Juan Martinez and Kara Sullivan are vice presidents of Eastern Money Management and co-directors of the company’s pension fund management division. A major new client, the North Carolina League of Cities, has requested that Eastern present an investment seminar to the mayors of the represented cities. Martinez and Sullivan, who will make the presentation, have asked you to help them by answering the following questions. 1. What are the four most fundamental factors that affect the cost of money (interest rates)? 2. What is the real risk-free rate of interest (r*) and the nominal risk-free rate (rrf) (definitions not values!)? 3. Explain the formula r=r* + IP +DRP+ LP + MRP in your own words. Why might these premiums vary over time? How do they vary among different types of bonds (treasuries, short term corporate bonds, long-term corporate bonds). 4. Explain how the term structure of interest rates determines a yield curve. What is the shape of the current yield curve for Treasuries? (show it or describe it). 5. What is the pure expectations theory? What does it imply about the term structure of interest rates? 6. What are the key features of a bond? 7. What are call provisions and sinking fund provisions? Should an investor avoid these provisions or are they desirable? 8. What are bond covenants? Give some examples of reasonable covenants. 9. What is the value of a 20 year $1,000 par value bond with a 10% annual coupon if the required return is 10% a. if interest rates rose to 12% what would be the value of the bond? Would you now have a premium or discount bond? 10. What is the YTM on a 10 year, 9%…
and print on both sides. This assignment is due February 22.
The recording of nonconvertible bonds at the date of issue is the same as the recording of straight debt issues.
A company should allocate the proceeds from the sale of debt with detachable stock warrants between the two securities based on their par values.
The intrinsic value of a stock option is the difference between the market price of the stock and the exercise price of…
it require shares to be issued at a par value. Provincial charter regulations vary on this issue. Some require both a set number of authorized and shares to be sold at par. The number of shares that a corporation is authorized to sell is in the articles of incorporation, but this can be amended later on if necessary. A par value share is share capital that has a specific value stated in the corporate charter. Par value does not indicate the worth or market value of the shares, but does have legal…
1. Assume that the one-period spot interest rate is 3% and the two-period spot interest rate is 7%. What is the present value of $100 received one year from now?
E. None of the above.$97.08
2. The present value of $100 received one year from now is $91.27 and the present value of $100 received two years from now is $88.76. What is the two-year spot interest-rate?
and paying dividends (Kimmel, P.D., Weygandt, J.J., & Kieso, D.E, Chp. 13, pg. 615).
Another type of company stocks are the par-value stocks and the no-par value stocks. The par-value stocks are capital stock to which the charter has assigned a value per share. The no-par value stocks are capital stock to which the charter has not assigned a value. To appeal to more investors, a corporation may issue an additional class of stock, called preferred stock. Preferred stock has provisions…
2013 Kris Boudt
• Pricing of bonds; • Price quotation of bonds; • Measuring the yield of a bond investment.
PRICING OF BONDS: GIVEN THE CASHFLOWS AND REQUIRED YIELD, WHAT IS THE PRICE OF THE BOND?
Chapter 2, Fabozzi
Pricing of bonds
• Suppose: – Cash flows from the issuer to the investor are known (excludes bonds with implied options) – The required yield is known Then the bond price can be computed as the present value of the future cash flows. • To simplify the…
A bond is a long-term contract
under which a borrower agrees to
make payments of interest and
principal, on specific dates, to the
holders of the bond.
1. Bond Value
Fundamental principle of bond
valuation is that the bond's value is
equal to the present value of its
expected (future) cash flows.
1. Bond Value – Price and
Bonds can be priced at: Par,
Par: It is the face value of a bond
when first issued
FI 3300 – Chapter 9
Valuation of Stocks and Bonds
Instructor: Ryan Williams
Value a bond given its coupon rate, par value,
yield-to-maturity, time to maturity and
Given all but one of the factors of a bond’s
value, find the remaining factor.
Value a stock using the dividend discount
model under assumptions of constant growth
and non-constant growth.
Given all but one of the factors of a stock’s
value, find the remaining factor.
Remember – different…
Chapter 5: Bonds, Bond
Valuation, and Interest Rates
Key Concepts and Skills
What is a bond?
A bond is a security.
A bond is a long-term contract in which a
borrower agrees to make payments of
interest and principal, on specific dates, to
the holders of the bond.
Cash Flows from Bonds
Bondholders normally expect to receive two
different cash flows:…
of a bond?
answer: if possible, begin this lecture by showing students an actual bond certificate. We show a real coupon bond with physical coupons. These can no longer be issued--it is too easy to evade taxes, especially estate taxes, with bearer bonds. All bonds today must be registered, and registered bonds don't have physical coupons.
1. Par or face value. We generally assume a $1,000 par value, but par can be anything, and often $5,000 or more is used. With registered bonds, which…