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Unformatted text preview: 165.Take the following list of securities and arrange them in order of their priority of claims:Preferred stock Senior debentureSubordinated debenture Senior secured debtCommon stock Junior secured debtThe priority of claims can be determined from Figure 162:senior secured debt,junior secured debt,senior debenture,subordinated debenture,preferred stock,common stock.169.Discuss the relationship between bond prices and interest rates. What impact do changing interest rates have on the price of longterm bonds versus shortterm bonds?Bond prices on outstanding issues and interest rates move in opposite directions. If interest rates go up, bond prices will go down and vice versa. Longterm bonds are particularly sensitive to interest rate changes because the bondholder is locked into the interest rate for an extended period of time.1610.What is the difference between the followingyields: coupon rate, current yield, yield to maturity?The different bond yield terms may be defined as follows:Coupon rate  stated interest rate divided by par value.Current yield  stated interest rate divided by the current price of the bond.Yield to maturity  the interest rate that will equate future interest payments and payment at maturity to a current market price.163.An investormustchoosebetweentwobonds:Bond A pays $90 annual interest and has a market value of $850. It has 10 years to maturity.Bond B pays $80 annual interest and has a market value of $900. It has twoyears to maturity.a. Compute the current yield on both bonds.b. Which bond should he select based on your answer to part a?c. A drawback of current yield is that it does not consider the total life of the bond. For example, the approximate yield to maturity on Bond A is 11.54 percent. What is the approximate yield to maturity on Bond B?d. Has your answer changed between parts b and c of this question in terms of which bond to select?...
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This document was uploaded on 07/03/2011.
 Spring '11

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