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Chapter 7 Questions

Chapter 7 Questions. Q1. What are 6 important features or characteristics of Bonds as long term debt instruments? What is the difference between a “Note” and a “Bond”?

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Chapter 7 Questions

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  1. Chapter 7 Questions Q1. What are 6 important features or characteristics of Bonds as long term debt instruments? What is the difference between a “Note” and a “Bond”? Can include: Par Value, Maturity Date, Coupon Interest Rate, Coupon Interest Payment, Investors’ Yield To Maturity, Indenture, Bond Trustee, Credit Ratings, issued only by Businesses and Governments, etc. Q2. What is “Yield To Maturity” (aka “YTM”)? Which financial calculator key refers to YTM? YTM is the bond investors’ required rate of return for a bond’s remaining cash flows (i.e., interest and principal payments) until the day of maturity. (A similar concept is called “Yield To Call” which is computed for the remaining cash flows until the first scheduled permitted call date, which is the first date the bond issuer could exercise its legal right to buy-back from bondholders their bonds. Q3. What is “interest rate risk” as it applies to a long-term debt instrument like a Bond or Note? (A) Price Risk: the variability of the price of a bond when market interest rates change. (B) Re-Investment Rate Risk: the risk that market interest rates will decrease in the future by the time an investor needs to re-invest the proceeds of bonds that mature.

  2. Chapter 7 Questions Q1. What are 6 important features or characteristics of Bonds as long term debt instruments? What is the difference between a “Note” and a “Bond”? Can include: Par Value, Maturity Date, Coupon Interest Rate, Coupon Interest Payment, Investors’ Yield To Maturity, Indenture, Bond Trustee, Credit Ratings, issued only by Businesses and Governments, etc. Q2. What is “Yield To Maturity” (aka “YTM”)? Which financial calculator key refers to YTM? YTM is the bond investors’ required rate of return for a bond’s remaining cash flows (i.e., interest and principal payments) until the day of maturity. (A similar concept is called “Yield To Call” which is computed for the remaining cash flows until the first scheduled permitted call date, which is the first date the bond issuer could exercise its legal right to buy-back from bondholders their bonds. Q3. What is “interest rate risk” as it applies to a long-term debt instrument like a Bond or Note? (A) Price Risk: the variability of the price of a bond when market interest rates change. (B) Re-Investment Rate Risk: the risk that market interest rates will decrease in the future by the time an investor needs to re-invest the proceeds of bonds that mature.

  3. Chapter 7 Questions Q1. What are 6 important features or characteristics of Bonds as long term debt instruments? What is the difference between a “Note” and a “Bond”? Can include: Par Value, Maturity Date, Coupon Interest Rate, Coupon Interest Payment, Investors’ Yield To Maturity, Indenture, Bond Trustee, Credit Ratings, issued only by Businesses and Governments, etc. Q2. What is “Yield To Maturity” (aka “YTM”)? Which financial calculator key refers to YTM? YTM is the bond investors’ required rate of return for a bond’s remaining cash flows (i.e., interest and principal payments) until the day of maturity. (A similar concept is called “Yield To Call” which is computed for the remaining cash flows until the first scheduled permitted call date, which is the first date the bond issuer could exercise its legal right to buy-back from bondholders their bonds. Q3. What is “interest rate risk” as it applies to a long-term debt instrument like a Bond or Note? (A) Price Risk: the variability of the price of a bond when market interest rates change. (B) Re-Investment Rate Risk: the risk that market interest rates will decrease in the future by the time an investor needs to re-invest the proceeds of bonds that mature.

