(a)
To Discuss:
The likely impact on the offering yield of adding a call feature to a proposed bond issue
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
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:
The likely impact on the bond's expected life of adding a call feature to a proposed bond issue.
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.
(c)
To Discuss:
One advantage and one disadvantage of investing in callable bonds rather than non-callable bonds
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
ESSEN OF INVESTMENTS CONNECT AC
- See the chart below. The top line shows the 90 day yield on corporate bonds and the bottom line is the US Treasury bill (TB) rate for similar maturity. The yield is shown on the y-axis. Notice that the gap between the two curves got wider during the recession years of 2008-2009. Which of the following reasons can possibly explain this widening? FRED 6 сл 5 4 3 2 1 0 -1 2006 · 1950 2008 2010 2012 2014 Shaded areas indicate US recessions - 2014 research.stlouisfed.org A) During the recession, the government decided to cut the tax rate on interest earned from corporate bonds but not on interest earned on TB. B) During the recession, the relative risk on corporate bonds increased. C) During the recession, the relative liquidity of corporate bonds increased. D) Two of the first three options can explain this. E) All of the first three options can explain this.arrow_forwardDon't used Ai solutionarrow_forwardDon't used Ai solutionarrow_forward
- Wildcat, Incorporated, has estimated sales (in millions) for the next four quarters as follows: Q1 Q2 Q3 Sales $ 125 $ 145 $ 165 Q4 $ 195 Sales for the first quarter of the following year are projected at $140 million. Accounts receivable at the beginning of the year were $55 million. Wildcat has a 45-day collection period. Wildcat's purchases from suppliers in a quarter are equal to 45 percent of the next quarter's forecast sales, and suppliers are normally paid in 36 days. Wages, taxes, and other expenses run about 20 percent of sales. Interest and dividends are $10 million per quarter. Wildcat plans a major capital outlay in the second quarter of $81 million. Finally, the company started the year with a cash balance of $70 million and wishes to maintain a $30 million minimum balance. a. Complete the following cash budget for Wildcat, Incorporated. Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers in millions,…arrow_forwardPlease don't use Ai solutionarrow_forward· What does a degree of financial leverage (DFL) of 2.0 indicate? O For every 1 percent change in its EBIT, the firm's EPS will change by 2 percent. O For every 1 percent change in its EBIT, the firm's sales will change by 2 percent. For every 1 percent change in its sales, the firm's EBIT will change by 2 percent. For every 1 percent change in its EPS, the firm's EBIT will change by 0.5 percent. ○ For every 1 percent change in its EPS, the firm's sales will change by 0.5 percent.arrow_forward
- Don't used Ai solutionarrow_forwardDani Corporation has 3.4 million shares of common stock outstanding. The current share price is $84.50, and the book value per share is $8.75. The company also has two bond issues outstanding. The first bond issue has a face value of $71 million, a coupon rate of 5.1 percent, and sells for 95.5 percent of par. The second issue has a face value of $43 million, a coupon rate of 5.7 percent and sells for 104.5 percent of par. The first issue matures in 21 years, the second in 9 years. The most recent dividend was $3.98 a the dividend growth rate is 4.1 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 21 percent. What is the company's cost of equity? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. Cost of equity % What is the company's aftertax cost of debt? Note: Do not round intermediate…arrow_forwardGateway Tours is choosing between two bus models. One is more expensive to purchase and maintain but lasts much longer than the other. Gateway's discount rate is 10.9%. The company plans to continue with one of the two models for the foreseeable future. Based on the costs of each shown here, which should it choose? (Note: dollar amounts are in thousands.) Based on the costs of each model, which should it choose? (Select the best choice below.) OA. Gateway Tours should choose Short and Sweet because the NPV of its costs is smaller. OB. Gateway Tours should choose Old Reliable because it lasts longer. C. Gateway Tours should choose Short and Sweet because the equivalent annual annuity of its costs is smaller. OD. Gateway Tours should choose Old Reliable because the equivalent annual annuity of its costs is smaller. Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Model Year 0 Year 1 Year 2 Year 3 Old Reliable - $201 - $3.9 - $3.9 -$3.9 Year 4 -…arrow_forward
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