31. A large corporation issued both fixed- and floating-rate notes five years ag

Question

31. A large corporation issued both fixed- and floating-rate notes five years ago, with terms given in the following table: (LO 10-4) 9% Coupon Notes $250 million 20 years 93 9% Fixed coupon Floating-Rate Note $280 million 15 years 98 896 Every year 1-year Tbil rate + 2% 0 years after issue 102 Issue size Maturity Current price (% of par) Current coupon Coupon adjusts Coupon reset rule Callable 10 years after issue Call price Sinking fund None Yield to maturity Price range since issued $85-$112 $97-$102 a. why is the price range greater for the 9% coupon bond than the floating-rate note? b. What factors could explain why the floating-rate note is not always sold at par value? . Why is the call price for the floating-rate note not of great importance to investors? d. Is the probability of call for the fixed-rate note high or low? e. If the firm were to issue a fixed-rate note with a 15-year maturity, callable after five years at 106, what coupon rate would it need to offer to issue the bond at par value? f Why is an entry for yield to maturity for the floating-rate note not appropriate? 32, A 25-year maturity, 7.4% coupon bond paying coupons semiannually is callable in six years at a call price of $1,180. The bond currently sells at a yield to maturity of 6.4% (3.2% per half-year). (LO 10-4) a. What is the yield to call b. What is the yield to call if the call price is only $1,130 . What is the yield to call if the call price is $1,100 but the bond can be called in three years instead of five years? 33. A newly issued 20-year maturity, zero-coupon bond is issued with a yield to maturity of 72% and face value $1,000. Find the imputed interest income in the first, second, and last year of the bond's life. (LO 10-3)

Explanation / Answer

31 a.

31 b. For a bond to be sold at Par, the coupon rate should be eqaul to required return (YTM usually). For a floating bond, let's start with 8% coupon and 8% YTM in year 1 (Pricing it at Par), next year it changes to 8.7% and YTM should be 8.7% for it to be priced on Par. The required return (YTM) would vary with the market conditions and can't always guarantee the changes in Coupon rate (floating rate) to match up to the required rate of return. Also, a floating rate bond can be redeemed usually at face value

31 c. The call price of the bond changes every year based on how the T bill is doing, since the numbers are not fixed, investors aren't much concerned about the price.

31d. If the interest rates decrese, the probability to call a fixed rate become High

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