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Unformatted text preview: 1 1 . 12. 13. t4. 15. 16. C H A P T E R 7 I n t e r e s t R a t e s a n d B o n d V a l u a t i o n Crossover Bonds Looking back at the crossover bonds we discussed in the chap- ter, why do you think split ratings such as these occur? Municipal Bonds Why is it that municipal bonds are not taxed at the federal level, but are taxable across state lines? Why are U.S. Treasury bonds not taxable at the state level? (You may need to dust off the history books for this one.) Bond Market What are the implications for bond investors of the lack of transparency in the bond market? Treasury Market All Treasury bonds are relatively liquid, but some are more liquid than others. Take a look back at Figure 7.4. Which issues appear to be the most liquid'l The least liquid? Rating Agencies A controversy erupted regarding bond-rating agencies when some agencies began to provide unsolicited bond ratings. Why do you think this is controversial? Bonds as Equity The 1O0-year bonds we discussed in the chapter have something in common with junk bonds. Critics charge that, in both cases, the issuers arc really selling equity in disguise. What are the issues here? Why would a company want to sell "equity in disguise"'/ Interpreting Bond Yields Is the yield to maturity on a bond the same thing as the required return? Is YTM the same thing as the coupon rate? Suppose today a 12 percent collpon bond sells at par. Two years from now, the required return on the same bond is l0 percent. What is the coupon rate on the bond now? The YTM? Interpreting Bond Yields Suppose you buy an 8 percent coupon, lS-year bond today when it's first issued. If interest rates suddenly rise to 14 percent. what hap- pens to the value of your bond'/ Why? Bond Prices Borderline Co. issued I l-year bonds one year ago at a coupon rate of 8.6 percent. The bonds make semiannual payments. If the YTM on these bonds is 7.4 percent, what is the current bond price'? Bond Yields Aragorn Co. has 10 percent couporl bonds on the market with nine years left to maturity. The bonds make annual payments. If the bond cr,rrrently sells for f884.50, what is its YTM'I Coupon Rates Ultra Soft Diapers has bonds on the market making annual payments, with 16 years to maturity, and selling for $870. At this price, the bonds yield 6.8 percent. What must the coupon rate be on Ultra's bonds'/ Bond Prices Savera Limited has 8 percent coupon bonds on the market that have l0 years left to maturity. The bonds make annual payments. lf the YTM on these bonds is 6 percent, what is the current bond price? Bond Yields Raines Umbrella Corp. issued l2-year bonds 2 years ago at a coupon rate of 8.6 percent. The bonds make semiannual payments. If these bonds currently sell for 95 percent of par value, what is the YTM?...
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- Spring '10