Question 1

Find the yield to maturity for this floating rate note: The reset date is today; coupons are paid annually according to the formula (LIBOR + ¼ percent); since issuance, there has not been a change in the issuer's credit rating. The bond has ten years to maturity and LIBOR = 3.5 percent.

Accepted Answer

The answer of Find the yield to maturity for this...

Question 2

On a reset date, floating-rate notes

Accepted Answer

On a reset date, floating-rate notes will typically have their interest rate adjusted based on a specified benchmark, such as LIBOR. As a result, the market price of the floating-rate note will typically gravitate towards par, as the interest rate will be adjusted to reflect market conditions. However, if the borrower's credit rating has changed since the note was issued, this could impact the market price of the note. Thus, both options B and C could be correct, depending on the borrower's credit rating.

Question 3

Six-month U.S. dollar LIBOR is currently 4.375%; your firm issued floating-rate notes indexed to six-month U.S. dollar LIBOR plus 50 basis points. What is the amount of the next semi-annual coupon payment per U.S. $1,000 of face value?

Accepted Answer

The next semi-annual coupon payment per U.S. $1,000 of face value can be calculated as follows:

Coupon rate = 6-month U.S. dollar LIBOR + 50 basis points
= 4.375% + 0.50%
= 4.875%

Coupon payment = Coupon rate x Face value / 2
= 4.875% x $1,000 / 2
= $24.375

Therefore, the correct answer is (C) $24.375.

Question 4

Consider a bond with an equity warrant. The warrant entitles the bondholder to buy 25 shares of the issuer at €50 per share for the lifetime of the bond. The bond is a 30-year zero coupon bond with a €1,000 par value that has a yield to maturity of i_€ = 5 percent. The price of the bond is €500. What is the value of the warrant?

Accepted Answer

The bond's present value is calculated using the formula for a zero-coupon bond: PV = FV / (1 + i)^n. Here, FV = €1,000, i = 0.05, and n = 30. The calculated present value is €231.38. Since the bond price is €500, the difference of €268.62 is attributed to the value of the warrant. Therefore, the value of the warrant is €231.38.

Question 5

Euro-medium term notes

Accepted Answer

Euro-medium term notes are typically fixed-rate corporate notes issued with maturities ranging from less than a year to about ten years.

Question 6

There are two types of equity related bonds:

Accepted Answer

Convertible bonds are bonds that can be exchanged for a predetermined number of shares of stock in the issuing company, allowing the investor to potentially participate in the company's equity growth. Bonds with equity warrants are similar, but instead of being able to exchange the bond for stock, the investor holds a warrant that allows them to purchase stock at a predetermined price. These types of bonds offer investors the potential to benefit from both fixed income and equity growth, making them appealing options for certain investors.

Question 7

The coupon interest on Eurobonds

Accepted Answer

The answer of The coupon interest on Eurobonds
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Question 8

Bonds with equity warrants

Accepted Answer

Bonds with equity warrants can be viewed as straight debt with a call option (technically a warrant) attached. The warrants give the bondholder the right to buy shares of the issuing company's stock at a predetermined price within a certain time frame. The bond portion pays interest on the principal, while the warrant portion gives the bondholder the potential to benefit from an increase in the stock price. Bonds with equity warrants are separate from convertible bonds, which allow the bondholder to convert the bond into shares of the company's stock at a predetermined ratio.

Question 9

True or false: floating rate notes behave differently in response to interest rate risk than straight fixed-rate bonds.

Accepted Answer

Floating rate notes (FRNs) have a different behavior than straight fixed-rate bonds when it comes to interest rate risk. The interest rate on FRNs is reset periodically based on a reference rate, thus making their price fluctuations less sensitive to changes in the market interest rate. This is because the coupon rate is adjusted to align with the prevailing interest rate. Therefore, the statement in option A is correct, and option B is incorrect.

Question 10

Eurobonds are usually

Accepted Answer

Eurobonds are typically issued as bearer bonds, which means the physical possession of the bond is the only evidence of ownership, and no records are kept of the owner's identity.

