FINE 2000 Chapter Notes - Chapter 6: Bid Price, Accrued Interest, Current Yield

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emeraldlouse520

3 Mar 2015

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Often companies need to generate cash from investors: can issues shares in the form of preferred/common stock (equity financing) Company agrees to make series of fixed interest payments and then repay principal amount of the debt. Federal and provincial government also raise money through bonds. Issued at a lower interest rate since government raises taxes and can print money. Long term bonds prices are most sensitive to fluctuations in interest rates. Bond: security that obligates the issuer to make specified payments to the bondholder. Coupon: interest payment paid to the bondholder. Face value: payment at maturity of the bond (pay value, maturity value, principal: differences among bonds: Bonds can have fixed or flexible coupon payment as short-term interest rates change. Bonds can vary in maturity and characteristics. Coupon rate: annual interest payment as a percentage of face value. Asked price: what investors need to pay to buy the bond.

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Please can someone help me with this :

Minicase 1

Interest Rates, Bond Yields, and Duration

CONCEPTS IN THIS CASE

simple loans
fixed-payment loans
coupon bonds
present value
yield-to-maturity
current yield
nominal and real interest rates
rate of return
capital gain
interest-rate and reinvestment risk
duration

You have been hired to analyze the debt securities of your organization. The firm has outstanding loans and bonds. A quick review of the balance sheet shows the following:

	Liability Amount ($)	Nominal Interest (coupon) Rate	Years to Maturity
Selected Liabilities of the firm
Simple Loans	800	5%	1
Fixed-Payment Loans	5,000	12%	19
Long-term Bonds #1	500,000	10%	4
Long-term Bonds #2	1,080,000	10%	10
Liabilities Total	1,585,800

Market Price for Bond #1	930.50
Market Price for Bond #2	859.50
Face Value of Each Bond	1,000.00
Selected Current Assets of the firm
Marketable Securities:
Treasury Bills	100,000

Note: Treasury Bills have a $10,000 face value, which matures in one year. Each Treasury Bill has a cost of $9,580.00

How much interest would the firm pay each year on the simple-interest loan?

How much would you write a cheque for to pay off the loan in one year?

What is the monthly payment needed to pay off the fixed-payment loans?

What is the current yield for each bond if the current price is:

$930.50 for Bond #1?

$859.50 for Bond #2?

What is the expected yield to maturity for each bond?

Bond #1 selling for $930.50?

Bond #2 selling for $859.50

What is the rate of capital gain if both bonds sell for $900.00 in one year?

Bond #1 selling for $930.50 today?

Bond #2 selling for $859.50 today?

If the Yield to Maturity expected by investors changes to 11%:

What will be the market price of Bond #1?

What will be the market price for Bond #2?

What will be the dollar change in price for Bond #1?

What will be the dollar change in price for Bond #2?

What will be the percent change in price for Bond #1?

What will be the percent change in price for Bond #2?

Since the change in expected yield to maturity is the same, why is the amount of change different between the bonds?

If investors holding our 4-year bonds (Bond #1) receive interest income annually for four years, plus the face value of the bonds at maturity,

What will be the total interest earned on the bond over the next four years?

What will be the face value received at maturity?

Given the following projected income stream for Bond #1:

			Projected Reinvestment Rates
Year	Coupon Interest ($)	Face Value ($)	10%	5%
1	100
2	100		10.00	5.00
3	100		21.00	10.25
4	100	1000	33.10	15.76
Total Income	400	1000	64.10	31.01

What is the total cash available over the next four years to the bond holder earning

10%

15%

What is the average annual rate of return for the bond holder earning

10%

15%

Why does the reinvestment rate affect the annual rate of return for the same bond?

If the expected rate of return on our bonds is 10%, what is the duration of Bond #1?

What is the yield to maturity on the Treasury Bills (a discount bond)?

What is the real rate of interest if the nominal rate is 10% and the inflation rate is 3%?

amethystcrow453

I NEED HELP WITH A RESPONSE TO THE POSTBELOW.

How do bonds provide financing to corporations for theircapital projects? Issuing bonds is the easiest mosteffective way to raise money to do the things needed to allow thecompany to grow without taking a loan from the bank with higherinterest rates. A investor basically loans the company the money inexchange for interest payments. Companies are more willing to issuea bond and pay a lower interest rate.

What are the key differences between using bonds tofinance capital projects and using stock for that purpose?The key difference is that with bonds companies can continue toissue all the bonds that they want just as long as they haveinvestors who are willing to invest the money for a certaininterest rate. When a company does this it does not have any impacton ownership and the way the company is operated or the sharesdistributed. With stocks you have to put up shares of the company,which will mean that the company brings in less money because ofthe sharing of the revenue with the stockholders of thecompany.

