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Unformatted text preview: 16-5.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 16-2:senior secured debt,junior secured debt,senior debenture,subordinated debenture,preferred stock,common stock.16-9.Discuss the relationship between bond prices and interest rates. What impact do changing interest rates have on the price of long-term bonds versus short-term 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. Long-term bonds are particularly sensitive to interest rate changes because the bondholder is locked into the interest rate for an extended period of time.16-10.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.16-3.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