Concept explainers
Requirement 1
To determine:
The definition of a catastrophe bond
Introduction:
Debt securities also referred to as fixed-income securities promise to give fixed income or value determined as per a given formula. Bonds are basically debt securities. Bonds are securities which are provided in connection with borrowing arrangement. Over a certain period of time, the issuer is obliged to make specific payments to the holder in this type of securities.

Explanation of Solution
Catastrophe bonds are bonds which are meant for raising money in case of any hurricane, earthquake or any such catastrophe. These bonds are risk linked securities. Here the risk is transferred from the bond issuer or sponsor to the investor. Since the risk is high, these bonds provide higher coupon rates. Bondholders may lose everything or a part of the investments in case of any calamity.
Catastrophe bonds are high yield, high risk bonds.
Catastrophe bonds are high yield, high risk bonds.
To determine:
The definition of Eurobond
Introduction:
Debt securities also referred to as fixed-income securities promise to give fixed income or value determined as per a given formula. Bonds are basically debt securities. Bonds are securities which are provided in connection with borrowing arrangement. Over a certain period of time, the issuer is obliged to make specific payments to the holder in this type of securities.

Explanation of Solution
Eurobonds are those bonds which are denominated by currencies which are different from the currency or the market in which they was issued. They are issued in one country's currency and sold to markets of other nations. These bonds have smaller par values. These bonds are generally grouped based on the currency. Example: Euroyen bond or Eurodollar bonds. These bonds attract the investors owing to their high liquidity.
Eurobonds are small par value, high liquidity bonds
Eurobonds are denominated in different currencies.
Requirement 3
To Define:
The definition of a zero-coupon bond
Introduction:
Debt securities also referred to as fixed-income securities promise to give fixed income or value determined as per a given formula. Bonds are basically debt securities. Bonds are securities which are provided in connection with borrowing arrangement. Over a certain period of time, the issuer is obliged to make specific payments to the holder in this type of securities.

Explanation of Solution
A type of bond which does not pay any coupons is the zero-coupon bond. These bonds are issued at a value which is discounted and they are redeemed at full face
Zero-coupon bonds are those that pay no coupons.
Zero coupon bonds are no coupon paying bonds.
Requirement 4
To determine:
The definition of a Samurai bond
Introduction:
Debt securities also referred to as fixed-income securities promise to give fixed income or value determined as per a given formula. Bonds are basically debt securities. Bonds are securities which are provided in connection with borrowing arrangement. Over a certain period of time, the issuer is obliged to make specific payments to the holder in this type of securities.

Explanation of Solution
The bonds issued by the non-Japanese companies subjected to the regulations of Japan are Samurai bonds. These bonds are yen-denominated bonds. There are also other similar bonds like Euroyens which are issued generally in London and countries other than Japan.
Samurai bonds are sold in Japan.
Bonds sold in Japan.
Requirement 5
To determine:
The definition of a Junk bond
Introduction:
Debt securities also referred to as fixed-income securities promise to give fixed income or value determined as per a given formula. Bonds are basically debt securities. Bonds are securities which are provided in connection with borrowing arrangement. Over a certain period of time, the issuer is obliged to make specific payments to the holder in this type of securities.

Explanation of Solution
As per the credit rating by S&P or Ba, some bonds get a credit rating of BB or lower. Some bonds may get a credit rating which is lower than BB. These bonds are called Junk bonds. They may also be unrated bonds. They carry a higher default risk. These bonds are high yield bonds.
Junk bonds are low rated bonds.
Junk bonds are high yield bonds.
Requirement 6
To determine:
The definition of a convertible bond
Introduction:
Debt securities also referred to as fixed-income securities promise to give fixed income or value determined as per a given formula. Bonds are basically debt securities. Bonds are securities which are provided in connection with borrowing arrangement. Over a certain period of time, the issuer is obliged to make specific payments to the holder in this type of securities.

Explanation of Solution
Convertible bonds are bonds which could be exchanged to specific number of shares or stocks at the discretion of the bondholder. The coupon rates of these bonds are lower. This is because lower coupon rate is the price that the bondholders are paying for getting the converting option on the security.
Convertible bonds are exchangeable.
Convertible bonds are low coupon rate bonds.
Requirement 7
To determine:
The definition of a serial bond
Introduction:
Debt securities also referred to as fixed-income securities promise to give fixed income or value determined as per a given formula. Bonds are basically debt securities. Bonds are securities which are provided in connection with borrowing arrangement. Over a certain period of time, the issuer is obliged to make specific payments to the holder in this type of securities.

