Chapter 14, Problem 1PS

a.

Summary Introduction

To determine: The Catastrophe bond

Introduction: The bonds are the units of debt issued in corporate and it is securitized as a trade asset. The prices of the bonds are inversely proportional to the interest rates.

Answer to Problem 1PS

It provides the investor a stable interest payment.

Explanation of Solution

Bonds are referred as an instrument for getting fixed income. The coupon rate is the rate of interest that the bond issuer will pay. It is expressed in percentage and it is fixed. The payments are made by the specified time interval. When the bonds reach maturity, these are redeemable.

A Catastrophe bond is also known as CAT bond. It is a debt instrument in which high yield for money raising opportunities for the companies. In this bond, the investor gets a higher rate of interest for bearing high risk. It offers the investor stable interest payments. It also provides competition in yielding compare to the fixed income bonds.

b.

Summary Introduction

To determine: Eurobond

Introduction: The bonds are the units of debt issued in corporate and it is securitized as a trade asset. The prices of the bonds are inversely proportional to the interest rates.

Answer to Problem 1PS

The bond is easily sold and bought.

Explanation of Solution

Bonds are referred as an instrument for getting fixed income. The coupon rate is the rate of interest that the bond issuer will pay. It is expressed in percentage and it is fixed. The payments are made by the specified time interval. When the bonds reach maturity, these are redeemable.

A Eurobond is a debt instrument issued by euro currency that is other than home currency. The market where the bond is issued, it is different from that currency. These help to raise capital when having the flexibility to issue in euro currency. Due to high liquidity, these bonds can easily sell and bought.

c.

Summary Introduction

To determine: The zero-coupon bond.

Introduction: The bonds are the units of debt issued in corporate and it is securitized as a trade asset. The prices of the bonds are inversely proportional to the interest rates.

Answer to Problem 1PS

These bonds never disburse regular interest payments

Explanation of Solution

Bonds are referred as an instrument for getting fixed income. The coupon rate is the rate of interest that the bond issuer will pay. It is expressed in percentage and it is fixed. The payments are made by the specified time interval. When the bonds reach maturity, these are redeemable.

Zero-coupon bonds are debt instruments that never pay interest. These bonds offer full face value profits during maturity. The bonds have no coupon rate. This does not disburse regular interest payments. The investor buys these bonds at a discount price that is the price lower than the face value.

d.

Summary Introduction

To determine: The Samurai bond

Introduction: The bonds are the units of debt issued in corporate and it is securitized as a trade asset. The prices of the bonds are inversely proportional to the interest rates.

Answer to Problem 1PS

The bond is issued in Japan, Yen

Explanation of Solution

Bonds are referred as an instrument for getting fixed income. The coupon rate is the rate of interest that the bond issuer will pay. It is expressed in percentage and it is fixed. The payments are made by the specified time interval. When the bonds reach maturity, these are redeemable.

Samurai bonds issued by foreign companies and subject to all regulations in Japan. These bonds issued in Japan, Yen for capitalizing low interest rates. The bond issued by a foreign issuer in the domestic market. These bonds give an opportunity to grow in the Japanese market without any risk of currency. These attract investment for Japanese investors.

e.

Summary Introduction

To determine: Junk bond

Introduction: The bonds are the units of debt issued in corporate and it is securitized as a trade asset. The prices of the bonds are inversely proportional to the interest rates.

Answer to Problem 1PS

This bond has high default risk

Explanation of Solution

Bonds are referred as an instrument for getting fixed income. The coupon rate is the rate of interest that the bond issuer will pay. It is expressed in percentage and it is fixed. The payments are made by the specified time interval. When the bonds reach maturity, these are redeemable.

A junk bond is a debt security instrument that is poorly rated due to the high default risk. These bonds have a high risk for not paying their interest the principals to the investors. The coupon rates are high on these. These bonds have a principal amount, maturity date. So, there are high risks of principal and interest payments. These bonds can be issued by corporations or governments.

f.

Summary Introduction

To determine: Convertible bond

Introduction: The bonds are the units of debt issued in corporate and it is securitized as a trade asset. The prices of the bonds are inversely proportional to the interest rates.

Answer to Problem 1PS

This bond can be converted into a predetermined share.

Explanation of Solution

Bonds are referred as an instrument for getting fixed income. The coupon rate is the rate of interest that the bond issuer will pay. It is expressed in percentage and it is fixed. The payments are made by the specified time interval. When the bonds reach maturity, these are redeemable.

