Corporate Finance Text Problem Sets – Week Two Chapter Five Question # 4 Define the following terms: bond indenture, par value, principal, maturity, call provision, and sinking fund. Bond indenture. Bond indenture is a legal contract for a publicly traded bond. The structure of this contract outline incentives explicitly by detailing responsibilities, constraints, penalties, and oversight required. For example, contracts may specify interest and principal payment timing and amounts. Par value.
Par value denotes face value or designated value of a bond or stock. Par value of a bond is typically $1,000 and the sum investors pay upon issue. It is also the sum received when they redeem the bond matures. Conversely, stock par value is frequently set at $1. In this case, par value is an accounting tool that shows no connection to the stocks’ market value. Principal. The term “principal” refers to a sum of money one borrows or invests. The face amount of a bond – the value printed on a stock or bond, or a debt balance. Principal does not encompass finance charges.
Principal also describes an investor represented by a broker who executes trades on that investor’s behalf or an investor who trades for his or her own benefit. Principal also refers to a party affected by an agent’s decisions in a principal-agent relationship. Maturity. Maturity is the end of a bond’s life. In finance, maturity (or maturity date) designates the date of final payment on a financial instrument. Maturity value is the amount of money the bond issuer must repay at the end of a bond’s life. At that juncture, the principal and remaining interest payment are due.
The Essay on Running Head Bond Yield to maturity
Running Head: Bond Yield-to-Maturity Bond Yield-to-Maturity (Authors Name) (Institution Name) Introduction This assignment pertains to a coworkers purchase of a 10% bond that she had purchased and the subsequent discussion she had with her broker who with insistence kept repeating that it had a 9% yield, therefore, this assignment clarifies the confusion related to the issue as follows: Example As ...
Face value and par value are terms that describe maturity value. Call provision. Call provision is an option giving bond issuers or businesses the right to repay bonds before their maturity date. It is an indenture provision designating a bond as “callable. ” That provision authorizes the issuing entity to cash in the bond prior to its maturity. The bondholder usually receives par value when the issuer “calls” the bond. Issuers use callable bonds as a hedge against interest-rate risk. They can call a bond if interest rates fall precariously and issue a new one at a reduced rate, consequently lessening their liabilities.
Sinking fund. Sinking fund is a repayment method where bond issuers use multiple installments to repay their financial instruments (Emery, Finnerty, & Stowe, 2007).
It is also a fund companies use to accumulate monies over time so they can retire their bonds, preferred stock, or debentures (Investor Words, 2013).
Regarding bonds, incremental imbursements to a sinking fund normally mitigates financial shock that may occur when a bond matures. Investors favor sinking fund backed bonds and debentures because of their lower default risk.
Prospective homeowners may set up a sinking fund for a house down payment, and companies usually establish sinking funds to pay off bonds. Challenging Question # 11 What is interest-rate risk? How is interest-interest rate Risk Management At Ucc">rate risk related to the maturity of a bond and to the coupon rate for a bond? Emery, Finnerty, and Stowe (2007) describe interest-rate risk, as “the sensitivity of a bond’s value to interest-rate change as it depends primarily on the bond’s remaining maturity” (p. 132).
An inverse relationship exists between bond price and yield. Rising interest rates lower bond prices and vice-versa (Waring, 2013).
In addition, there are several other relationships between interest-rate risk and bonds: •An increase in bonds’ YTM affects a smaller price decrease than any price gain related to a decrease of equal magnitude in yield. •Long-term bonds prices are more sensitive to interest rate fluctuations than short-term bond prices. •Concerning coupon bonds, as maturity increases, bond price sensitivity to yield changes increase at a decreasing rate. •Interest rate risk and coupon rate are inversely related (Spaulding, 2013).
The Coursework on House Prices Interest Rate
Economics Coursework: The Price Mechanism Introduction I have been asked to investigate a question similar to What determines the price of a particular good or product. I have chosen to answer the question, What determines the price of houses have also come up with a hypothesis related to my question, later in my investigation I will either prove or disprove this theory. My hypothesis is, House ...
Hence, high coupon bonds prices are less sensitive to interest rate changes than do low coupon bond prices.
Zero coupon bonds tend to be the most sensitive. •Sensitivity of the price of a bond to a yield change inversely relates to the maturity yield at which the bond is now selling. Problem # A6 (Yield to maturity) Marstel Industries has a 9. 2% bond maturing in 15 years. What is the yield to maturity if the current market price of the bond is: a. $1,120? b. $1,000? c. $785? a. YTM if bond current market price is $1,120 = 7. 81%* b. YTM if bond current market price is $1,000 = 9. 20%* c. YTM if bond current market price is $785 = 12. 43%* * See Appendix for Excel worksheet for computations Chapter Seven Question # 8
Why is it that the market will pay an investor for taking on non-diversifiable risk but will not pay an investor for taking on diversifiable risk? All investment assets comprise diversifiable and non-diversifiable risk. The market rewards an investor for assuming non-diversifiable risk. However, the market does not reward diversifiable risk because risk is intrinsic with non-diversified portfolios. To attract investors, the market must offer enticement; hence, it pays them for assuming non-diversifiable (systematic and unavoidable) risk. Consequently, an asset’s non-diversifiable risk determines its required return (Emery et al. 007).
The market return rate is greater than the risk-free return rate because an investor’s reward for risk-taking is a higher return average for holding a risky asset. In essence, non-diversifiable risk is “market risk” an investor cannot eliminate by diversifying his or her portfolio. On the other hand, investors have the option to eliminate diversifiable risk; hence, they cannot expect payment for assuming said risk. Challenging Question # 13 Suppose rf is 5% and rM is 10%. According to the SML and the CAPM, an asset with a beta of ? 2. 0 has a required return of negative 5% [= 5 ? 2(10 ? 5)].
The Essay on Random Walk Stock Risk Market
A Random Walk Down Wall Street Key points Chapters 1 & 2 A. Random walk is a movement in which future steps or directions cannot be predicted. Applying random walk theory to stock market simply means short run gains / loses in stock prices cannot be predicted. Hence, advisory services, earnings predictions, and forecast analysis are obsolete, not to mention, costly. Eliminate the middlemen! B. ...
Can this be possible? Does this mean that the asset has negative risk? Why would anyone ever invest in an asset that has an expected and required return that is negative? Explain. As presented in the scenario above, it is possible for an asset to comprise a negative beta and a negative required return. A negative beta does not imply risk is negative, but that asset returns move in an opposite direction to market returns. In this scenario, when the market rises, the asset would decrease in value and when the market declines, the asset would increase in value. In this case, the assets’ beta (-2. 0) is