References

Smith, L. (2018, December 21). Why Companies Issue Bonds.Retrieved January 14, 2019, fromhttps://www.investopedia.com/articles/investing/062813/why-companies-issue-bonds.asp

The value of a bond is dependent primarily on twofactors. Name and explain these factors. The value of abond is dependent on the value of its cash flow in terms of thepresent value of the coupon payments and the present value of thepar value. The coupon changes according to the current interestrate. When the interest rate falls lower than the coupon rate thenthe value of the bond payment rises. The length of paymentsremaining before maturity is also a factor as it represents agreater or lesser portion of the value. The current value of a bondis always measured against the going interest rate, whichdetermines what will be paid out.

Compare and contrast the differences between stocks andbonds. The characteristics of bonds is that the valuerises and falls depending on interest rates, interest payment aretax deductible by the corporation, equity is not lost throughissuance, unpaid debt is a liability, can be issued at any time forany reason and the creditors have not voting powers. Thecharacteristics of stocks is that the value rises and fallsdepending on the value that the stock trades are at, dividends arenot tax deductible, loss of stock value creates no liability, canonly be issued one time, equity owners can control the company withvoting powers and stock issuance is based on transfer ofequity.

mauverhinoceros969

8. Your company issued bonds at a premium. Which of the following statements is NOT true?
A. The contra account, premium on bonds payable, is amortized each year by shifting part of its balance to interest expense.
B. On the date of issuance, the stated interest rate was greater than the market interest rate.
C. As the current date approaches the maturity date, the carrying value of the bond approaches the face value of the bond.
D. The account used to record the premium has a normal debit balance.

9. Which of the following would help a company improve its quick ratio without necessarily lowering the liability risk to a creditor?
A. Borrowing money on a long-term note just before the end of the accounting period.
B. Shifting resources from long-term assets to short-term assets such as supplies and inventory.
C. Shifting obligations from long-term liabilities to short-term liabilities.
D. Acquiring inventory by issuing a long-term note.

10. Which of the following is not used to calculate the times interest earned ratio?
A. Net income.
B. Income tax expense.
C. Interest earned on investments.
D. Interest expense.

11. Which of the following statements regarding treasury stock is true?
A. When a company reissues treasury stock for more than it originally paid for the stock, it does not report a gain.
B. When a company purchases treasury stock or pays a dividend, it increases total stockholders' equity.
C. Treasury stock is reported as an asset on the balance sheet.
D. Treasury stock is reported as issued and outstanding stock.

16. Typically, all other things equal, a profitable company that pays little or no dividends:
A. is a bad investment.
B. will reinvest profits which can lead to greater growth potential.
C. will experience relatively stable stock prices over time.
D. will appeal to investors who desire distributions of profit.

17. If a corporation declares and distributes a 10% stock dividend on its common shares, the account debited is:
A. Dividends Payable.
B. Common Stock.
C. Share Capital.
D. Retained Earnings.

20. Limited Liability Companies (LLCs) are like general partnerships in that:
A. income tax is not paid by the company itself.
B. the business has a separate legal identity.
C. liability is limited.
D. amounts paid to the owners are recorded as salaries expense.

21. Which of the following statements regarding financing activities is NOT true?
A. Cash dividends paid to a company's stockholders are reported as cash outflows from financing activities.
B. When a company issues stock for cash, it reports a cash inflow from financing activities.
C. When a company repurchases stock with cash, it reports a cash outflow for financing activities.
D. When a company repays a loan, it reports a cash outflow from investing activities.

22. Which of the following statements regarding quality of income ratio is NOT true?
A. A quality of income ratio will increase if a company's working capital management allows current assets such as inventory to increase out of control.
B. Variations in the ratio can be seasonal and are the result of sales fluctuations rather than reasons for alarm.
C. The quality of income ratio measures the portion of income that was generated in cash.
D. The quality of income ratio is useful when compared to industry competitors or to prior periods.

23. Which of the following types of information is not provided by the statement of cash flows?
A. Company management of current assets and liabilities.
B. Expenditures on long-term assets.
C. Current profitability as measured by specific revenues and expenses.
D. Reliance on external financing.

24. Cash and cash equivalents include:
A. assets that have stable long-term value.
B. assets that are short-term, highly liquid, and are purchased within three months of maturity.
C. assets that consistently grow in value over the long run.
D. assets that are expected to be used up within a year.

FINE 2000 Chapter Notes - Chapter 6: Bid Price, Accrued Interest, Current Yield

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