Chapter 11, Problem 3CP

Summary Introduction

(a)

To discuss:

Two specific bond issues are to be evaluated as part of an analysis of debt issued by Monticello Corporation,shown in the table below.

The price and yield behavior of the two bonds under each of the following two scenarios is to be compared using the duration and yield information in the table:

1. In case of rising inflation expectations,strong economic recovery
2. In case of reduced inflation expectations,economic recession

Introduction:

When specified payments are made by the issuer to the holder for a given period of time due to an obligation created by a security, then that security is known as Bond.The amount the holder will receive on maturity along with the coupon rate which is also known as the interest rate of the bond is known as the face value of the bond. The discount rate due to which the present payments from the bond become equal to its price i.e. it is the average rate of return which a holder can expect from a bond, is known as Yield to Maturity.

A bond's annual income when divided by the current price of the security is known as the current yield.

A bond due to whichthe issuer is permitted to hold the benefit of redeeming the bond at atime before the bond reaches its maturityis known as Callable Bond.

Summary Introduction

(b)

To discuss:

Two specific bond issues are to be evaluated as part of an analysis of debt issued by Monticello Corporation, shown in the table below:

The projected price change for Bond B if the yield to maturity for this bond falls by 75 basis points is to be calculated using the information in the table:

Introduction:

When specified payments are made by the issuer to the holder for a given period of time due to an obligation created by a security, then that security is known as Bond.The amount the holder will receive on maturity along with the coupon rate which is also known as the interest rate of the bond is known as the face value of the bond. The discount rate due to which the present payments from the bond become equal to its price i.e. it is the average rate of return which a holder can expect from a bond, is known as Yield to Maturity.

A bond's annual income when divided by the current price of the security is known as the current yield.

A bond due to whichthe issuer is permitted to hold the benefit of redeeming the bond at atime before the bond reaches its maturity is known as Callable Bond.

Summary Introduction

(c)

To Discuss:

Two specific bond issues are to be evaluated as part of an analysis of debt issued by Monticello Corporation, shown in the table below:

The shortcoming of analyzing Bond A strictly to call or to maturity is to be described.

Introduction:

When specified payments are made by the issuer to the holder for a given period of time due to an obligation created by a security, then that security is known as Bond.The amount the holder will receive on maturity along with the coupon rate which is also known as the interest rate of the bond is known as the face value of the bond. The discount rate due to which the present payments from the bond become equal to its price i.e. it is the average rate of return which a holder can expect from a bond, is known as Yield to Maturity.

A bond's annual income when divided by the current price of the security is known as the current yield.

A bond due to whichthe issuer is permitted to hold the benefit of redeeming the bond at atime before the bond reaches its maturity is known as Callable Bond.