2. Features of Bo-knows Enterprises Bond and Stock Amount of debt issue Date of
ID: 2793966 • Letter: 2
Question
2. Features of Bo-knows Enterprises Bond and Stock Amount of debt issue Date of issue Maturity Face Value Annual Coupon Offer price $100 million 6/1/90 6/1/20 $1000 9% 100% Security Sinking Fund Call Provision Call Price Rating Junior Note None Annual, beginning 6/1/2000 callable after 6/1/2015 102% Moody's Aa At the time of its IPO, If the company were to issue a similar bond but without a sinking fund, should the coupon rate be the same or lower or higher? Briefly explain. a. The coupon rate would be higher because the no sinking fund. | b. In March 2011, the yield of similar risk bonds was 7%, what was the price of this bond then? In 2012, the yield on bonds of similar risk bonds decreased to 6%, what was the price of this bond then? C. d. Suppose you purchased this bond in 2011 and sold it in 2012. Did you make a good investment? What is your return?Explanation / Answer
a) If any bond contains sinking fund provision it is considered to be more safe because the company is going to retire it's debt through sinking fund and it will have less debt burden in it's Balance sheet. so here coupon rate will be same but a bond with no sinking fund will trade at a higher yield so it will be traded at discount
b) yield on similar bond = 7%
PV=C/(1+r) +C/(1+r)^2.........C+FV/(1+r)^9
=90/(1+7) +90/(1+7)^2......1090/(1+7)^9
=1130.3 bond price in 2011
3) yield on similar bond =6%
PV=C/(1+r) +C/(1+r)^2.........C+FV/(1+r)^8
=90/(1+6) +90/(1+6)^2......1090/(1+6)^8
=1186.29 bond price in 2012
4) yed indeed I have made a profit of (1186.29-1130.3) = 55.9
Holding period return = (55.9/1130.3)*100
=4.95%
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.