Q1. Eddie is working hard for the final exam of Business Finance. While reading his notes,...
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Q1. Eddie is working hard for the final exam of Business Finance. While reading his notes, he feels uncertain about the following 6 statements. Please help Eddie by clarifying whether they are correct or not with a few short (and critical) sentences respectively. (a) Scenario A below is not feasible because the straight value of convertible bond is smaller than the face value of bond. Scenario B is more likely to be feasible at the issuance of a company's convertible bonds. Suppose the bonds are available for immediate conversion. Face value of bond Straight value of convertible bond Market value of convertible bond Scenario A Scenario B $1,000 $1,000 $850 $1,000 $1100 $1050 (4 marks) (b) Volatility is a measure of risk. Even though a higher value of it implies a higher risk, volatility increase could lead to positive and negative impacts on financial products. For example, if the volatility of the return of an underlying stock increases, the premiums of relevant call options will increase while the prices of relevant convertible bonds will decrease. (c) The price of any financial product will always be greater than or equal to 0. (3 marks) (3 marks) (d) Suppose that over the next few years, the rate of inflation in Mexico will be 5%, while average prices for goods in the U.S. will increase by 2%. If relative purchasing power parity holds, Mexican peso is expected to depreciate against the U.S. dollar. (3 marks) (e) For an international firm that operates across multiple countries, the best way to manage exchange rate risk is for each subsidiary to hedge risk independently, so that the risk exposure of each individual division could be minimized. (3 marks) (f) Bonds with a sinking fund provision have higher yields than those without, while bonds with a call provision have lower yields than those without. (4 marks) Q1. Eddie is working hard for the final exam of Business Finance. While reading his notes, he feels uncertain about the following 6 statements. Please help Eddie by clarifying whether they are correct or not with a few short (and critical) sentences respectively. (a) Scenario A below is not feasible because the straight value of convertible bond is smaller than the face value of bond. Scenario B is more likely to be feasible at the issuance of a company's convertible bonds. Suppose the bonds are available for immediate conversion. Face value of bond Straight value of convertible bond Market value of convertible bond Scenario A Scenario B $1,000 $1,000 $850 $1,000 $1100 $1050 (4 marks) (b) Volatility is a measure of risk. Even though a higher value of it implies a higher risk, volatility increase could lead to positive and negative impacts on financial products. For example, if the volatility of the return of an underlying stock increases, the premiums of relevant call options will increase while the prices of relevant convertible bonds will decrease. (c) The price of any financial product will always be greater than or equal to 0. (3 marks) (3 marks) (d) Suppose that over the next few years, the rate of inflation in Mexico will be 5%, while average prices for goods in the U.S. will increase by 2%. If relative purchasing power parity holds, Mexican peso is expected to depreciate against the U.S. dollar. (3 marks) (e) For an international firm that operates across multiple countries, the best way to manage exchange rate risk is for each subsidiary to hedge risk independently, so that the risk exposure of each individual division could be minimized. (3 marks) (f) Bonds with a sinking fund provision have higher yields than those without, while bonds with a call provision have lower yields than those without. (4 marks)
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a Sc enario A is not feasible because the straight value of the convertible bond is lower than the f... View the full answer
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Data Analysis and Decision Making
ISBN: 978-0538476126
4th edition
Authors: Christian Albright, Wayne Winston, Christopher Zappe
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