MC Triple A Rated Bond Issue Offer a Higher or Lower Yield Question

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For calculation problems, show your intermediate steps or you will receive no credit. Textbook Questions: Ch 16: 3, 4, 8, 9, 14, 15 3. Issuer Corporation triple A Corporation double B Corporation triple C Corporation double D Corporation triple E Rating Yield (%) 7.87 Spread (bps) 50 Treasury benchmark 10 A 7.77 A 10 40 8.60 72 8.66 78 30 A A 30 9.43 155 30 A For the corporate bond issues reported in the table above, answer the following questions: a. Should a triple-A-rated bond issue offer a higher or lower yield than a double-A-rated bond issue of the same maturity? b. What is the spread between the corporation A’s issue and corporation B’s? c. Is the spread reported in part (b) consistent with your answer to part (a)? d. The yield spread between these two bond issues reflects more than just credit risk. What other factors would the spread reflect? e. Corporation B’s issue is not callable. However, corporation A’s issue is callable. How does this information help you understand the spread between these two issues? 4. The following yields were reported on August 4, 2014, for U.S. Treasury securities, corporate bonds, and tax-exempt bonds (i.e., municipal bonds): Issuer Treasury Corporate Corporate Corporate Tax exempt Tax exempt Tax exempt Rating -AAA AA A AAA AA A 2-year 0.52 -0.52 0.65 0.42 0.43 0.63 5-year 1.75 1.87 2.02 2.12 1.15 1.30 1.47 10-year 2.56 2.92 3.26 3.42 2.15 2.44 2.42 a. Why is the yield on a tax-exempt security less than the yield on a Treasury security of the same maturity and credit rating? b. Why is the yield on a tax-exempt security less than the yield on a corporate security of the same maturity and credit rating? c. What appears to be the relationship between yield and maturity for corporate bonds? d. For an investor in the 40% marginal tax bracket, compare the yield on the two-year AA-rated corporate bond and the tax-exempt bond on an equivalent-taxable yield basis. 8. a. What is a yield curve? b. Why is the Treasury yield curve closely watched by market participants? 9. What is meant by a “spot rate”? 14. You observe the Treasury yield curve on page 411 (all yields are shown on a bondequivalent basis). All securities maturing from 1.5 years on are selling at par. The six-month and one-year securities are zero-coupon instruments. a. Calculate the missing spot rates. b. What should the price of the six-year Treasury security be? c. What is the implicit six-month forward rate starting in the sixth year? 15. a. Using the theoretical spot rates in table 16.2, calculate the theoretical value of a 7%, sixyear Treasury bond. b. Using the theoretical spot rates in table 16.2, calculate the two-year forward rate four years from now. Ch 17: 4, 8, 13, 16 4. What is the purpose of a prospectus?” 8. In September 2013, Twitter Inc. acquired MoPub (a mobile ad startup). The acquisition occurred a few days prior to Twitter’s announcement that the company was going public. What document did Twitter Inc. have to file with the SEC as a result of the acquisition? 13. The FewerSearches.Net company is using a Dutch auction to do an IPO of its stock. Ten million shares are to be issued. The table below lists the bids and number of shares at each bid price: a. Who are the winning bidders? b. How much will each winning bidder pay for a share of FewerSearches.Net? c. How much of the security will be allocated to each winning bidder? d. How much will FewerSearches.Net receive in proceeds before fees are paid? 16. What is meant by a “completely integrated world capital market”? Ch 18: 1, 8, 11, 18, 22 1. How do secondary markets benefit investors? 8. a. Why would an investor sell short a security? b. What happens if the price of a security that is sold short rises? 11. What is the difference between a broker and a dealer? 18. a. What is meant by an “information-motivated trade”? b. What is meant by an “informationless trade”? 22. Indicate why you agree or disagree with the following statement: “An investor who believes a market is price efficient should pursue an active investment strategy.”
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For calculation problems, show your intermediate steps or you will receive no credit.
Textbook Questions:
Ch 16: 3, 4, 8, 9, 14, 15
3.
Issuer

Rating

Corporation
triple
A
Corporation
double
B

Yield (%)

Spread (bps)

7.87

50

Treasury
benchmark
10

A
7.77
A

Corporation
triple
C

10
40

8.60

72

8.66

78

30

A

Corporation
double
D

A

Corporation
triple
E

30

9.43

155

30

A

For the corporate bond issues reported in the table above, answer the following questions:
a. Should a triple-A-rated bond issue offer a higher or lower yield than a double-A-rated bond
issue of the same maturity?
Ans:

Lower yield

b. What is the spread between the corporation A’s issue and corporation B’s?
Yield spread= Corporation A yield =7.87% -

Corporation B yield

7.77%

=0.1% or 0.001
c. Is the spread reported in part (b) consistent with your answer to part (a)?

Yes, given the fact that corporation A has triple A bond rate compared to corporation B, it
would definitely result to a lower yield.
d. The yield spread between these two bond issues reflects more than just credit risk. What other
factors would the spread reflect?
There are other possible factors that could affect the spread including type of issuer,
perceived credit worthiness, maturity of the instrument, provisions, taxability and liquidity
of security.
e. Corporation B’s issue is not callable. However, corporation A’s issue is callable. How does
this information help you understand the spread between these two issues?
Since corporation A is callable it means that it will cause the investors to demand higher
return on corporation A’s bond compared to identical bonds’ rate because it will dominate
the future interest rates. If they are not callable, on the other hand, the spread will not yield
to an extra premium required by investors if they will accept callable bond.
4. The following yields were reported on August 4, 2014, for U.S. Treasury securiti...

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