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ChaPter

Bond Markets

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9. What is a callable bond? Is a call provision more or less attractive to a bond holder than a noncallable bond? (LG 6-2) 10. Explain the meaning of a sinking fund provision on a bond issue.(LG 6-2) 11. What is the difference between an investment-grade bond and ajunk bond? (LG 6-2) 12. what is the difference between a Eurobond and a foreign bond? (LG 6-4) per13. What are sovereign bonds? How did sovereign bonds (LG 6-4) form during the 2000s?

what is the difference between bearer bonds and registered bonds?&G 6-2) what is the difference between term bonds and serial bonds? (LG 6-2) Which type of bond-a mortgage bond, a debenture' or a subordinateddebenture-generally has the (LG 6-2) a. Highest cost to the bond issuer? b. Least risk to the bond holder? c. Highest yield to the bond holder?
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What is a convertible bond? Is a convertible bond more or less attractive to a bond holder than a nonconvertible bond? (LG 6-2)

PROBLEMS
[. Refer ro rhe Tlnore and T:.bondquotes in Thble 6-1. (LG 6-2) a. What is the asking price on the 4'375 percent November 2039 T-bond if the face value of the bond is $10'000? b. What is the bid price on the 5'000 percentAugust 2011 T-note if the face value of the bond is $10,000? a. If the semiannual inflation rate during the first six months is 0.3 percent, calculate the principal amount used to determine the first coupon payment and the first coupon payment (paid on June 30, 2014)' b. From your answer to part a, calculate the inflationadjusted principal at the beginning of the second six months. c.Supposethatthesemiannualinflationrateforthesecond six.monthperiodislpercent.Calculatetheinflationadjusted principal at the end of the second six months (on December 31, 2014) and the coupon payment to the investor for the second six-month period' What is the inflation-adjusted principal on this coupon payment date? 6. You can invest in taxable bonds that are paying a 9.5 percent annual rate of return or a municipal bond paying a 7.75 percent annual rate of return' If your marginal tax rate is 21 percent, which security bond should you buy? (LG 6-2) 7. A municipal bond you are considering as an investment currently pays a 6.75 percent annual rate of return' (LG 6-2) a. calculate the tax equivalent rate of return if your marginal tax rate is 28 Percent. b.Calculatethetaxequivalentrateofreturnifyourmarginal tax rate is 2l Percent. 8. Refer to Table 6-6. (LG 6-2) a. On July 16, 2010, what were the coupon rate' price' and yieldonmunicipalbondsissuedbytheHawaiiDepartment of Budget & Finance? b. What was the price, on July 15, 2010, on Massachusetts Department of Transportation bonds maturing on January1,2035? the 9. Use the bond pricing formula and Table 6-6 to calculate number of years (tothe nearest 1/1000thof a year) between the Monday, July 19, 2010, settlement date and the maturity date on the Massachusetts Development Finance Agency revenuebonds maturing on January 1,2040' (LG 6-2) 10. Refer to Table 6-:7. (LG 6-2) a. What was the closing price on the Bank of America 5.625 percentcoupon bonds on July 16, 2010?

