Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
11th Edition
ISBN: 9780077861759
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 15, Problem 10QP
Valuing Callable Bonds Bowdeen Manufacturing intends to issue callable, perpetual bonds with annual coupon payments. The bonds are callable at $1,175. One-year interest rates are 9 percent. There is a 60 percent probability that long-term interest rates one year from today will be 10 percent, and a 40 percent probability that they will be 8 percent. Assume that if interest rates fall the bonds will be called. What coupon rate should the bonds have in order to sell at par value'!
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Students have asked these similar questions
FYI bonds pay $40 in interest every six months and will mature in 10 years.
a. Calculate the price if the yield to maturity on the bonds is 7, 8, and 9 percent, respectively.
b. Explain the impact on price if the required rate of return decreases.
Bandon Manufacturing intends to issue callable, perpetual bonds with annual coupon payments and a par value of $1, 000. The bonds are callable at $1, 230. One year interest rates are 8 percent. There is a 60 percent probability that long-term interest rates one year from today will be 10 percent, and a 40 percent probability that they will be 8 percent. Assume that if interest rates fall the bonds will be called. What coupon rate should the bonds have in order to sell at par value? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Bandon Manufacturing intends to issue callable, perpetual bonds with annual coupon
payments and a par value of $1,000. The bonds are callable at $1,255. One-year interest
rates are 8 percent. There is a 60 percent probability that long-term interest rates one
year from today will be 9 percent, and a 40 percent probability that they will be 7
percent. Assume that if interest rates fall the bonds will be called. What coupon rate
should the bonds have in order to sell at par value? (Do not round intermediate
calculations and enter your answer as a percent rounded to 2 decimal places, e.g.,
32.16.)
Coupon rate
%
Chapter 15 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 15 - Bond Features What are the main features of a...Ch. 15 - Prob. 2CQCh. 15 - Preferred Stock Preferred stock doesnt offer a...Ch. 15 - Preferred Stock and Bond Yields The yields on...Ch. 15 - Prob. 5CQCh. 15 - Call Provisions A company is contemplating a...Ch. 15 - Prob. 7CQCh. 15 - Preferred Stock Do you think preferred stock is...Ch. 15 - Long-Term Financing As was mentioned in the...Ch. 15 - Internal versus External Financing What is the...
Ch. 15 - Prob. 11CQCh. 15 - Classes of Stock Several publicly traded companies...Ch. 15 - Callable Bonds Do you agree or disagree with the...Ch. 15 - Bond Prices If interest rates fall, will the price...Ch. 15 - Sinking Funds Sinking funds have both positive and...Ch. 15 - Prob. 1QPCh. 15 - Prob. 2QPCh. 15 - Prob. 3QPCh. 15 - Prob. 4QPCh. 15 - Financial Leverage Kiedis, Corp., has...Ch. 15 - Financial Leverage Frusciante, Inc., has 290,000...Ch. 15 - Financial Leverage Harrison, Inc., has the...Ch. 15 - Valuing Callable Bonds KJC, Inc., plans to issue 5...Ch. 15 - Valuing Callable Bonds New Business Ventures,...Ch. 15 - Valuing Callable Bonds Bowdeen Manufacturing...Ch. 15 - Prob. 11QPCh. 15 - Prob. 12QP
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- Yield to Maturity and Yield to Call Arnot International’s bonds have a current market price of $1,200. The bonds have an 11% annual coupon payment, a $1,000 face value, and 10 years left until maturity. The bonds may be called in 5 years at 109% of face value (call price = $1,090). What is the yield to maturity? What is the yield to call if they are called in 5 years? Which yield might investors expect to earn on these bonds, and why? The bond’s indenture indicates that the call provision gives the firm the right to call them at the end of each year beginning in Year 5. In Year 5, they may be called at 109% of face value, but in each of the next 4 years the call percentage will decline by 1 percentage point. Thus, in Year 6 they may be called at 108% of face value, in Year 7 they may be called at 107% of face value, and so on. If the yield curve is horizontal and interest rates remain at their current level, when is the latest that investors might expect the firm to call the bonds?arrow_forwardA bond has the following features: Coupon rate of interest (paid annually): 12 percent Principal: $1,000 Term to maturity: 11 years What will the holder receive when the bond matures? If the current rate of interest on comparable debt is 8 percent, what should be the price of this bond? Assume that the bond pays interest annually. Use Appendix B and Appendix D to answer the question. Round your answer to the nearest dollar. $ Would you expect the firm to call this bond? Why? , since the bond is selling for a . If the bond has a sinking fund that requires the firm to set aside annually with a trustee sufficient funds to retire the entire issue at maturity, how much must the firm remit each year for eleven years if the funds earn 8 percent annually and there is $90 million outstanding? Use Appendix C to answer the question. Round your answer to the nearest dollar. $arrow_forwardBandon Manufacturing intends to issue callable, perpetual bonds with annual coupon payments and a par value of $1,000. The bonds are callable at $1,260. One-year interest rates are 9 percent. There is a 60 percent probability that long-term interest rates one year from today will be 10 percent, and a 40 percent probability that they will be 8 percent. Assume that if interest rates fall the bonds will be called. What coupon rate should the bonds have in order to sell at par value? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) (/explain well with step by step answer).arrow_forward
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