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FI515Week3 - Homework Problems Chapter 5 Questions 5-1and...

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Homework Problems Chapter 5: Questions 5-1and 5-2 Chapter 5: Problems 5-1 and 5-5 Chapter 6: Questions 6-1, 6-2 and 6-3 Chapter 6: Problems 6-3 and 6-4 Question Answer 5-1 a. Bond- a promissory note issued by a business or government unit. Treasury bond – Bonds issued by the federal government and not exposed to default risk. Sometimes referred to as government bonds. Corporate bond – Debt issued by corporations and exposed to default risk. Different corporate bonds have different levels of default risk. Municipal bond- Issued by state and local governments. The interest earned on most municipal bonds is exempt from federal taxes, and also from state taxes if the holder is a resident of the issuing state. Foreign bond – a bond sold by a foreign borrower but denominated in the currency of the country in which the issue is sold.
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b. Par value – The nominal or face value of a stock or bond. maturity date – The date when the bond’s par value is repaid to the bondholder. coupon payment- Dollar amount of interest paid to each bondholder on the interest payment dates. coupon interest rate – Stated rate of interest on a bond, defined as a coupon payment divided by the par value. c. floating-rate bond – Bond whose coupon payment may vary over time. zero coupon bond – Pays no coupons at all, but is offered at a substantial discount below its par value and hence provides capital appreciation rather than interest income. original issue discount bond - In general, any bond originally offered at a price significantly below its par value. d. Call provision – Gives the issuing corporation the right to call the bonds for redemption. Redeemable fund – Gives investors the right to sell the bonds back to the corporation at a price that is usually close to the par value. Sinking fund – Facilitates the orderly retirements of a bond issue. e. convertible bond – Security that is convertible into shares of common stock, at a fixed, price, at the option of the bondholder warrant – A call option issued by a company allowing the holder to buy a stated number of shares of stock from a company at a specified price. Warrants are generally distributed with debt, or preferred stock, to induce investors to buy those securities at lower cost. income bond – Pay interest only if the interest is earned (riskier than regular bonds). indexed or purchasing power bond – The interest rate of a bond is based on an inflation index such as the consumer price index, so the interest paid rises automatically when the inflation rate rises, thus protecting the bondholders against inflation. f. premium bond – Bond prices and interest rat4es are inversely related. If current interest rates are below the coupon rate, a fixed rate bond will sell at a premium or above its par value.
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