Question 11

A convertible bond pays interest annually at a coupon rate of 5% on a par value of $1,000. The bond has 10 years maturity remaining and the discount rate on other-wise identical non-convertible debt is 5%. The bond is convertible into shares of common stock at a conversion price of $25 per share (i.e. the bond is exchangeable for 40 shares). Today's closing stock price was $31.25. What is the floor value of this bond?

Accepted Answer

The floor value of a convertible bond is the greater of its straight bond value and its conversion value.

The straight bond value can be calculated as follows:

PV = coupon payment / (1 + discount rate) + coupon payment / (1 + discount rate)^2 + ... + coupon payment / (1 + discount rate)^n + par value / (1 + discount rate)^n

Where:
coupon payment = $1,000 x 5% = $50
discount rate = 5%
n = 10 years

PV = $50 / 1.05 + $50 / 1.05^2 + ... + $50 / 1.05^10 + $1,000 / 1.05^10
PV = $937.89

The conversion value can be calculated by multiplying the conversion ratio (40 shares) by the current stock price ($31.25):

Conversion value = conversion ratio x current stock price
Conversion value = 40 x $31.25
Conversion value = $1,250

Therefore, the floor value of the convertible bond is the greater of its straight bond value ($937.89) and its conversion value ($1,250), which is $1,250.

Hence, the correct answer is (C)

Question 12

Find the price of a 30-year zero coupon bond with a €1,000 par value that has a yield to maturity of i_€ = 5 percent.

Accepted Answer

The formula to find the price of a zero-coupon bond is: 
Price = Face value / (1 + r)^n 
Where r is the yield to maturity and n is the number of years until maturity. 
In this case, n = 30 and r = 0.05. 
Price = 1000 / (1 + 0.05)^30 = €231.38 
Therefore, the correct answer is A.

Question 13

Unlike a bond issue, in which the entire issue is brought to market at once, _______ is partially sold on a continuous basis through an issuance facility that allows the borrower to obtain funds only as needed on a flexible basis.

Accepted Answer

A Euro-medium term note issue allows the borrower to continuously issue notes and obtain funds as needed. This is in contrast to a bearer bond or a Euro-long/short term note issue, which are typically issued all at once and have a fixed maturity date.

Question 14

A convertible bond pays interest annually at a coupon rate of 5% on a par value of $1,000. The bond has 10 years maturity remaining and the discount rate on otherwise identical non-convertible debt is 6.5%. The bond is convertible into shares of common stock at a conversion price of $25 per share (i.e. the bond is exchangeable for 40 shares). Today's closing stock price was $20. What is the floor value of this bond?

Accepted Answer

The floor value of the bond is the greater of the value of the bond as a straight bond or the value of the bond if it were converted into shares and sold.

Value of straight bond = PV of cash flows
= (coupon rate x par value) / discount rate * (1 - 1 / (1 + discount rate)^n) + par value / (1 + discount rate)^n
= (0.05 x 1000) / 0.065 * (1 - 1 / 1.065^10) + 1000 / 1.065^10
= $754.51

Value of converted shares = Conversion ratio x market price per share 
= 40 x $20 
= $800.00

Since the value of the straight bond is less than the value of the converted shares, the floor value of the bond is $800.00, which is answer choice B.

Question 15

Straight fixed-rate bond issues have

Accepted Answer

Straight fixed-rate bond issues have a designated maturity date at which the principal of the bond issue is promised to be repaid. During the life of the bond, fixed coupon payments, which are a percentage of the face value, are paid as interest to the bondholders.

Question 16

The floor value of a convertible bond

Accepted Answer

The answer of The floor value of a convertible bond
...

Question 17

Floating-rate notes (FRN)

Accepted Answer

Floating-rate notes (FRN) are typically medium-term bonds that have coupon payments tied to a reference rate such as LIBOR. The coupon payments are adjusted periodically to reflect changes in the reference rate, which means that the interest rates paid to the investor will increase if market rates rise and decrease if market rates fall. FRNs appeal to investors who want to preserve the principal value of their investment should they need to liquidate prior to maturity. Additionally, the price of the bonds may experience volatile price changes between reset dates. Therefore, both options B and C are correct.