  4. Chapter 7 Questions Q1. What are 6 important features or characteristics of Bonds as long term debt instruments? What is the difference between a “Note” and a “Bond”? Can include: Par Value, Maturity Date, Coupon Interest Rate, Coupon Interest Payment, Investors’ Yield To Maturity, Indenture, Bond Trustee, Credit Ratings, issued only by Businesses and Governments, etc. Q2. What is “Yield To Maturity” (aka “YTM”)? Which financial calculator key refers to YTM? YTM is the bond investors’ required rate of return for a bond’s remaining cash flows (i.e., interest and principal payments) until the day of maturity. (A similar concept is called “Yield To Call” which is computed for the remaining cash flows until the first scheduled permitted call date, which is the first date the bond issuer could exercise its legal right to buy-back from bondholders their bonds. Q3. What is “interest rate risk” as it applies to a long-term debt instrument like a Bond or Note? (A) Price Risk: the variability of the price of a bond when market interest rates change. (B) Re-Investment Rate Risk: the risk that market interest rates will decrease in the future by the time an investor needs to re-invest the proceeds of bonds that mature.

  5. Chapter 7 Questions Q4. Assume the City of Tulsa, Oklahoma issued bonds 3 years ago as follows: 8.75% $150 million original maturity was 25 years, par value is $1,000, with interest paid annually. The original credit rating was A1/A+ by Moody’s and S&P, respectively. If the rating agencies downgrade the credit ratings to A3/A-, investors will want a 9.10% return. What would happen to the price per bond if that happens today? (6 decimal places). N = 25-3 = 22 I = 9.10 PMT = 1000 x .0875 = 87.50 Compute PV = -967.199318 = $967.199318 Q5. Newco Acquisitions Inc. sold $200 million of 7-year Notes last year. The coupon interest rate is 10.25%, interest is paid annually, and the par value per Note is $1,000. If the Notes are selling for a price of $1,028.644146 each, what must be investors’ average yield to maturity? (6 decimal places). N = 7-1 = 6 PV = -1028.644146 PMT = 1000 x .1025 = 102.50 FV = 1000 Compute I = 9.60 = 9.60% Q6. MacGregor Manufacturing Corp. sold $500 million of 15-year bonds two years ago, with a par value of $1,000 and annual interest payments. If investors’ required return is 6.85% today, and the price today is $1,054.789627, what must be the annual interest payment and coupon interest rate? (6 decimal places). N = 15 – 2 = 13 I = 6.85 PV = -1054.789627 FV = 1000 Compute PMT = 75 = $75.00; Coupon Interest Rate = $75.00/$1,000 = 7.50%

  6. Chapter 7 Questions Q4. Assume the City of Tulsa, Oklahoma issued bonds 3 years ago as follows: 8.75% $150 million original maturity was 25 years, par value is $1,000, with interest paid annually. The original credit rating was A1/A+ by Moody’s and S&P, respectively. If the rating agencies downgrade the credit ratings to A3/A-, investors will want a 9.10% return. What would happen to the price per bond if that happens today? (6 decimal places). N = 25-3 = 22 I = 9.10 PMT = 1000 x .0875 = 87.50 Compute PV = -967.199318 = $967.199318 Q5. Newco Acquisitions Inc. sold $200 million of 7-year Notes last year. The coupon interest rate is 10.25%, interest is paid annually, and the par value per Note is $1,000. If the Notes are selling for a price of $1,028.644146 each, what must be investors’ average yield to maturity? (6 decimal places). N = 7-1 = 6 PV = -1028.644146 PMT = 1000 x .1025 = 102.50 FV = 1000 Compute I = 9.60 = 9.60% Q6. MacGregor Manufacturing Corp. sold $500 million of 15-year bonds two years ago, with a par value of $1,000 and annual interest payments. If investors’ required return is 6.85% today, and the price today is $1,054.789627, what must be the annual interest payment and coupon interest rate? (6 decimal places). N = 15 – 2 = 13 I = 6.85 PV = -1054.789627 FV = 1000 Compute PMT = 75 = $75.00; Coupon Interest Rate = $75.00/$1,000 = 7.50%

