Question
Part 3: Bond Valuation Mr. James Johnson is the vice-president City Investment Services. As an MBA degree holder, Mr. Johnson has requested you to help
Part 3: Bond Valuation Mr. James Johnson is the vice-president City Investment Services. As an MBA degree holder, Mr. Johnson has requested you to help them prepare for a seminar that will be presented to potential investors. Their presentation will focus on corporate bonds. Mr. Johnson have asked you to help them by answering the following questions relating to corporate bonds.
A. What are the key features of a bond?
B. What are call provisions and sinking fund provisions? Do these provisions make bonds more or less risky?
C. How is the value of any asset whose value is based on expected future cash flows determined?
D. How is the value of a bond determined? What is the value of a 10-year, $1,000 par value bond with a 10 percent annual coupon if its required rate of return is 10 percent? E. What would be the value of the bond described in Part D if, just after it had been issued, the expected inflation rate rose by 3 percentage points, causing investors to require a 13 percent return? Would we now have a discount or a premium bond?
F. What is the yield to maturity on a 10-year, 9 percent annual coupon, $1,000 par value bond that sells for $887.00? That sells for $1,134.20? What does the fact that a bond sells at a discount or at a premium tell you about the relationship between required rate of return and the bond's coupon rate? What is the yield-to-maturity of the bond? G. If a firm were to default on the bonds, would the company be immediately liquidated? Would the bondholders be assured of receiving all of their promised payments? Discuss the advantages and disadvantages of using a long-term loan instead of a bond.
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