Homework -Chapter 7

QUestions 8 Variable-rate Bonds Are variable - rate bonds attractive to investors who expect interest rates to decrease? Explain. Would a firm that needs to borrow funds consider issuing variable -rate bonds if it expects that interest rates will decrease? Explain

Question 14.

Bond Downgrade Explain how the downgrading of bonds for a particular corporation affects the prices of these bond, the return to investors that currently hold these bonds, and the potential return to other investors who may invest in the bonds in the near future.

Question 15

Junk Bond Merrito, Inc, is a large US firm that issued bonds several years ago, the bonds were rated in the junk bond classification. Nevertheless, investor were buying the bonds in the secondary market because of the attractive yield they offered. Last week, Merrito defaulted on its bonds, and the prices of most other junk bonds declined abruptly on the same day. Explain why news of Merrito's financial problems could cause the prices of junk bonds issued by other firms to decrease, even when those firms had no business relationships with Merrito. Explain why the prices of those junk bonds with less liquidity declined more than those with a high degree of liquidity.

Problem 1 & 2 (attachment HW-Chapter 7 - Problem 1 and 2 in JPG version)

Chapter 8

1. Bond Investment Decision- Based on your forecast of interest rates, would you recommend that investors purchase bonds today? Explain.

10. Inflation Effects - assume that inflation is expected to declined in the near future. How could this affect future bond prices? Would you recommend that financial institutions increase or decrease their concentration in long-term bonds on this expectation? Explain.

Problem 1, 3 and 12 (attachment HW-Chapter8 - Problem 1, 3 and 12 in JPG version)