***Reading Attached

Chapter 7

2. Explain the use of a sinking-fund provision. How can it reduce the investor's risk?

3. What are protective covenants? Why are they needed?

4. Explain the use of call provisions on bonds. How can a call provision affect the price of a bond?

7. What are the advantages and disadvantages to a firm that issues low or zero coupon bonds?

9. Why can convertible bonds be issues by firms at a higher price than other bonds?

11. Explain how the credit crisis affected the default rates of junk bonds and the risk premiums offered on newly issued junk bonds?

12. Explain the new guidelines for credit rating agencies resulting from the Financial Reform Act of 2010.

14. Explain how the downgrading of bonds for a particular corporation affects the prices of those bonds, the return to investors that currently hold these bonds, and the potential return to other investors who many invest in the bonds in the near future.

16. An Insurance company purchased bonds issued by Hartnett Company two years ago. Today, Harnett Company has begun to use junk bonds and is using the funds to repurchase most of its existing stock. Why might the market value of those bonds held by the insurance company be affected by this action?

Chapter 8

1. Based on your forecast of interest rates, would you recommend that investors purchase bonds today? Explain.

7. If a bond's coupon rate were above its required rate of return, would its price be above or below its par value? Explain.

8. Is the price of a long term bond more or less sensitive to a change in interest rates than to the price of a short term security? Why?

9. Why does the required rate of return for a particular bond change over time?

10. Assume that inflation is expected to decline in the near future. How could this affect future bond prices? Would you recommend that financial institutions increase or decrease their concentration in long term bonds based on this expectation? Explain.

15. Assume that oil producing countries have agreed to reduce their oil production by 30%. How could bond prices be affected by this announcement? Explain.

17. Assume that bond market participants suddenly expect the Fed to substantially increase the money supply.

a. Assuming no threat of inflation, how would bond prices be affected by this expectation?

b. Assuming that inflation may result, how would bond prices be affected?

c. Given your answers to a. and b., explain why expectation of the Fed's increase in the money supply may sometimes cause bond market participant to disagree about how bond prices will be affected.

Problems

1. Assume the following information for an existing bond that provides annual coupon payments:

Par value = $1,000

Coupon rate = 11%

Maturity = 4 years

Required rate of return by investors = 11%

a. What is the present value of the bond?

b. If the required rate of return by investors were 14% instead of 11%, what would be the present value of the bond?

c. If the required rate of return by investors were 9%, what would be the present value of the bond?

2. Assume the following information for existing zero coupon bonds:

Par value = $100,000

Maturity = 3 years

Required rate of return by investors = 12%

How much should investors be willing to pay for these bonds?