An investor in the 22 percent tax bracket is trying to decide which of two bonds to select: one is a 5.5 percent U.S. Treasury bond selling at par, the other is a municipal bond with a 4.25 percent coupon, which is also selling at par. Which of the two bonds hould the investor select? Why?
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An investor in the 22 percent tax bracket is trying to decide which of two bonds to select: one is a 5.5 percent U.S. Treasury bond selling at par, the other is a municipal bond with a 4.25 percent coupon, which is also selling at par. Which of the two bonds hould the investor select? Why?
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- An investor has a cash of $29,379,685 at disposal. He wants to invest in a bond with $1,000 nominal value and whose dirty price is equal to 101.36%. What is the number of bonds he will buy? Round to the nearest integer. Blank Excel Worksheet Your Answer: AnswerGronseth Drywall Systems, Inc., is in discussions with its investment bankers regarding the issuance of new bonds. The investment banker has informed the firm that different maturities will carry different coupon rates and sell at different prices. The firm must choose among several alternatives. In each case, the bonds will have a $1,000 par value and flotation costs will be $30 per bond. Calculate the before-tax cost of financing with the following alternative. coupon rate 9% time to maturity 16 years premium or discount $250Which of the following is FALSE regarding bonds? The yield to maturity is the return an investor would earn if she buys the bond at the current price and holds it to maturity, collecting all of the promised coupon payments and the par value at maturity bond holders vote to elect members to the board of directors a bond indenture includes all of the basic terms of a bond issue bondholders have legal recourse if a company fails to make the promised interest payments or the par value at maturity corporate bonds usually have a fixed coupon rate with semi-annual interest payments.
- Mr. Norman and Mr. Foster are both investors looking to buy financial assets. Mr. Norman prefers assets with the lowest prices while Mr. Foster prefers assets on the financial market with higher prices. Each of them currently has GHC 1,000 to invest and needs your assistance to know which asset to buy to suit their preference. The following information provides details of investment options. a. Asset A is a bond with a coupon rate of 10% and pays semi- annual coupons. The par value is GHC 1,000, and the bond has 5 years to maturity. The yield to maturity is 11%. b. Asset B is a stock whose dividend is expected to increase by 20% in one year and by 15% in two years. After that, dividends will increase at a rate of 5% per year indefinitely. The last dividend was GHC 100 and the required return is 20%. Which asset will Mr. Norman and Mr. Foster invest in? In the 2020 accounting year, investors made a number observations in terms of certain decisions some corporations were taking: (1) The…Frank Meyers, CFA, is a fixed-income portfolio manager for a large pension fund. A member of the Investment Committee, Fred Spice, is very interested in learning about the management of fixed-income portfolios. Spice has approached Meyers with several questions.Meyers decides to illustrate fixed-income trading strategies to Spice using a fixed-rate bond and note. Both bonds have semiannual coupon periods. Unless otherwise stated, all interest rate changes are parallel. The characteristics of these securities are shown in the following table. He also considers a 9-year floating-rate bond (floater) that pays a floating rate semiannually and is currently yielding 5%. Characteristics of Fixed-Rate Bond and Fixed-Rate Note Fixed-Rate Bond Fixed-Rate Note Price 107.18 100.00 Yield to maturity 5.00% 5.00% Time to maturity (years) 18 8 Modified duration (years) 6.9848 3.5851 Spice asks Meyers to quantify price changes from changes in interest rates. To illustrate, Meyers…Mr. Jackson is considering investing in corporate bonds. He has talked to an investment analyst who has advised him to choose between company A or company B bonds. The possible rates of return for the two bonds, which are subject to the state of the economy are given below: State of theeconomy Probability for State ofthe economy Possible rate of returnfor Company A bond Possible rate ofreturn for CompanyB bond Expansion 0.2 17% 20% Normal 0.1 13% 15% Recession 0.4 10% 11% Required:i. Calculate the expected return for each corporate bond ii. Calculate the variance and standard deviation for each bond. iii. Compute the coefficient of variation for each bond iv. Advice Mr. Jackson on the best bond to invest in.
