Two companies, Blue Plc and Yellow Plc, have bonds yielding 4% and 5.3%respectively. Blue Plc has a credit rating of AA, while Yellow Plc holds a BB rating. If youwere a risk-averse investor, which bond would you choose? Explain your reasoning withacademic references.
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Two companies, Blue Plc and Yellow Plc, have bonds yielding 4% and 5.3%
respectively. Blue Plc has a credit rating of AA, while Yellow Plc holds a BB rating. If you
were a risk-averse investor, which bond would you choose? Explain your reasoning with
academic references.
Step by step
Solved in 2 steps
- If given the original value (par value) and market price (the price the bond sold for), how do youknow if the bond is being issued at a discount or a premium? 2. As an investor, would you want to buy a bond at a discount or premium? Explain the reasoningbehind your choice. 3. Explain how a company's Income Statement is affected by treasury stock transactions?Using the previous information, correctly match each curve on the graph to it's corresponding issuing company. (Hint: Each curve indicates the path that each bond's price, or value, is expected to follow.) Curve A Curve B Curve C Based on the preceding information, which of the following statements are true? Check all that apply. O Johnson Incorporated's bonds have the highest expected total return. O The bonds have the same expected total return. O The expected capital gains yield for Smith, LLC's bonds is negative. O The expected capital gains yield for Smith, LLC's bonds is greater than 12%. Irwin Corporation's bonds have exhibited a substantial trading volume in the past few years. Its bonds would be referred to as a1. Go to finance yahoo and search for bonds. Address the following about the bond that you select and bonds in general: a) Describe the different types of bonds.b) Describe the difference between stocks and bonds.c) Select a specific bond to focus on. Describe the bond and why you selected it.d) Explain the security of the bond, that is, whether the bond has collateral.e) Describe how the seniority of the bond is calculated.f) Describe the presence of a sinking fund. Does the bond you selected to fit into this category? Explain. If it does not, find one that does and describe how this impacts the bond.g) Review a bond with a call provision and explain the specified call dates and call prices.h) Review a bond with a deferred call accompanying the above call provision and explain what this means.i) What are positive covenants.? Discuss several possible positive covenants the bond company might consider.j) What are negative covenants? Also, discuss several possible negative covenants the…
- You review the characteristics of a recent corporate bond issue and notice that the issuing firm's Debt to Equity (D/E) ratio is higher than the industry average, while its Return on Equity (ROE) is lower than the industry average. If bonds issued by other firms with industry average D/E and ROE ratios have a BBB rating, you can draw the following conclusion: a. This bond is likely to have a higher rating (A or above). b. This bond is likely to have a lower rating (BB or below). c. This bond will also have a BBB rating.If an investor is holding the bonds of a corporation, he or she will be concerned about interest rate risk since it affects Blank______. Multiple choice question. the par value of bonds the coupon rates of bonds the time to maturity of bonds the market price of bondsRisks of investing in bonds The higher the risk of a security, the higher its expected return will be. A bond’s risk level is reflected in its yield, but understanding the different risks involved when investing in bonds is important. Q1. The following graph shows the relationship between interest rates and maturity for three security classes: US Treasury securities (USTs), AA-rated corporate bonds, and BBB-rated corporate bonds. Use the selection dropdown lists to correctly associate each curve with its corresponding security class: Select one of the three options for A, B, and C Option A: BBB or UST or AA Option B: AA or BBB or UST Option C: AA or UST or BBB Frank Barlowe is retiring soon, so he’s concerned about his investments providing him with a steady income every year. He’s aware that if interest rates Q2._____, the potential earnings power of the cash flow from his investments will increase. In particular, he is concerned that a decline in interest rates might lead to…
- Which of the following statements is CORRECT? Group of answer choices The bond-yield-plus-risk-premium approach to estimating the cost of common equity involves adding a risk premium to the interest rate on the company’s own long-term bonds. The size of the risk premium for bonds with different ratings is published daily in The Wall Street Journal or is available online. The WACC is calculated using a before-tax cost for debt that is equal to the interest rate that must be paid on new debt, along with the after-tax costs for common stock and for preferred stock if it is used. An increase in the risk-free rate is likely to reduce the marginal costs of both debt and equity. The relevant WACC can change depending on the amount of funds a firm raises during a given year. Moreover, the WACC at each level of funds raised is a weighted average of the marginal costs of each capital component, with the weights based on the firm’s target capital structure. Beta measures market risk,…Briefly explain how the yield to maturity (YTM) of a corporate bond is calculated. Is this the expected return an investor should expect for investing in the bond? Why or why not?To provide credit rating in the bond market, Bonds are given rankings according to their investment quality, i.e., investment grade and non-investment grade. Which of the following is a measure of the highest investment grade bond? ABC Bbb AAA Ccc- None of the above.
- To understand how bonds work and how they are priced, we have to have an understanding of what determines a bond’s price. One of the most important factors to consider when pricing bonds is the prevailing market rate of interest for bonds of similar risk in terms of duration and quality. In your response to this question, you should highlight the relationship between bond prices and interest rates and indicate what risks are considered when we price bonds. Include at least two citations that support your response.To earn a high rating from the bond rating agencies, a company would want to have: (check all that apply) A high profitability ratio A high quick ratio A low EBIT to interest coverage ratio A high debt-to-equity ratipPlease help me.thank you