Chapter 10, Problem 3PS

Summary Introduction

(a)

To Discuss:

The likely effect on a bond's yield to maturity of an increase in the issuing firm's times-interest-earned ratio.

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.

The times-interest-earned-ratio is the calculation of a firm's income before interest and taxes divided by the interest expense.

Summary Introduction

(b)

To Discuss:

The likely effect on a bond's yield to maturity of an increase in the issuing firm's debt-equity ratio.

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.

Debt-equity ratio is the calculation of the extent to which the shareholders equity can meet the obligations of the creditors in the event of a decline.

Summary Introduction

(c)

To Discuss:

The likely effect on a bond's yield to maturity of an increase in the issuing firm's quick ratio.

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.

Quick ratio is the measure of a company's ability to pay its short term obligations using its most liquid assets.