5 Years 1. Why do the coupon rates vary among the four bonds? 2. List five facto

Question

5 Years

1.    Why do the coupon rates vary among the four bonds?

2.    List five factors that would influence a bond’s S&P rating.

3.    What typically happens to the price of a bond when the rating agency lowers (downgrades) the bond’s rating?

4.    Select one of the bonds from the table and calculate its yield to maturity.

5.    Briefly describe the purpose and operation of a sinking fund the may be used with a bond issue. What effect does the call provision have on the bond’s risk and return potential?

6.    A few of the bonds feature a call period option. Briefly explain how this is used.

7.    Rank the bonds in terms of their riskiness. Briefly explain your rankings.

Corporate Bond Information (hypothetical data) Issuer Face (Par) Value Coupon Rate S&P Bond Rating Quoted Price Years until Maturity Sinking Fund Call Period ABC Company $1,000 5% AAA $703.01 20 Yes 3 Years ABC Company $1,000 0% AAA $208.30 20 Yes N/A XYZ Company $1,000 10% AA $1,092.00 20 Yes 5 Years XYZ Company $1,000 11% AA $1,206.40 30 No

5 Years

Explanation / Answer

1) Bonds are usually issued at par and the coupon rates are decided as per the prevailing market rate at the time of issuance. Hence coupon rates differ due to different issuance period

2)The 5 factors are:
Profitability of entity
Macroeconomic environemnt
Cash flows
Coupon rate
Expected future cash flows

3)When rating is lowered the prices fall and yiedl rises

4)XYZ company 10% bond:
=RATE(40,50,-1092,0)
=6.71%

Related Questions

Navigate

• Browse (All)
• Browse 5
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.