  7. Chapter 7 Questions Q4. Assume the City of Tulsa, Oklahoma issued bonds 3 years ago as follows: 8.75% $150 million original maturity was 25 years, par value is $1,000, with interest paid annually. The original credit rating was A1/A+ by Moody’s and S&P, respectively. If the rating agencies downgrade the credit ratings to A3/A-, investors will want a 9.10% return. What would happen to the price per bond if that happens today? (6 decimal places). N = 25-3 = 22 I = 9.10 PMT = 1000 x .0875 = 87.50 Compute PV = -967.199318 = $967.199318 Q5. Newco Acquisitions Inc. sold $200 million of 7-year Notes last year. The coupon interest rate is 10.25%, interest is paid annually, and the par value per Note is $1,000. If the Notes are selling for a price of $1,028.644146 each, what must be investors’ average yield to maturity? (6 decimal places). N = 7-1 = 6 PV = -1028.644146 PMT = 1000 x .1025 = 102.50 FV = 1000 Compute I = 9.60 = 9.60% Q6. MacGregor Manufacturing Corp. sold $500 million of 15-year bonds two years ago, with a par value of $1,000 and annual interest payments. If investors’ required return is 6.85% today, and the price today is $1,054.789627, what must be the annual interest payment and coupon interest rate? (6 decimal places). N = 15 – 2 = 13 I = 6.85 PV = -1054.789627 FV = 1000 Compute PMT = 75 = $75.00; Coupon Interest Rate = $75.00/$1,000 = 7.50%

  8. Chapter 7 Questions Q4. Assume the City of Tulsa, Oklahoma issued bonds 3 years ago as follows: 8.75% $150 million original maturity was 25 years, par value is $1,000, with interest paid annually. The original credit rating was A1/A+ by Moody’s and S&P, respectively. If the rating agencies downgrade the credit ratings to A3/A-, investors will want a 9.10% return. What would happen to the price per bond if that happens today? (6 decimal places). N = 25-3 = 22 I = 9.10 PMT = 1000 x .0875 = 87.50 Compute PV = -967.199318 = $967.199318 Q5. Newco Acquisitions Inc. sold $200 million of 7-year Notes last year. The coupon interest rate is 10.25%, interest is paid annually, and the par value per Note is $1,000. If the Notes are selling for a price of $1,028.644146 each, what must be investors’ average yield to maturity? (6 decimal places). N = 7-1 = 6 PV = -1028.644146 PMT = 1000 x .1025 = 102.50 FV = 1000 Compute I = 9.60 = 9.60% Q6. MacGregor Manufacturing Corp. sold $500 million of 15-year bonds two years ago, with a par value of $1,000 and annual interest payments. If investors’ required return is 6.85% today, and the price today is $1,054.789627, what must be the annual interest payment and coupon interest rate? (6 decimal places). N = 15 – 2 = 13 I = 6.85 PV = -1054.789627 FV = 1000 Compute PMT = 75 = $75.00; Coupon Interest Rate = $75.00/$1,000 = 7.50%

  9. Q7. The State of California issued bonds 4 years ago as follows: 7.20% $10 billion original maturity was 30 years, par value is $1,000, with interest paid semi-annually. The original credit rating was Baa3/BBB- by Moody’s and S&P, respectively. If the rating agencies upgrade the credit ratings to Baa1/BBB+, investors will want a 6.85% return. What would happen to the price per bond if that happens today? (6 decimal places). N = 30-4 = 26 x 2 = 52 I = 6.85/2 = 3.4250 PMT = 1000 x .0720 = 72.00/2 = 36 Compute PV = -1042.226395 = $1,042.23 Q8. Musicorp Instruments sold $50 million of 6-year Notes last year. The coupon interest rate is 5.40%,interest is paid semi-annually, and the par value per Note is $1,000. If the Notes are selling for a price of $1,072.50 each, what must be investors’ average yield to maturity? (6 decimal places). N = 6-1 = 5 x 2 = 10 PV = -1072.50 PMT = 1000 x .054 = 54.00/2 = 27.00 FV = 1000 Compute I = 1.897217 x 2 = 3.794434% Q9. Borgan Pharmaceutical Inc. sold $250 million of 20-year bonds three years ago, with a par value of $1,000 and semi-annual interest payments. If investors’ required return is 8.95% today, and the price today is $1,220.603577, what must be the annual interest payment and coupon interest rate? (6 decimal places). N = 20 – 3 = 17 x 2 = 34 I = 8.95/2 = 4.4750 PV = -1220.603577 FV = 1000 Compute PMT = 57.50 x 2 = $115.00; Coupon Interest Rate = $115.00/$1,000 = 11.50% Chapter 7 Questions

