Study with the several resources on Docsity
Earn points by helping other students or get them with a premium plan
Prepare for your exams
Study with the several resources on Docsity
Earn points to download
Earn points by helping other students or get them with a premium plan
An in-depth analysis of junk bonds, their valuation, and the relationships between bond prices, interest rates, and investor's required rate of return. It covers topics such as bond cash flows, bond yields, and the impact of interest rates on bond prices. Additionally, it discusses the risks for bondholders, including interest rate risk, default risk, and call risk.
Typology: Study notes
1 / 130
This page cannot be seen from the preview
Don't miss anything!
Covers Chapters 7, 8, 12, 13, 14.
Contents in Chapters 12, 13, 14 not covered in
class/assignments are NOT required.
Important: Review the end-of-chapter
assignments solutions and lecture notes on
Blackboard. Read the textbook for context.
Understand the formulas. The formula sheet
is posted on Blackboard and will be provided
during exam.
30 questions/problems, all multiple-choice.
Making Money, Inc.
Balance Sheet
At December 31, 2004
ASSETS LIABILITIES & SE
Current Assets: Current Liabilities:
Cash and equivalents $15 Accounts Payable $
S-T Investments 65 Accrued Liab. 20
Accounts Rec., net 315 S-T Notes payable 30
Inventories 415 N/P Bank - LOC 4
Total Current Assets 810 Curr. Bond redempt. 6
Total Current Liab. 220
PP & E, at cost 920 Intermediate-term loans 20
Less: A/D -50 L-T bonds, excl. current 560
Net PP & E 870
Preferred stock (4k sh.) 40
Common stock ( 50k sh.) 30
Addition paid-in capital 100
Retained earnings 710
Total common equity 840
Total Assets $1,680 Total Liab. and equity $1,
Bonds
Bonds contain two parts:
This is
a single
sum.
This is an
ordinary
annuity.
Country and currency do not match.
Par value is the face value of the bond, returned to the
bondholder at maturity regardless of the price paid at
the time of purchase.
In general, corporate bonds are issued at denominations
or par value of $1,000.
Prices are quoted as a % of face value. Thus a bond
quoted at 112 can be bought at 112% of its par value in
the market.
The percentage of the par value of the bond that will be
paid periodically in the form of interest.
Example: A bond with a $1,000 par value
and 5% coupon rate will pay $50 annually (.05*1000)
or $25 (if interest is paid semi-annually).
Call provision gives corporation the option to redeem
the bonds before the maturity date.
For example, if the prevailing interest rate goes down,
the firm may want to pay off the bonds early and
reissue at a more favorable interest rate.
Issuer must pay the bondholders a premium.
Not all bonds have a call provision.
An indenture is the legal agreement between the firm
issuing the bond and the trustee who represents the
bondholders.
Many of the terms seek to protect the status of bonds
from being weakened by managerial actions or by other
security holders.
Moody’s and Standards and Poor’s (S&P) Ratings:
AGENCY INVESTMENT GRADE JUNK BONDS
Moody’s Aaa Aa A Baa Ba B Caa C
S & P AAA AAA BBB BBB CCC D
high grade medium grade low and very low grade
High-risk, high-yield
-What risk do bond ratings rate?