1.. Refer again to Table 6'1. (LG 6-2) a. Verify the askedprice on the 0'875 percentMarch 2011 T -notefo rFrid ay,Ju ly 16, 2010' Theas k edy ieldont he noteis0.23T percentandthenotematuresonMarch3l, 20L1. Settlement occurs two business days after purchase; i.e., you would take possessionof the note on MondaY,JulY 19,2010. b. Verify the asked yield on the 2'000 percent November 2013T-noteforJuly16,201l.Theaskedpriceis|03:42 and the note matures on November 30, 2Ol3' 3, Refer to Table 6-1. (LG 6-2) a. Verify the July 16, 2010 asked yield of l'83Vo on the Treasury bond, stripped principal STRIP maturing August 2015. Use a two-day settlement period from the date of purchase (i'e., ownership occurs on Monday' July 19, 2010). The STRIP matureson August 15' 2015' b. Verify the asked price (86.823) on the Treasury note' stripped principal STRIP maturing in Novembet 2016' i.e., the STRIP matureson November 15, 2016' that On Octobet 5,2013, you purchasea $10,000 T:'note matures on August 15, 2024 (settlement occurs two days bond after purchur", ,o you receive actual ownership of the 4'375 is T-note the on rate coupon on October 1,2013).The percent and the current price quoted on the bond is 105:08 (orl05.2 5Too fthe facev alueof t heT: not e) . Thelas t c oupon payment occurred on May 15,2013 (145 days before on settlement), and the next coupon payment will be paid (LG 6-2) settlement)' from (39 days 15,2013 November a.Calculatetheaccruedinterestduetothesellerfromthe buYer at settlement' b. Calculate the dirty price of this transaction' 5. Consider an investor who, on January 1, 2014, purchases 8 a TIPS bond with an original principal of $100'000' an and rate' coupon percent annual (or 4 percent semiannual) 10 yearsto maturitY.(LG 6-2)

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SecuritiesMarkets

b. What was the S&P bond rating on Morgan Stanley 5.500 percentcoupon bonds maturing in2020 on July 16,2010? c. What was the closing price on Cox Communications 7.750percentbondson July 15, 2010? 11. A $1,000 face value corporatebond with a 6.5 percentcoupon (paid semiannually) has 15 years left to maturity. It has had a credit rating of BBB and a yield to maturity of 7.2 percent The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BB. The new appropriatediscountrate will be 8.5 percent.What will be the change in the bond's price in dollars and percentage terms?(LG 6-2) L2. A client in the 33 percent marginal tax bracket is comparing a municipal bond that offers a 4.5 percent yield to maturity and a similar risk corporate bond that offers a 6.45 percent yield. Which bond will give the client more profit after taxes?GG 6-2\ 13. A $1,0m face value corporatebond with a 6.75 percent coupon (paid semiannually) has 10 years left to maturity. It has had a credit rating of BB and a yield to maturity of 8.2 percent. The firm recently became more financially stable and the rating agencyis upgrading the bonds to BBB. The new appropriate discount rate will be 7 .l percent.What will be the change terms?(LG 6-2) in the bond's price in dollars and percentage

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bond with an 8 percentcoupon rate (paid semiannually)and a requiredreturnof 7.5 percentif the bond is 6.48514,8.41148, yearsfrom maturity?(LG 6-2) 10.519,and 14.87875 The Bond Periodic Coupon Required =+ Value Total Payment Return Will Be Payments :4Vo 7.57o lo7-l7%o 8Vo/2 6.48574x 2 : 12.97148 IOOVo 7.5 103-03 4 100 8.47148x2:16.94296
Face Value

100 100

X 2:21.0380 10.519 14.87875x2:29.7575

4 4

7.5 7.5

103-19 104-14

15. Hilton Hotels Corp. has a convertible bond issue outstanding. Each bond, with a face value of $1,000, can be converted into common sharesat a rate of 61.2983 sharesof stock per $1,000 face value bond (the conversionrate),or $16.316per share. Hilton's common stock is trading (on the NYSE) at $15.90 per shareand the bonds are trading at $975. (LG 6-2) a. Calculate the conversion value of each bond. b. Determine if it is currently profitable for bond holders to convert their bonds into sharesof Hilton Hotels common stock.

and find the most recent data Go to the Bank for InternationalSettlements Web site at uruuuu.bis.org on the issue of new internationaldebt and the cunnentdistributionof internationalbonds by type of issuer usingthe followingsteps. Tables." Clickon Clickon "Detailed Review." & nesearch," click on "Guanterly Under "Publications "securities Market." This will bring the file onto your computer that contains the relevant data in 128 and 138. Tables Gluestions in Tables6-12 and 6-13? 1 . How havethese valueschangedsince 2O1O as neponted bonds issued in percentage and equity-nelated floating-nate, fixed-r'ate, of the stnaight 2. Calculate and eunos. U.S. dollans