QUESTION Bond Yields BDJ Co. wants to issue new 10-year bonds for some muchneeded expansion projects. The company currently has 8 percent coupon bonds on the market that sell for $1,095, make semiannual payments, and mature in 10 years. What coupon rate should the company set on its new bonds if it wants them to […]
QUESTION Cash versus Stock Payment Eastman Corp. is analyzing the possible acquisition of Kodiak Company. Both firms have no debt. Eastman believes the acquisition will increase its total after tax annual cash flows by $2.6 million indefinitely. The current market value of Kodiak is $102 million, and that of Eastman is $140 million. The appropriate […]
QUESTION You are considering the purchase of a convertible bond issued by Bildon Enterprises, a noninvestment- grade medical service firm. The issue has seven years to maturity and pays a semiannual coupon rate of 7.625 percent (i.e., 3.8125 percent per period). The issue is callable by the company at par and can be converted into […]
QUESTION Put-call-forward parity and range forward positions both involve the purchase of a call option and the sale of a put option (or vice versa) on the same underlying asset. Describe the relationship between these two trading strategies. Is one a special case of the other? A range forward is actually an option strategy that […]
QUESTION Evaluate the following substitution swap: You currently hold a 25-year, 9.0 percent coupon bond priced to yield 10.5 percent. As a swap candidate, you are considering a 25-year, Aa-rated, 9.0 percent coupon bond priced to yield 10.75 percent. (Assume a one-year work-out period and reinvestment at 10.5 percent.) Current Bond Candidate Bond Dollar investment […]
QUESTION CFA Examination Level II Patrick Wall is considering the purchase of one of the two bonds described in the following table. Wall realizes his decision will depend primarily on effective duration, and he believes that interest rates will decline by 50 basis points at all maturities over the next six months. BOND DESCRIPTIONS Characteristic […]
QUESTION CFA Examination Level II On May 30, 1999, Janice Kerr is considering purchasing one of the following newly issued 10-year AAA corporate bonds shown in the following exhibit. Kerr notes that the yield curve is currently flat and assumes that the yield curve shifts in an instantaneous and parallel manner. BOND CHARACTERISTICS Description Coupon […]
QUESTION As the chief investment officer for a money management firm specializing in taxable individual investors, you are trying to establish a strategic asset allocation for two different clients. You have established that Ms. A has a risk-tolerance factor of 8 while Mr. Bs risk-tolerance factor is 27. The characteristics for four model portfolios follow: […]
QUESTION CFA Examination Level II Westfield Capital Management Companys equity investment strategy is to invest in companies with low price-to-book ratios, while taking into account differences in solvency and asset utilization. Westfield is considering investing in the shares of either Jerrys Department Stores (JDS) or Miller Stores (MLS). a. Calculate each of the following ratios […]
QUESTION A $1,000 face value corporate bond with a 6.75% coupon (paid semiannually) has 10 years leftto maturity. It has a credit rating of BB and a yield to maturity of 8.2%. The firm recentlybecame more financially stable and the rating agency is upgrading the bonds to BBB. Thenew appropriate discount rate will be 7.1%. […]