  10. Q7. The State of California issued bonds 4 years ago as follows: 7.20% $10 billion original maturity was 30 years, par value is $1,000, with interest paid semi-annually. The original credit rating was Baa3/BBB- by Moody’s and S&P, respectively. If the rating agencies upgrade the credit ratings to Baa1/BBB+, investors will want a 6.85% return. What would happen to the price per bond if that happens today? (6 decimal places). N = 30-4 = 26 x 2 = 52 I = 6.85/2 = 3.4250 PMT = 1000 x .0720 = 72.00/2 = 36 Compute PV = -1042.226395 = $1,042.23 Q8. Musicorp Instruments sold $50 million of 6-year Notes last year. The coupon interest rate is 5.40%,interest is paid semi-annually, and the par value per Note is $1,000. If the Notes are selling for a price of $1,072.50 each, what must be investors’ average yield to maturity? (6 decimal places). N = 6-1 = 5 x 2 = 10 PV = -1072.50 PMT = 1000 x .054 = 54.00/2 = 27.00 FV = 1000 Compute I = 1.897217 x 2 = 3.794434% Q9. Borgan Pharmaceutical Inc. sold $250 million of 20-year bonds three years ago, with a par value of $1,000 and semi-annual interest payments. If investors’ required return is 8.95% today, and the price today is $1,220.603577, what must be the annual interest payment and coupon interest rate? (6 decimal places). N = 20 – 3 = 17 x 2 = 34 I = 8.95/2 = 4.4750 PV = -1220.603577 FV = 1000 Compute PMT = 57.50 x 2 = $115.00; Coupon Interest Rate = $115.00/$1,000 = 11.50% Chapter 7 Questions

  11. Q7. The State of California issued bonds 4 years ago as follows: 7.20% $10 billion original maturity was 30 years, par value is $1,000, with interest paid semi-annually. The original credit rating was Baa3/BBB- by Moody’s and S&P, respectively. If the rating agencies upgrade the credit ratings to Baa1/BBB+, investors will want a 6.85% return. What would happen to the price per bond if that happens today? (6 decimal places). N = 30-4 = 26 x 2 = 52 I = 6.85/2 = 3.4250 PMT = 1000 x .0720 = 72.00/2 = 36 Compute PV = -1042.226395 = $1,042.23 Q8. Musicorp Instruments sold $50 million of 6-year Notes last year. The coupon interest rate is 5.40%,interest is paid semi-annually, and the par value per Note is $1,000. If the Notes are selling for a price of $1,072.50 each, what must be investors’ average yield to maturity? (6 decimal places). N = 6-1 = 5 x 2 = 10 PV = -1072.50 PMT = 1000 x .054 = 54.00/2 = 27.00 FV = 1000 Compute I = 1.897217 x 2 = 3.794434% Q9. Borgan Pharmaceutical Inc. sold $250 million of 20-year bonds three years ago, with a par value of $1,000 and semi-annual interest payments. If investors’ required return is 8.95% today, and the price today is $1,220.603577, what must be the annual interest payment and coupon interest rate? (6 decimal places). N = 20 – 3 = 17 x 2 = 34 I = 8.95/2 = 4.4750 PV = -1220.603577 FV = 1000 Compute PMT = 57.50 x 2 = $115.00; Coupon Interest Rate = $115.00/$1,000 = 11.50% Chapter 7 Questions