Question 18

A ten-year Floating-rate note (FRN) has coupons referenced to 3-month pound LIBOR, and pays coupon interest quarterly. Assume that the current 3-month LIBOR is 3 percent. If the risk premium above LIBOR that the issuer must pay is 1/8 percent, the next period's coupon rate on a £1,000 face value FRN will be

Accepted Answer

The answer of A ten-year Floating-rate note (FRN) has coupons...

Question 19

Floating-rate notes

Accepted Answer

Floating-rate notes are a form of adjustable rate bond, meaning their coupon payments fluctuate based on changes in a specified reference rate (such as LIBOR). This distinguishes them from fixed-rate bonds, which have contractually specified coupon payments that remain the same for the life of the bond. Additionally, like other bonds, floating-rate notes may trade above or below their par value.

Question 20

A five-year floating-rate note has coupons referenced to six-month dollar LIBOR, and pays coupon interest semiannually. Assume that the current six-month LIBOR is 6 percent. If the risk premium above LIBOR that the issuer must pay is 1/8 percent, the next period's coupon rate on a $1,000 face value FRN will be:

Accepted Answer

The coupon rate on the FRN is calculated as the current reference rate (LIBOR) plus the issuer's risk premium. Therefore, the coupon rate for the next period would be:

6% + 0.125% = 6.125%

This rate is applied to the face value of $1,000, with interest paid semiannually, so the coupon payment would be:

($1,000 x 6.125%)/2 = $30.625

Therefore, the correct answer is (C).

Quiz 12: International Bond Market

Find the yield to maturity for this floating rate note: The reset date is today; coupons are paid annually according to the formula (LIBOR + ¼ percent) ; since issuance, there has not been a change in the issuer's credit rating. The bond has ten years to maturity and LIBOR = 3.5 percent.

On a reset date, floating-rate notes

Six-month U.S. dollar LIBOR is currently 4.375%; your firm issued floating-rate notes indexed to six-month U.S. dollar LIBOR plus 50 basis points. What is the amount of the next semi-annual coupon payment per U.S. $1,000 of face value?

Euro-medium term notes

There are two types of equity related bonds:

The coupon interest on Eurobonds

Bonds with equity warrants

True or false: floating rate notes behave differently in response to interest rate risk than straight fixed-rate bonds.

Eurobonds are usually

Find the price of a 30-year zero coupon bond with a €1,000 par value that has a yield to maturity of i_€ = 5 percent.

Unlike a bond issue, in which the entire issue is brought to market at once, _______ is partially sold on a continuous basis through an issuance facility that allows the borrower to obtain funds only as needed on a flexible basis.

Straight fixed-rate bond issues have

The floor value of a convertible bond

Floating-rate notes (FRN)

Floating-rate notes

Quiz 12: International Bond Market

Find the yield to maturity for this floating rate note: The reset date is today; coupons are paid annually according to the formula (LIBOR + ¼ percent) ; since issuance, there has not been a change in the issuer's credit rating. The bond has ten years to maturity and LIBOR = 3.5 percent.

On a reset date, floating-rate notes

Six-month U.S. dollar LIBOR is currently 4.375%; your firm issued floating-rate notes indexed to six-month U.S. dollar LIBOR plus 50 basis points. What is the amount of the next semi-annual coupon payment per U.S. $1,000 of face value?

Euro-medium term notes

There are two types of equity related bonds:

The coupon interest on Eurobonds

Bonds with equity warrants

True or false: floating rate notes behave differently in response to interest rate risk than straight fixed-rate bonds.

Eurobonds are usually

Find the price of a 30-year zero coupon bond with a €1,000 par value that has a yield to maturity of i€ = 5 percent.

Unlike a bond issue, in which the entire issue is brought to market at once, _______ is partially sold on a continuous basis through an issuance facility that allows the borrower to obtain funds only as needed on a flexible basis.

Straight fixed-rate bond issues have

The floor value of a convertible bond

Floating-rate notes (FRN)

Floating-rate notes

Find the price of a 30-year zero coupon bond with a €1,000 par value that has a yield to maturity of i_€ = 5 percent.