Explanation of Solution
Serial bonds are issues which are structured in such a way that they mature at regular intervals. The burden of the firm to repay the principal amount is spread now. These bonds are used to finance projects which could provide regular income with which bond repayment could take place.
Serial bonds are structured issues.
Serial bonds are structured issues.
Requirement 8
To determine:
The definition of an Equipment obligation bond
Introduction:
Debt securities also referred to as fixed-income securities promise to give fixed income or value determined as per a given formula. Bonds are basically debt securities. Bonds are securities which are provided in connection with borrowing arrangement. Over a certain period of time, the issuer is obliged to make specific payments to the holder in this type of securities.

Explanation of Solution
Equipment obligation bonds are those bonds which are issued where the collateral against the bonds is the equipments which are pledged.
Equipment obligation bonds are with equipment collaterals
Equipments are pledged as collaterals here.
Requirement 9
To determine:
The definition of an original issue discount bond
Introduction:
Debt securities also referred to as fixed-income securities promise to give fixed income or value determined as per a given formula. Bonds are basically debt securities. Bonds are securities which are provided in connection with borrowing arrangement. Over a certain period of time, the issuer is obliged to make specific payments to the holder in this type of securities.

Explanation of Solution
Original issue discount bonds are the kind of bonds where the coupon rates are lower intentionally and which make the bond to be sold at a value discounted from the par value. These bonds are not as popular as the other coupon bonds which are issued at par.
Original issue discount bonds are intentionally issued at low coupon rates.
Original issue discount bonds are intentionally issued at low coupon values.
Requirement 10
To determine:
The definition of an Indexed bond
Introduction:
Debt securities also referred to as fixed-income securities promise to give fixed income or value determined as per a given formula. Bonds are basically debt securities. Bonds are securities which are provided in connection with borrowing arrangement. Over a certain period of time, the issuer is obliged to make specific payments to the holder in this type of securities.

Explanation of Solution
The types of bonds where the payments are generally made based on the price of a certain commodity or based on the general price index are called the Indexed bonds.
Indexed bonds are those whose payments are dependent on general price index.
Indexed bonds are linked to the general price index.
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Chapter 10 Solutions
ESS. OF INVESTMENTS - ETEXT ACCESS CARD
- Assume that the following statements of financial position are stated and a book value. Alpha Corporation Current Assets $15,000 Current Liabilities $5,400 Net Fixed Assets 39,000 Long-Term Debt 10,100 Equity 38,500 $54,000 $54,000 Beta Corporation Current Assets $3,600 Current Liabilities $1,400 Net Fixed Assets 6,700 Long-Term Debt 2,100 Equity 6,800 $10,300 $10,300 Suppose the fair market value of Beta’s fixed assets is $9,500 rather than the $6,700 book value shown. Alpha pays $17,300 for Beta and raises the needed funds through an issue of long-term debt. Construct the post-merger statement of financial position now, assuming that the purchase method of accounting is used.arrow_forwardThe shareholders of Barley Corporation have voted in favor of a buyout offer from Wheat Corporation. Information about each firm is given here: Barley Wheat Price/earnings ratio 13.5 21 Shares outstanding 90,000 210,000 Earnings $180,000 $810,000 Barley shareholders will receive one share of Wheat stock for every three shares they hold of Barley. Required What will the EPS of Wheat be after the merger? What will be the P/E ratio if the NPV of the acquisition is 0? What must Wheat feel is the value of the synergy between these two firms? Explain how your answer can be reconciled with the decision to go ahead with the takeover?arrow_forwardBlack Oil Company is trying to decide whether to lease or buy a new computer-assisted drilling system for its extraction business. Management has already determined that acquisition of the system has a positive NPV. The system costs $9.4 million and qualifies for a 25% CCA rate. The equipment will have a $975,000 salvage value in five years. Black Oil’s tax rate is 36%, and the firm can borrow at 9%. Cape Town Company has offered to lease the drilling equipment to Black Oil for payments of $2.15 million per year. Cape Town’s policy is to require its lessees to make payments at the start of the year. Suppose it is estimated that the equipment will have no savage value at the end of the lease. What is the maximum lease payment acceptable to Black Oil now?arrow_forward
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