The bond in which the investor can exchange for a specific amount of stock at a later date is known as convertible bond. These bonds pay fixed income interest payments. It can be converted into predetermined shares. It provides a hybrid security like interest payments.

g.

Summary Introduction

To determine: Serial bond

Introduction: The bonds are the units of debt issued in corporate and it is securitized as a trade asset. The prices of the bonds are inversely proportional to the interest rates.

Answer to Problem 1PS

This bond gives an option to mature in a specific time intervals.

Explanation of Solution

Bonds are referred as an instrument for getting fixed income. The coupon rate is the rate of interest that the bond issuer will pay. It is expressed in percentage and it is fixed. The payments are made by the specified time interval. When the bonds reach maturity, these are redeemable.

Serial bond issues structured bonds in which a part of outstanding bonds mature with a specific time intervals. These provide a constant income stream for repayment. These bonds mature in a sequential manner.

h.

Summary Introduction

To determine: Equipment Obligation bond

Introduction: The bonds are the units of debt issued in corporate and it is securitized as a trade asset. The prices of the bonds are inversely proportional to the interest rates.

Answer to Problem 1PS

These bonds are issued with particular equipment

Explanation of Solution

Bonds are referred as an instrument for getting fixed income. The csoupon rate is the rate of interest that the bond issuer will pay. It is expressed in percentage and it is fixed. The payments are made by the specified time interval. When the bonds reach maturity, these are redeemable.

The bond issued with particular equipment, which is collateral against the bond is called an equipment obligation bond. The investor gets the equipment at default. These bonds are the parts of municipal bonds.

i.

Summary Introduction

To determine: Original issue discount bond

Introduction: The bonds are the units of debt issued in corporate and it is securitized as a trade asset. The prices of the bonds are inversely proportional to the interest rates.

Answer to Problem 1PS

These bonds have the potential for gains

Explanation of Solution

Bonds are referred as an instrument for getting fixed income. The coupon rate is the rate of interest that the bond issuer will pay. It is expressed in percentage and it is fixed. The payments are made by the specified time interval. When the bonds reach maturity, these are redeemable.

Original issue discount bond are the bonds having the potential for gains. These are bought at a lower price than the face values by the investors. These bonds are very less affected by change in interest rates.

j.

Summary Introduction

To determine: Indexed bond

Introduction: The bonds are the units of debt issued in corporate and it is securitized as a trade asset. The prices of the bonds are inversely proportional to the interest rates.

Answer to Problem 1PS

These bonds are interlinked to an index

Explanation of Solution

Bonds are referred as an instrument for getting fixed income. The coupon rate is the rate of interest that the bond issuer will pay. It is expressed in percentage and it is fixed. The payments are made by the specified time interval. When the bonds reach maturity, these are redeemable.

Indexed bonds are the bonds in which the coupon payments and maturity payments are interlinked to an index. So, they fluctuate with the rate of inflation. Due to they are volatile in nature, these are beneficial to investors.

k.

Summary Introduction

To determine: Callable bond

Introduction: The bonds are the units of debt issued in corporate and it is securitized as a trade asset. The prices of the bonds are inversely proportional to the interest rates.

Answer to Problem 1PS

It provides paid back before its maturity date

Explanation of Solution

Bonds are referred as an instrument for getting fixed income. The coupon rate is the rate of interest that the bond issuer will pay. It is expressed in percentage and it is fixed. The payments are made by the specified time interval. When the bonds reach maturity, these are redeemable.

A callable bond is one that can be paid back by the issuer before its maturity date. This bond allows paying off early before maturity, so the favorable interest rate moves. It is also called redeemable bond.

l.

Summary Introduction

To determine: Puttable bond

Introduction: The bonds are the units of debt issued in corporate and it is securitized as a trade asset. The prices of the bonds are inversely proportional to the interest rates.

Answer to Problem 1PS

It can redeem before the maturity date.

Explanation of Solution

Bonds are referred as an instrument for getting fixed income. The coupon rate is the rate of interest that the bond issuer will pay. It is expressed in percentage and it is fixed. The payments are made by the specified time interval. When the bonds reach maturity, these are redeemable.

A potable bond is a kind of bond provides the right to the investor to force to redeem the bond before the maturity date. The bond is embedded with the put option. It is contradictory to the callable bond.