Reference no: EM132999578

Address all parts of the problem below. For those questions which require it, you need to show relevant calculations for each part of the problem, and those calculations should be done using Excel functions/formulas.

The Valuation and Characteristics of Bonds

Please answer the following:

1. Distinguish between debentures and mortgage bonds.

2. a. How does a bond's par value differ from its market value?

b. Explain the differences among a bond's coupon interest rate, current yield, and required rate of return.

3. What factors determine a bond's rating? Why is the rating important to the firm's manager?

4. What are the basic differences among book value, liquidation value, market value, and intrinsic value?

5. Hamilton, Inc. bonds have an 8 percent coupon rate. The interest is paid semiannually, and the bonds mature in 5 years. Their par value is $1,000.

a. If your required rate of return is 10 percent, what is the value of the bond?

b. If your required rate of return is 10 percent and interest is paid annually, what is the value of the bond?

6. ABC bonds have an annual coupon rate of 8 percent and a par value of $800 and will mature in 20 years. If you require a return of 7.25 percent, what price would you be willing to pay for the bond? What happens if you pay more for the bond? What happens if you pay less for the bond?

7. You own a bond that pays $55 in annual interest, with a $1,000 par value. It matures in 17 years and your required rate of return is 7 percent. What is the value of the bond?

8. XYZ Corp plans on issuing bonds that pay no interest but can be converted into $2,200 (you receive when bond matures), 12 years from their purchase. It is determined that they should yield 6.5%, compounded annually. What price should XYZ Corp sell the bonds?