 . i = 11%
If I want to invest $50,000, the Annuity bond is better buy
Câu 6. The yield on a corporate bond is 10%, and it is currently selling at par. The marginal
tax rate is 20%. A par value municipal bond with a coupon rate of 8.50% is available. Which security is a better buy? Corporate bond: i tax = 10% = i tax free = 8%
As corporate bond offers a lower aftertax yield (8% < 8,5%), so the municipal bond is a better buy.
Câu 7. If the municipal bond rate is 4.25% and the corporate bond rate is 6.25%, what is the
marginal tax rate, assuming investors are indifferent between the two bonds? i tax = 6,25% = tax rate = 32%