  12. Q7. The State of California issued bonds 4 years ago as follows: 7.20% $10 billion original maturity was 30 years, par value is $1,000, with interest paid semi-annually. The original credit rating was Baa3/BBB- by Moody’s and S&P, respectively. If the rating agencies upgrade the credit ratings to Baa1/BBB+, investors will want a 6.85% return. What would happen to the price per bond if that happens today? (6 decimal places). N = 30-4 = 26 x 2 = 52 I = 6.85/2 = 3.4250 PMT = 1000 x .0720 = 72.00/2 = 36 Compute PV = -1042.226395 = $1,042.23 Q8. Musicorp Instruments sold $50 million of 6-year Notes last year. The coupon interest rate is 5.40%,interest is paid semi-annually, and the par value per Note is $1,000. If the Notes are selling for a price of $1,072.50 each, what must be investors’ average yield to maturity? (6 decimal places). N = 6-1 = 5 x 2 = 10 PV = -1072.50 PMT = 1000 x .054 = 54.00/2 = 27.00 FV = 1000 Compute I = 1.897217 x 2 = 3.794434% Q9. Borgan Pharmaceutical Inc. sold $250 million of 20-year bonds three years ago, with a par value of $1,000 and semi-annual interest payments. If investors’ required return is 8.95% today, and the price today is $1,220.603577, what must be the annual interest payment and coupon interest rate? (6 decimal places). N = 20 – 3 = 17 x 2 = 34 I = 8.95/2 = 4.4750 PV = -1220.603577 FV = 1000 Compute PMT = 57.50 x 2 = $115.00; Coupon Interest Rate = $115.00/$1,000 = 11.50% Chapter 7 Questions

  13. Chapter 7 Questions Q10. What are bond credit ratings and what value are they in the financial markets? Which companies are the major credit rating agencies? What is the difference between “AAA”, “BBB”, and “CCC” as credit ratings? Bond credit ratings are a lettering system by which a bond issuer’s probability of default for a particular bond issue is estimated by Moody’s Investors’ Service and Standard & Poor’s Ratings Group if/when the bond issuer asks/pays for their credit ratings. “AAA” is the ratings category with the lowest estimated default risk; “BBB” has a significantly higher default risk than “AAA”-rated bonds, but “BBB” is still considered “investment grade” or worthy of investment for a number of professional investors; “CCC” signifies much higher default risk probability, closer to a high probability of default and bankruptcy risk. Credit ratings are used by professional investors to help them easily and efficiently estimate the probability of default (i.e., either as a supporting opinion to their own opinion from their own credit analysis, or in lieu of their own credit analysis. Interest Rate Risk Premium (and may include higher Inflation Risk Premium, Default Risk Premium, Tax Risk Premium, and/or Liquidity Risk Premium, plus the different demand and supply conditions in the bond market.

  14. Chapter 7 Questions Q10. What are bond credit ratings and what value are they in the financial markets? Which companies are the major credit rating agencies? What is the difference between “AAA”, “BBB”, and “CCC” as credit ratings? Bond credit ratings are a lettering system by which a bond issuer’s probability of default for a particular bond issue is estimated by Moody’s Investors’ Service and Standard & Poor’s Ratings Group if/when the bond issuer asks/pays for their credit ratings. “AAA” is the ratings category with the lowest estimated default risk; “BBB” has a significantly higher default risk than “AAA”-rated bonds, but “BBB” is still considered “investment grade” or worthy of investment for a number of professional investors; “CCC” signifies much higher default risk probability, closer to a high probability of default and bankruptcy risk. Credit ratings are used by professional investors to help them easily and efficiently estimate the probability of default (i.e., either as a supporting opinion to their own opinion from their own credit analysis, or in lieu of their own credit analysis. Interest Rate Risk Premium (and may include higher Inflation Risk Premium, Default Risk Premium, Tax Risk Premium, and/or Liquidity Risk Premium, plus the different demand and supply conditions in the bond market.

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