- As a bond fund manager, you are considering corporate bonds issued by Super Buy (SB). Each SB bond is a 4-year bond with a par value of $1 million. Its interest payments are based on the following schedule: $50,000 in year 1, $60,000 in years 2, $70,000 in year 3, and $80,000 in year 4. You estimate SB's current interest rate is 6%. What is the estimated new bond price using the duration model if the YTM increases by 100 basis points? OA. $1.0149 million OB. $1.0496 million OC.$0.9802 million OD. $0.9795 million46) Pete "Polar Bear" Alonso wants to purchase a bond with the highest tax-affect yield. He has a choice between a New York City municipal bond yielding 4.09% or a AAA-rated Coca Cola bond yielding 4.38%. His tax rate is 30%. Assuming the Polar Bear is a rational (and that is a stretch), which bond would be prefer? a) Neither, as he doesn't understand how to calculate tax-affected yields b) New York City bond c) Both, tax-affected yield is exactly the same d) Coca Cola e) His tax bracket is wrongFrank Meyers, CFA, is a fixed-income portfolio manager for a large pension fund. A member of the Investment Committee, Fred Spice, is very interested in learning about the management of fixed-income portfolios. Spice has approached Meyers with several questions. Meyers decides to illustrate fixed-income trading strategies to Spice using a fixed-rate bond and note. Both the bond and note have semiannual coupon periods. Unless otherwise stated, all interest rate changes are parallel. The characteristics of these securities are shown in the following table. He also considers a 9-year floating-rate bond (floater) that pays a floating rate semiannually and is currently yielding 5%. Characteristics of Fixed-Rate Bond and Fixed-Rate Note Fixed-Rate Fixed-Rate Note Bond 107.18 5.00% 9 100.00 5.00% 4 6.9848 3.5851 Price Yield to maturity Time to maturity (years) Modified duration (years) Spice asks Meyers to quantify price changes from changes in interest rates. To illustrate, Meyers computes…
- Mark Sexton and Todd Story, the owners of S&S Air, have decided to expand their operations. They instructed their newly hired financial analyst, Chris Guthrie, to enlist an underwriter to help sell $20 million in new 10-year bonds to finance construction. Chris has entered into discussions with Renata Harper, an underwriter from the firm of Crowe & Mallard, about which bond features S&S Air should consider and what coupon rate the issue will likely have. Although Chris is aware of the bond features, he is uncertain as to the costs and benefits of some features, so he isn’t clear on how each feature would affect the coupon rate of the bond issue. You are Renata’s assistant, and she has asked you to prepare a memo to Chris describing the effect of each of the following bond features on the coupon rate of the bond. She would also like you to list any advantages or disadvantages of each feature. QUESTIONS 1. The security of the bond—that is, whether the bond…Susan is looking into a convertible bond but does not know how to value this bond. The bond has a $1,000 face value and a conversion ratio of 36. What is the conversion price? If the stock price is $42, what is the conversion value? What is the downside risk percentage of the bond if the current price is $1,250 and the investment premium is $861.53? Is this risk concerning? The stock is currently selling for $42 per share. The issuer of the bond has announced a call; the call price is 108. What are your options here? What should you do?Elizabeth is trying to decide whether to buy a corporate bond that pays a 6.5% coupon or a muni bond that pays a 4.8% coupon. the bonds are comparable risk and maturity. if she has a 24% marginal tax rate, which bond should she buy and why? buy the corporate bond because its yield is greater than the muni bond yield buy the muni because she can avoid paying taxes on the interest. buy the corporate bond because her after-tax bond yield on the corporate bond is greater than the muni yield. she should be indifferent between the two bonds because they are both good investments. buy the muni because her return on the muni is greater than her after-tax return on the corporate bond
