Unformatted text preview: 232 PA a 1' 4 Valuing Stocks and Bonds 6.9 6.10 6.11 6.12 6.13 6.1 4' 6.15 Bond Ratings. US. Treasury bonds are not rated. Why? Often, junk bonds are
not rated. Why? Crossover Bonds. Looking back at the crossover bonds we discussed in the
chapter, 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 is it that US. Treasury bonds are not
taxable at the state level? (You may need to dust off the. history books for this one.) Treasury. Market. All Treasury bonds are relatively liquid, but some are more ”liquid than others. Take a look back at Figure 6. 3.. Which issues appear to be the most liquid? The least liquid? Rating Agencies. Several years ago, 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 100-year bonds we discussed in the chapter have something in common with junk bonds. Critics charge that, in both cases, the ' issuers-are really seliing equity in disguise. What are the issues here? Why would a company want to sell “equity in disguise”?
Bond Prices versus Yields.
a. What is the relationship betWeen the price of a bond and its YTM? b. Explain why seine bonds sell at a premium over par value while other bonds
sell at a discount. What do you know about the relationship between the
coupon rate and the YTM for premium bonds? What about for discount
bonds? For bonds selling at par value? c. What is the relationship between the current yield and YTM for premium
, bonds? For discount bonds? For bonds selling at par value? Seiect problems are available in McGraprill o u ESTI 0N5 A" D PRO B LEMS % comect Connect. Please see the packaging options Basic
(Questions 1—14) 1‘ 2' section of the preface f0:r more information. Interpreting Bend 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 8 percent coupon bond sells at par. Two years from now, the required return on the
same bond is 10 percent. What is the coupon rate on the bond now? The YTM? Interpreting Bond Yields. Suppose you buy a 7 percent coupon, 20—year
bond today when it’s ﬁrst issued. If interest rates suddenly fall to 4 percent, what
happens to the value of your bond? Why? Bond Prices. Lycan, Inc, has 7 percent coupon .bonds on the market that have
8 years left to maturity. The bonds make annual payments. If the YTM on these
bonds is 10 percent, what is the current bond price? Bond Yields. Smart Choice Plc has 10 percent. coupon bonds on the market with nine years left to maturity. The bonds make annual payments. If the bond
currently sells for $1,145.70, what is its YTM? Coupon Rates. Merton Enterprises has bonds on the market making annual
payments, with 16 years to maturity, and selling for $963. At this price, the bonds
yield 7.5 percent. What must the coupon rate be on Merton’s bonds? . Bond Prices. App Store Co. issued 15-year bonds one year ago at a'coupon rate of 6.1 percent. The bonds make semiannual payments. If the YTM on these
bonds is 5.4 percent, what is the current bond price? ...1..__.._-_.‘.u. ...
View Full Document
- Spring '11