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You own some bonds issued by Another Failing Airline Inc. (AFA). When AFA issued the bonds it was in good financial health and was able to get a coupon rate of 6.6%. The bonds pay coupons annually, and have exactly 10 years remaining until maturity. Each bond has a face value of $1000. Due to the recent increase in operating costs, most notably fuel prices, AFA is no longer able to pay the coupon payments on its bonds. At a creditors meeting, bond holders agreed to forgive the next 3 interest payments (starting with the payment due one year from today). This means that the next interest payment on the bonds will be made 4 years from today. After that, interest payments will be made annually until maturity. Given the risk of AFA and its recent credit downgrade to CC, the required return on these bonds is now 24.2%. What is the fair price of one AFA bond?

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Deanna Hettinger
Deanna HettingerLv2
28 Sep 2019

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q1)WhichBank has just issued 90-day bank bills with a face value of $300,000. If the current 90-day bill rate is 7.7% p.a., what is the current value of these bank bills? Enter your answer to the nearest dollar

Q2)You own some bonds issued by Another Failing Airline Inc. (AFA). When AFA issued the bonds it was in good financial health and was able to get a coupon rate of 6.4%. The bonds pay coupons annually, and have exactly 10 years remaining until maturity. Each bond has a face value of $1000.

Due to the recent increase in operating costs, most notably fuel prices, AFA is no longer able to pay the coupon payments on its bonds. At a creditors meeting, bond holders agreed to forgive the next 3 interest payments (starting with the payment due one year from today). This means that the next interest payment on the bonds will be made 4 years from today. After that, interest payments will be made annually until maturity. Given the risk of AFA and its recent credit downgrade to CC, the required return on these bonds is now 19.2%.

What is the fair price of one AFA bond? Enter your answer to the nearest cent.

for q2 should my answer be 311.93 or 312?

2. For this and the next question. The City of Knights issued $10,000,000 of 9% coupon, 20-year, semiannual payment, tax-exempt municipal bonds. The bonds were issued 5 years ago. The bonds can be called now if the city chooses to do so. The call premium is 4% of the face value. New 15-year, 5%, semiannual payment bonds can be sold at par, but flotation costs on this issue would be 2% of the amount of bonds sold. Note that the combined costs associated with calling the existing bonds and paying for the flotation cost of the new issue represent the total initial outlay for the refinancing. The initial cost is $600,000. CALCULATE THE TOTAL SEMI-ANNUAL SAVINGS ASSOCIATED WITH REFINANCING

120,000

30,000

none of the above

3. What is the net present value of the refunding? Note that cities pay no income taxes. Hence, taxes are not relevant in this analysis.

$453,443

$499,921

$240,000

$551,163

none of the above

4. For this and the next 2 question. New York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14.5% coupon, 30-year bond issue that was issued 5 years ago. It has been amortizing $3 million of flotation costs on these bonds over their 30-year life. The company could sell a new issue of 25-year bonds at an annual interest rate of 11.67% in today's market. A call premium of 14% would be required to retire the old bonds, and flotation costs on the new issue would be $3 million. The company's marginal tax rate is 40%. The new bonds would be issued when the old bonds are called. The initial cost of the refunding is $6,200,000?

Calculate the after-tax annual INTEREST SAVINGS if the refunding takes place.

$664,050

$768,000

$849,000

$930,369

none of the above

5. What is the NPV if the bods are refunded today?

$1,746,987

$1,838,933

$1,935,719

$3,785,322

6. A callable bond with an original maturity of 20 years now has 15 years to mature. The bond was originally issued at par with a coupon rate of 12% and semiannual interest payments. The bond can be called 7 years from now at a 20 percent call premium. Calculate this bond’s yield-to-call and yield-to-maturity if the current price is $860.

YTC = 14.29%; YTM = 17,09%

YTC = 17.09%; YTM = 14.29%

None of the above

7. Which of the following statements is most correct?

Junk bonds typically carry a lower yield to maturity than investment grade bonds

A debenture is a secured bond which is backed by some or all of the firm’s fixed assets

All else equal, subordinated bonds typically carry lower yields than mortgage bonds

None of the above statements is correct

8. Assume you wish to purchase a bond with a 30-year maturity, a coupon rate of 10 percent, a face value of $1,000, and semiannual interest payments. If you require 9% yield to maturity, what is the present value of the bond?

$905.35

$1,102.74

$1,103.19

$1,149.63

9. A bond has a coupon rate of 8%, a maturity of 10 years, a face value of $1,000, and makes semiannual payments. If the price is $9.34.96, what is the annual nominal yield to maturity on the bond?

8.39%

9.64%

4.41%

none of the above

An investor has two bonds in his portfolio that both have a face value of $1,000 and pay a 7% annual coupon. Bond L matures in 13 years, while Bond S matures in 1 year. Assume that only one more interest payment is to be made on Bond S at its maturity and that 13 more payments are to be made on Bond L.

Assume that only one more interest payment is to be made on Bond S at its maturity and that 13 more payments are to be made on Bond L.

a. What will the value of the Bond L be if the going interest rate is 4%? Round your answer to the nearest cent.
$

What will the value of the Bond S be if the going interest rate is 4%? Round your answer to the nearest cent.
$

What will the value of the Bond L be if the going interest rate is 8%? Round your answer to the nearest cent.
$

What will the value of the Bond S be if the going interest rate is 8%? Round your answer to the nearest cent.
$

What will the value of the Bond L be if the going interest rate is 12%? Round your answer to the nearest cent.
$

What will the value of the Bond S be if the going interest rate is 12%? Round your answer to the nearest cent.
$

Why does the longer-term bond’s price vary more than the price of the shorter-term bond when interest rates change?

I. The change in price due to a change in the required rate of return increases as a bond's maturity decreases.

II. Long-term bonds have greater interest rate risk then do short-term bonds.

III. The change in price due to a change in the required rate of return decreases as a bond's maturity increases.

IV. Long-term bonds have lower interest rate risk then do short-term bonds.

V. Long-term bonds have lower reinvestment rate risk then do short-term bonds

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