Financial Management

b. What would be the value of each bond if they had annual coupon payments?

1. If you are borrowing money and paying interest, would you prefer an interest rate that compounds annually, quarterly, or daily? Why? (2-4 sentences. 1.0 points)

A bond with an annual coupon of $70 and originally sold at par for $1,000. The current market interest rate (yield to maturity) is 8%. This bond will sell at _______. Assuming no change in market interest rates, the bond will present the holder with capital ________ as it matures.

1. If you are borrowing money and paying interest, would you prefer an interest rate that compounds annually, quarterly, or daily? Why? (2-4 sentences. 1.0 points)

B. The present value of an annuity is unaffected by the number of the annuity payments.

3. Which of the following statements about the yield-to-maturity is true? a) Discounting all cash flows of a bond with the bond’s yield-to-maturity only gives us the correct price if we have a flat term structure of interest rates. b) The yield-to-maturity is upwards sloping. c) The yield-to-maturity is always a spot rate. d) Several of the above statements are true. e) None of the above statements are true. E is correct. The yield-to-maturity, y is the constant hypothetical interest rate that solves P = 1 FV c 1− + T y (1 + y) (1 + y)T

Its coupon rate is 8.3%. Its value at maturity is $1,000. It matures in 4 years. Its yield to maturity is currently 5.3%. The modified duration of this bond is ______ years.

2) The way a firm chooses between alternate uses of free cash flow is referred to as

So, the 20 year corporate bond interest rate associated with the company’s rating is 3.86.

of a firm; therefore their decisions play a large role in the cost of capital calculation.

b. Generate a graph or table showing how the bond’s present value changes for semi-annually compounded interest rates between 1% and 15%.

A sinking fund reduces coupon rate because it provides a kind of future guarantee to bondholders. The company must make payments into the sinking fund or default so it must

19. A company has a quick ratio greater than 1. All else constant, which of the following transactions will increase a firm’s quick ratio?

All else equal, which bond’s price is more effected by a change in interest rates, a bond with a large coupon or a small coupon? Why?

3. A european corporation has issued bonds with a par value of Sfr 1,000 and an annual coupon of 5 percent. The last coupon on these bonds was paid four months ago, and their current clean price is 90 percent.