CONNECT WITH LEARNSMART FOR BODIE: ESSE
CONNECT WITH LEARNSMART FOR BODIE: ESSE
11th Edition
ISBN: 2819440196246
Author: Bodie
Publisher: MCG
Question
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Chapter 10, Problem 2CP
Summary Introduction

(a)

To Discuss:

On May 30, 2018, Janice Kerr is considering the newly issued 10-year AAA corporate bonds shown in the following table:

    Description Coupon Price Callable Call price
    Sentinel due May 30 2028 4% 100 Non-callable NA
    Colina due May 30 2028 4.20% 100 Currently callable 102

If the market interest rates decline by 100 basis points (i.e. 1%), contrast the effect of this decline on the price of each bond.

Introduction:

A bond is a security that creates an obligation on the issuer to make specified payments to the holder for a given period of time. The face value of the bond is the amount the holder will receive on maturity along with the coupon rate which is also known as the interest rate of the bond.

Yield to maturity is defined as the discount rate that makes the present payments from the bond equal to its price. In simple terms, it is the average rate of return a holder can expect from that bond.

Callable bonds are those bonds which are repurchased by the issuer at a specified call price before the maturity of the bond.

Summary Introduction

(b)

To Discuss:

On May 30, 2018, Janice Kerr is considering the newly issued 10-year AAA corporate bonds shown in the following table:

    Description Coupon Price Callable Call price
    Sentinel due May 30 2028 4% 100 Non-callable NA
    Colina due May 30 2028 4.20% 100 Currently callable 102

To discuss whether Kerr should prefer the Colina over the Sentinal bond when rates are expected to rise or to fall.

Introduction:

A bond is a security that creates an obligation on the issuer to make specified payments to the holder for a given period of time. The face value of the bond is the amount the holder will receive on maturity along with the coupon rate which is also known as the interest rate of the bond.

Yield to maturity is defined as the discount rate that makes the present payments from the bond equal to its price. In simple terms, it is the average rate of return a holder can expect from that bond.

Callable bonds are those bonds which are repurchased by the issuer at a specified call price before the maturity of the bond.

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