Given your computation and conclusions, which of the following statements is true? When the coupon rate is less than Liam's required return, the bond should trade at a discount.
When a company issues a bond in the open market for the first time, it pegs the coupon rate at or near prevailing interest rates in order to make it competitive.
The yield to maturity only equals the coupon rate when the bond sells at face value. The bond sells at a discount if its market price is below the par value, and in such a situation, the yield to maturity is higher than the coupon rate.
is higher than the coupon rate of the bond, the price of the bond is likely to fall because investors would be reluctant to purchase the bond at face value now, when they could get a better rate of return elsewhere.
When the coupon rate is greater than Sophia's required return, the bond should trade at a premium. A bond should trade at a par when the coupon rate is greater than Sophia's required return. When the coupon rate is greater than Sophia's required return, the bond's intrinsic value will be less than its par value.
Issuers can gradually reduce the outstanding balance of a bond issue by using a sinking fund account into which they deposit a specified amount of money each year . To operationalize the sinking fund provision of an indenture, issuers can (1) purchase a portion of the debt in the open market or (2) call the bonds if they contain a call provision.
The bond will not be called. BTR Co. has 9% annual coupon bonds that are callable and have 18 years left until maturity. The bonds have a par value of $1,000, and their current market price is $1,070.35. However, BTR Co. may call the bonds in eight years at a call price of $1,060.
FIN 320: Chapter Eleven (The Basics of Capital Bud…
In July 2009, Walmart sold 100 billion yen of five-year samurai bonds. Lead managers in the deal were Mizuho Securities, BNP Paribas, and Mitsubishi UFJ Securities.
Treasury bonds have a very small amount of default risk, so they are not completely riskless. Treasury bonds are completely risk less. Tre asury bonds are not completely riskless, since their prices will decline when interest rates rise. Click card to see definition 👆. Tap card to see definition 👆.
d) even without default, if you sell prior to maturity, you are exposed to risk that the YTM may change
a. Covan has 7 million shares outstanding, $3 million in excess cash, and it has no debt. If its cost of capital is 12 %, what should be its stock price?
River Enterprises has $497 million in debt and 17 million shares of equity outstanding. Its excess cash reserves are $ 17 million. They are expected to generate $199 million in free cash flows next year with a growth rate of 2% per year in perpetuity. River Enterprises' cost of equity capital is 11%.
d) Given a yield of 7.57%, it is likely these bonds are rated 7.57%, yes they are junk bonds
Conversely, if prevailing interest rates fall below the coupon rate the bond is paying, then the bond increases in value (and price) because it is paying a higher return on investment than an investor could make by purchasing the same type of bond now, when the coupon rate would be lower, reflecting the decline in interest rates.
In short, the coupon rate is affected by both prevailing interest rates and by the issuer’s creditworthiness. The prevailing interest rate directly affects the coupon rate of a bond, as well as its market price.
Zero-Coupon Bonds. A zero-coupon bond is a bond without coupons, and its coupon rate is 0%. The issuer only pays an amount equal to the face value of the bond at the maturity date. Instead of paying interest, the issuer sells the bond at a price less than the face value at any time before the maturity date.
The coupon rate represents the actual amount of interest earned by the bondholder annually, while the yield-to-maturity is the estimated total rate of return of a bond, assuming that it is held until maturity.
All types of bonds pay interest to the bondholder. The amount of interest is known as the coupon rate . Unlike other financial products, the dollar amount (and not the percentage) is fixed over time. For example, a bond with a face value of $1,000 and a 2% coupon rate pays $20 to the bondholder until its maturity. Even if the bond price rises or falls in value, the interest payments will remain $20 for the lifetime of the bond until the maturity date.
Bond Issuers There are different types of bond issuers. These bond issuers create bonds to borrow funds from bondholders, to be repaid at maturity. promises to make periodic payments to the bondholder, based on the principal amount of the bond, at the coupon rate indicated in the issued certificate. The issuer makes periodic interest payments.
If the coupon rate is below the prevailing interest rate, then investors will move to more attractive securities that pay a higher interest rate.