Assume that you are thinking of buying a default-free bond. Specifically, you're thinking of buying a...
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Assume that you are thinking of buying a default-free bond. Specifically, you're thinking of buying a bond issued by Risklessco, a company that is considered default-free by all major bond rating firms. You will select one of the following three bonds, which are identical except for the special features listed. (8 marks) Price Bond Face Maturity value A B C 1000 20 years 1000 20 years 1000 20 years Coupon rate (paid annually) 5.5% 5.5% 5.5% Yield to maturity* 5% 5.5% 3.5% Special features None Callable Callable and Convertible into Risklessco Stock a. Bond B is considered identical to Bond A except for the callability provision. ? * Yield to maturity represents the market's required rate of return. It is calculated using only stated coupon payments and face value, without regard for the special features. What would be the price of Bond A? II. What is the implied value of the callability provision? Par ? (4 marks, 1 each) b. Bond C is considered identical to bond B except for the conversion privilege. Ili. Who does the callability provision benefit: the issuer or the purchaser? iv. Is this consistent with the price you calculated for Bond A relative to the price of Bond B? Briefly explain. (4 marks, 1 each) What would be the price of Bond C? II. What is the implied value of the conversion privilege? iii. Does the conversion privilege benefit the issuer or the purchaser of the bond? iv. Is this consistent with the price you calculated for Bond C relative to the price of Bond B? Briefly explain. Assume that you are thinking of buying a default-free bond. Specifically, you're thinking of buying a bond issued by Risklessco, a company that is considered default-free by all major bond rating firms. You will select one of the following three bonds, which are identical except for the special features listed. (8 marks) Price Bond Face Maturity value A B C 1000 20 years 1000 20 years 1000 20 years Coupon rate (paid annually) 5.5% 5.5% 5.5% Yield to maturity* 5% 5.5% 3.5% Special features None Callable Callable and Convertible into Risklessco Stock a. Bond B is considered identical to Bond A except for the callability provision. ? * Yield to maturity represents the market's required rate of return. It is calculated using only stated coupon payments and face value, without regard for the special features. What would be the price of Bond A? II. What is the implied value of the callability provision? Par ? (4 marks, 1 each) b. Bond C is considered identical to bond B except for the conversion privilege. Ili. Who does the callability provision benefit: the issuer or the purchaser? iv. Is this consistent with the price you calculated for Bond A relative to the price of Bond B? Briefly explain. (4 marks, 1 each) What would be the price of Bond C? II. What is the implied value of the conversion privilege? iii. Does the conversion privilege benefit the issuer or the purchaser of the bond? iv. Is this consistent with the price you calculated for Bond C relative to the price of Bond B? Briefly explain.
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a Bond A i Price of Bond A Face Value 1000 This is because Bond A has no special features and Riskle... View the full answer
Related Book For
Fundamentals of Corporate Finance
ISBN: 978-1259024962
6th Canadian edition
Authors: Richard Brealey, Stewart Myers, Alan Marcus, Devashis Mitra, Elizabeth Maynes, William Lim
Posted Date:
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