WEEK 5 HW CORP FIN 2 Identify the following general statements concerning bonds
ID: 2621231 • Letter: W
Question
WEEK 5 HW CORP FIN 2
Identify the following general statements concerning bonds as True or False:
8. Bonds provide tax benefits to issuers of bonds.
9. The risk of company insolvency increases when a firm issues bonds.
10. Municipal bonds pay interest that is both federally and state tax-free.
11. All else constant, a bond will sell at a discount when its coupon rate is less than its yield to maturity.
12. Decreasing the time to maturity decreases the price of a discount bond, all else unchanged.
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Explanation / Answer
8. Bonds provide tax benefits to issuers of bonds.(True ) Because interest payments on Bond payments are tax deductible. It provides a tax shield to the company.
9. The risk of company insolvency increases when a firm issues bonds.(True) Because interest payments on bonds re fixed and needs to be paid on the due date failing which the company may face insolvency. However, dividend payment onshore is not fixed and may not be paid at all.
10. Municipal bonds pay interest that is both federally and state tax-free(True) The interest on municipal bonds are exempt from federal taxes and no state taxes are levied if the buyer of the bond is from the same state as the issuer of the bond.
11. All else constant, a bond will sell at a discount when its coupon rate is less than its yield to maturity. (True)
Price of bond = PV of all coupon discounted at Yield to maturity + Par value discounted at Yield to Maturity
If coupon rate is less than YTM than the PV of all coupon discounted at Yield to maturity + Par value discounted at Yield to Maturity will be less than Par value and will be sold at discount.
12. Decreasing the time to maturity decreases the price of a discount bond, all else unchanged. (True)
because Change in price = Initial Price of Bond |* Duration * change in YTM
Since yield till maturity is constant so with decrease in duration will reduce the price of the bond,
Best of Luck. God Bless
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