(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
Callable bonds are those bonds which are repurchased by the issuer at a specified call price before the maturity of the bond.
(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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Chapter 10 Solutions
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- The discount rate for firm's projects equals the cost of capital for the firm as a whole when Blank______. Multiple choice question. all projects have the same risk as the firm the average risk of the firm's projects is constant all projects have normally distributed returnsarrow_forwardTrue or false: The basic assumption of using weighted average cost of capital (WACC) to discount a project is that the capital has been raised in optimal proportions. True false question. True Falsearrow_forwardThe economic value added (EVA) is a performance measure based on the Blank______. Multiple choice question. risk-free rate weighted average cost of capital cost of equity expected returnarrow_forward
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