t

ChaPter 6 Bond Markets

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

subordinated debenture-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?

What is a convertible bond? Is a convertible bond more

or less attractive to a bond holder than a nonconvertible

bond? (LG 6-2)

211

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)

13. What are sovereign bonds? How did sovereign bonds per-

form during the 2000s? (LG 6-4)

PROBLEMS[. Refer ro rhe Tlnore and T:.bond quotes 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 percent August 2011

T-note if the face value of the bond is $10,000?

1.. Refer again to Table 6'1. (LG 6-2)

a. Verify the asked price on the 0'875 percent March 2011

T-noteforFr iday,July16,2010'Theaskedyieldonthenoteis0.23T percentandthenotematuresonMarch3l,

20L1. Settlement occurs two business days after pur-

chase; i.e., you would take possession of the note on

MondaY, JulY 19,2010.

b. Verify the asked yield on the 2'000 percent November

2013T-noteforJuly16,201l.Theaskedpriceis|03:42and 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 matures on 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 matures on November 15, 2016'

{. On Octobet 5,2013, you purchase a $10,000 T:'note that

matures on August 15, 2024 (settlement occurs two days

after purchur", ,o you receive actual ownership of the bond

on October 1,2013).The coupon rate on the T-note is 4'375

percent and the current price quoted on the bond is 105:08

(or l05.25ToofthefacevalueoftheT:note).Thelastcou-pon payment occurred on May 15,2013 (145 days before

settlement), and the next coupon payment will be paid on

November 15,2013 (39 days from settlement)' (LG 6-2)

a.Calculatetheaccruedinterestduetothesel lerfromthebuYer at settlement'

b. Calculate the dirty price of this transaction'

5. Consider an investor who, on January 1, 2014, purchases

a TIPS bond with an original principal of $100'000' an 8

percent annual (or 4 percent semiannual) coupon rate' and

10 years to maturitY. (LG 6-2)

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 inflation-

adjusted principal at the beginning of the second six

months.c.Supposethatthesemiannualinflationrateforthesecond

six.monthperiodislpercent.Calculatetheinf lat ion-adjusted 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 pay-

ing 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 cur-

rently pays a 6.75 percent annual rate of return' (LG 6-2)

a. calculate the tax equivalent rate of return if your mar-

ginal tax rate is 28 Percent.b.Calculatethetaxequivalentrateofreturni fyourmar-

ginal 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

yieldonmunicipalbondsissuedbytheHawaiiDepart-ment of Budget & Finance?

b. What was the price, on July 15, 2010, on Massachu-

setts Department of Transportation bonds maturing on

January 1,2035?

9. Use the bond pricing formula and Table 6-6 to calculate the

number of years (tothe nearest 1/1000th of a year) between

the Monday, July 19, 2010, settlement date and the maturity

date on the Massachusetts Development Finance Agency

revenue bonds 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 percent coupon bonds on July 16, 2010?

E|1E! Pant P Securities Markets

b. What was the S&P bond rating on Morgan Stanley 5.500percent coupon bonds maturing in2020 on July 16,2010?

c. What was the closing price on Cox Communications7.750 percent bonds on July 15, 2010?

11. A $1,000 face value corporate bond with a 6.5 percent cou-pon (paid semiannually) has 15 years left to maturity. Ithas had a credit rating of BBB and a yield to maturity of7.2 percent The firm has recently gotten into some troubleand the rating agency is downgrading the bonds to BB. Thenew appropriate discount rate will be 8.5 percent. What willbe 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 comparinga municipal bond that offers a 4.5 percent yield to maturityand a similar risk corporate bond that offers a 6.45 percentyield. Which bond will give the client more profit aftertaxes? GG 6-2\

13. A $1,0m face value corporate bond with a 6.75 percent cou-pon (paid semiannually) has 10 years left to maturity. It hashad a credit rating of BB and a yield to maturity of 8.2 percent.

The firm recently became more financially stable and the rat-ing agency is upgrading the bonds to BBB. The new appropri-ate discount rate will be 7 .l percent. What will be the changein the bond's price in dollars and percentage terms? (LG 6-2)

'a' ercer Yili,: Trm;'J;; ;#"JflffiT":*"J;bond with an 8 percent coupon rate (paid semiannually) and a

required return of 7.5 percent if the bond is 6.48514,8.41148,

10.519, and 14.87875 years from maturity? (LG 6-2)

FaceValue

TotalPayments

Periodic The BondCoupon Required =+ ValuePayment Return Will Be

IOOVo 6.48574 x 2 : 12.97148 8Vo/2 :4Vo 7.57o lo7-l7%o

100 8.47148x2:16.94296 4 7.5 103-03

100 10.519 X 2:21.0380 4 7.5 103-19

100 14.87875x2:29.7575 4 7.5 104-14

15. Hilton Hotels Corp. has a convertible bond issue outstand-ing. Each bond, with a face value of $1,000, can be converted

into common shares at a rate of 61.2983 shares of stock per

$1,000 face value bond (the conversion rate), or $16.316 per

share. Hilton's common stock is trading (on the NYSE) at

$15.90 per share and 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 shares of Hilton Hotels commonstock.

Go to the Bank for International Settlements Web site at uruuuu.bis.org and find the most recent dataon the issue of new international debt and the cunnent distribution of international bonds by type ofissuer using the following steps.

Under "Publications & nesearch," click on "Guanterly Review." Click on "Detailed Tables." Click on"securities Market." This will bring the file onto your computer that contains the relevant data inTables 128 and 138.

Gluestions

1 . How have these values changed since 2O1O as neponted in Tables 6-12 and 6-13?

2. Calculate the percentage of floating-nate, stnaight fixed-r'ate, and equity-nelated bonds issued inU.S. dol lans and eunos.