5 Fixed-Income Questions

wbuaal123
timer Asked: Mar 7th, 2015

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An issue of 8.5% Series C preferred stock has a par value of $75 million or $40 per share and was sold to investors several years ago at par. According to the terms of the issue, the preferred is scheduled to be redeemed in 25 years at its par value of $40 per share. Dividends are paid quarterly but analyzed as if paid annually. The stock is currently trading at a discount for $35 per share. 11. As an alternative to having the Trustee randomly select the shares to be redeemed, suppose the issuer is permitted to purchase preferred shares on the open market in order to fulfill its obligation to redeem shares. Specifically, the company can buy the shares at the market price and present them for cancellation rather than pay the Trustee $40 per share for the shares to be redeemed. Which of the following statements is most correct? a. The issuer would exercise this Delivery Option when the price is less than $40. b. The issuer would exercise this Delivery Option when the price is greater than $40. The issuer would exercise this Acceleration Option when the price is less than $40. d. The issuer would exercise this Acceleration Option when the price is greater than $40. c. e. The issuer would most likely never exercise this Delivery Option unless the price is less than $25. 12. Assume the year 16 redemption is only one week away and the issuer has not purchased any shares in the open market. What factors might cause the circumstance described in question #9 to occur? a. Interest rates have increased since the preferred was issued. b. Interest rates have decreased since the preferred was issued. The shares are held by a small number of institutional investors. d. Both answers a. and c. could be a cause. e. None of the above factors could be a cause. C. 13. If the issuer buys shares in the market and is able to submit them to the Trustee at the next redemption is lieu of cash, what effect this will have on the expected rate of return for investors? a. The expected rate of return will be reduced. b. The expected rate of return will be increased. c. The expected rate of return will be unchanged. d. All of the above answers are correct. None of the above answers are correct. e. . An issue of 9.60% senior debentures matures on February 15, 2024 and currently trade at 105. Interest is paid semi- annually and February 15 is a coupon anniversary date. (Today is February 15 so term to maturity is 9 years.] The debentures are callable on or at any time thereafter on the dates shown on the schedule below for the prices shown on the schedule. First call is 4 years away. W February 15, Call Price 2015-2018 No Call 2019 2020 2021 2022 2023 104% 103% 102% 101% 100.5% 36. What is the issuer's "breakeven interest rate" for refinancing the bonds on February 15, 2019 if the issuer has a tax rate of 35% and the bond was issued at par? a. 4.34% b. 5.64% c. 6.95% d. 8.67% e. 13.91% 37. Assuming interest rates and credit quality remain at their current levels: a. It would be profitable for the issuer to refinance and call the bonds on February 15, 2019. b. It would NOT be profitable for the issuer to refinance and call the bonds on February 15, 2019. C. The issuer would be indifferent to refinancing and calling the bonds on February 15, 2019. d. All of the above answers are correct. None of the above answers is correct. e.
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