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FIN 534 ? Homework Chapter 5




Question;Answer the following five questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link in the course shell. Each question is worth five points apiece for a total of 25 points for this homework assignment.;1. Ranger Inc. would like to issue new 20-year bonds. Initially, the plan was to make the bonds non-callable. If the bonds were made callable after 5 years at a 5% call premium, how would this affect their required rate of return?a. There is no reason to expect a change in the required rate of return.b. The required rate of return would decline because the bond would then be less risky to a bondholder.c. The required rate of return would increase because the bond would then be more risky to a bondholder.d. It is impossible to say without more information.e. Because of the call premium, the required rate of return would decline.;2. Under normal conditions, which of the following would be most likely to increase the coupon rate required to enable a bond to be issued at par?a. Adding a call provision.b. The rating agencies change the bond's rating from Baa to Aaa.c. Making the bond a first mortgage bond rather than a debenture.d. Adding a sinking fund.e. Adding additional restrictive covenants that limit management's actions.;3. Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?a. 20-year, 10% coupon bond.b. 20-year, 5% coupon bond.c. 1-year, 10% coupon bond.d. 20-year, zero coupon bond.e. 10-year, zero coupon bond.;4. Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price?a. A 1-year bond with a 15% coupon.b. A 3-year bond with a 10% coupon.c. A 10-year zero coupon bond.d. A 10-year bond with a 10% coupon.e. An 8-year bond with a 9% coupon.;5. Which of the following bonds has the greatest interest rate price risk?a. A 10-year, $1,000 face value, zero coupon bond.b. A 10-year, $1,000 face value, 10% coupon bond with annual interest payments.c. All 10-year bonds have the same price risk since they have the same maturity.d. A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments.


Paper#50221 | Written in 18-Jul-2015

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