SM_Chapter_06 - Answers to Chapter 6 Questions 1. Capital...

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Unformatted text preview: Answers to Chapter 6 Questions 1. Capital markets are markets that trade equity (stocks) and debt (notes, bonds, and mortgages) instruments with maturities of more than one year. Bonds are long term debt obligations issued by corporations and government units. Proceeds from a bond issue are used to raise funds to support long term operations of the issuer (e.g., for capital expenditure projects). In return for the investor = s funds, bond issuers promise to pay a specified amount in the future on the maturity of the bond (the face value) plus coupon interest on the borrowed funds (the coupon rate times the face value of the bond). If the terms of the repayment are not met by the bond issuer, the bondholder (investor) has a claim on the assets of the bond issuer. Bond markets are markets in which bonds are issued and trade. They are used to assist in the transfer of funds from individuals, corporations, and government units with excess funds to corporations and government units in need of long term debt funding. Bond markets are traditionally classified into three types: Treasury notes and bonds, municipal bonds, and corporate bonds. 2. In contrast to T-bills which are sold on a discount basis from face value, T-notes and T-bonds pay coupon interest (semiannually). Further, T-bills have an original maturity of less than one year. Treasury notes have original maturities from 1 to 10 years, while T-bonds have original maturities from 10 to 30 years. T-notes and bonds are issued in minimum denominations of $1,000, where T-bills are issued in minimum denominations of no less than $10,000. 3. a. The Ask price is $10,000 Η 142 27/32% = $14,284.375 b. The Bid price is $10,000 Η 103 3/32% = $10,309.375 4. a. November 11, 2004 to July 31, 2006 is 1.71781 years. Thus, V b = (2.75%/2) (PVIFA 2.71%/2, 1.71781(2) ) + 100% (PVIF 2.71%/2, 1.71781(2) ) = 100.066697% or to the nearest 1/32% = 100-02% b. November 11, 2004 to February 28, 2014 is 9.29863 years. Also, 98:19 = 98.59375%. Thus, 98.59375% = (4.00%/2) (PVIFA ASK YLD/2, 9.29863(2) ) + 100% (PVIF ASK YLD/2, 9.29863(2) ) Solving for ASK YLD,@ we get 4.184% 5. A STRIP is a Treasury security in which periodic coupon interest payments can be separated from each other and from the final principal payment. A STRIP effectively creates two securities C one for each interest payment and one for the final principal payment. STRIPs are attractive investments to investors who want to receive a certain amount at a specified time in the future and are not concerned about receiving current income. For example, STRIPs are used as investment securities for individual retirement accounts, Keogh Plans, and pension funds....
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This note was uploaded on 10/17/2010 for the course BUSINESS 201 taught by Professor Ban during the Spring '10 term at École Normale Supérieure.

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SM_Chapter_06 - Answers to Chapter 6 Questions 1. Capital...

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