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Deduct 2 for wrong amount or answer out of 65 given or automatically calculated Priority of Claims = enter values Part 1 Refer to Discussion Question 5 (Create - 244, Page 526) = enter results of cakulations Rank the following securities in order of their priority to claim assets in liquidation Use the numbers 1 thru 6 with "1" for highest priority and "6" for lowest priority. Rank Preferred stock Subordinated debenture Common stock Senior debenture Senior secured debt Junior secured debt Part 2 Refer to Problem 16-3 (Create 247 page 529) Bond yields Bond X Interest Market Market Interest Amount Value Yield Amount a) Compute current yield at stated interest and current market value Bond Z Market Value Market Yield Note: Enter results as a decimal for both answers Bond X Bond Z b) Which bond should be select, based only on current yield? Enter in one of the cells the letter "Y" for your selection c) Approximate yield to maturity on Bond Z Use formula, page 513 Annual Principal Price of Years to Interest Payment Bond Maturity If you wish, use green calls for calculations, not grade Numerator + If you want, use for calculation Continue Price Price of Principal Principal calculation Factor Bond Factor Amount Constant Constant Denominator 0.6 0.4 If you want, use green cel If you want use green cell for entering weighted bond price not grader for entering weighted principal amount, not grad Approximate yield to maturity Note: Enter results as a decimal above 3 e 3 1 5 6 -9 d) Which bond has the higher yield to maturity? Bond X Bond 2 Enter in one of the cells the letter "Y" for your selection Part 3 Refer to Problem 16-11 (Create 249-page 531) Present Value of Zero-Coupon Bonds Note zero-coupon bonds are sold at a discount so that loss is paid than the maturity value, with the difference being interest earned Present value is the discounted face value. See work of week 3. Period to maturity 17 years a) Present value 7% discount rate Look up present value of a future sum. Face Discount Present Value factor Value 51 52 53 54 55 b) Present value at 8% discount rate Face Discount Value factor 59 BO Present Value 63 64 c) Present value al 9% discount rate Face Discount Vah factor Present Value X Part 1 DISCUSSION QUESTIONS 1. tporate lebt has beenpanding vety dramatically in the last three decades. Wat his both the impact on interest Coverage, particularly since 1977? (L016-1 2. What are some specific features of bond agreements? (L016-1) 3. What is the difference between a bond agreement and a bond indenture2 (1016-1 4. Discuss the relationship between the coupon rate (original interest rate at tim of issue) on a bond and its security provisions. (L016-1) 5. Take the following list of securities and arrange them in order of their priority of claims: (L016-1) Preferred stock Senior debenture Subordinated debenture Senior secured debt Common stock Junior secured debt 6. What motto "hond repayment" reduces debt and increases the amount of common stock outstanding? (L016-3) 7. What is the purpose of serial repayments and sinking funds? (L016-1) 8. Under what circumstances would a call on a bond be exercised by a corpora- tion? What is the purpose of a deferred call? (L016-3) 9. Discuss the moloti value Hipd the following: in 10 years. Assume the par erest pay- Tert pays $95 annual interest and has a market value of $920. It has two years to 3. Harold Reese must choose between two bonds: Bond X pays $95 annual interest and has a market value of $900. It has 10 years to maturity. Bond Z coupon rate. b. The current rate. TIIU YICIU to naturny. a maturity. a. Compute the current yield on both bonds. b. Which bond should he select based on your answer to part a? C. A drawback of current yield is that it does not consider the total life of the bond. For example, the yield to maturity on Bond X is 11.21 percent. What is the yield to maturity on Bond Z? d Has your answer changed between parts b and c of this question? was initia use this formula in practice, but it ate the impact on the yield to maturity when a bo lum or a discount to its par value. The denominator adjusts for the ne linearity of the bond price as it moves lily, and the numeratorproximatest la flow by adding cuiscount from par on an annual basis or seracting premiato par on an annual basis. annual Approximate yield to maturity (Y') Annual Principal payment -- Price of the bond interest + payment Number of years to maturity 0.6 (Price of the bond) + 0.4 (Principal payment) (16 TUFF 10 ($900 + 0.41,000) $ DOO $10+ 1 $540 + $400 Y' = $100 + $10 $940 $110 $940 11.70% of the problem.) need the bon (LO mint more than previ- 10. A previously issued A2, 15-year industrial bond provides a return three-fourths inte higher than the prime in erest rate of 1 percent. Previously issued A2 public utilit Hopes provide a yeld of three-fourts of a percentage point higher than previosly issued 2 industrial bonds of equal quality. Finally, new issues of If immediately upon issue, interest rates increased to 9 percent, what woul a $1,250. What is the effective yield to maturity? (Compute PVF and go to B. You buy an 8 percent 25 year $1000 nar yalue floating rate bond in 1999. By Appendix B for the 10-year figure to find the answer, or compute FVp and go to (LO/ Appendix A for the 10-year figure to find the answer. Either approach will work.) A2 pub ic ulity-bonds nav three fo... ously AZ public utility bonds. What should be the interest rate on a newly issued A2 public utility bond? 11. A 17-year, $1,000 par value zero-coupon rate bond is to be issued to yield 7 percent. a. What should be the initial price of the bond? (Take the present value of $1,000 for 17 years at 7 percent.) b. If immediately upon issue, interest rates dropped to 6 percent, what would be the value of the zero-coupon rate bond? be the value of the zero-coupon rate bond? that sells for $102.and will mature in 10 years Zero bone (LOI C. 10 Assume Zor How (LOMC heye ant What is your