Chapter 10, Problem 31PS

Summary Introduction

(a)

To examine:

The reason due to which price range is greater for the $9\%$ coupon bond than the floating rate note

Introduction:

Fixed rate bond: Securities (debt instruments) which have a fixed coupon rate usually which is predetermined. These bonds are usually issued for long term.

Floating rate bond: Securities (debt instruments) which have a floating coupon rate i.e. it keeps on changing with changes in market. It is usually equal to money market reference rate as like LIBOR, MIBOR.

Summary Introduction

(b)

To examine:

floating rate note is not always sold at par.

Introduction:

Fixed rate bond: Securities (debt instruments) which have a fixed coupon rate usually which is predetermined. These bonds are usually issued for long term.

Floating rate bond: Securities (debt instruments) which have a floating coupon rate i.e. it keeps on changing with changes in market. It is usually equal to money market reference rate as like LIBOR, MIBOR.

Summary Introduction

(c)

To examine:

The call price for the floating-rate note is of not so much significance to investors.

Introduction:

Fixed rate bond: Securities (debt instruments) which have a fixed coupon rate usually which is predetermined. These bonds are usually issued for long term.

Floating rate bond: Securities (debt instruments) which have a floating coupon rate i.e. it keeps on changing with changes in market. It is usually equal to money market reference rate as like LIBOR, MIBOR.

Summary Introduction

(d)

To examine:

The probability of call for the fixed rate note is high or low.

Introduction:

Fixed rate bond: Securities (debt instruments) which have a fixed coupon rate usually which is predetermined. These bonds are usually issued for long term.

Floating rate bond: Securities (debt instruments) which have a floating coupon rate i.e. it keeps on changing with changes in market. It is usually equal to money market reference rate as like LIBOR, MIBOR.

Summary Introduction

(e)

To determine:

Coupon rate to issue the bond at par value where the firm issue a fixed rate note with 15-years maturity which is callable after five years.

Introduction:

Fixed rate bond: Securities (debt instruments) which have a fixed coupon rate usually which is predetermined. These bonds are usually issued for long term.

Floating rate bond: Securities (debt instruments) which have a floating coupon rate i.e. it keeps on changing with changes in market. It is usually equal to money market reference rate as like LIBOR, MIBOR.

Summary Introduction

(f)

To examine:

The entry for yield to maturity for the floating rate note not appropriate.

Introduction:

Fixed rate bond: Securities (debt instruments) which have a fixed coupon rate usually which is predetermined. These bonds are usually issued for long term.

Floating rate bond: Securities (debt instruments) which have a floating coupon rate i.e. it keeps on changing with changes in market. It is usually equal to money market reference rate as like LIBOR, MIBOR.