Question

In: Finance

a, This bond is callable. This means that

Issuer      Symbol                   Callable   Coupon _rate      Maturity                  Moody Rating        Price        Yield

MMM         BRK3680632     Yes          7%                            10/21/2030            Aa3                            120           _____

a, This bond is callable. This means that

  1. MMM bondholders can convert bond to stocks when the bond is called.

  2. MMM company is expected to call back this bond when the market interest rate decreases.

  3. MMM is expected to call back this bond when MMM stock price increases.

  4. MMM is expected to call back this bond when MMM stock price decreases.


b, The coupon rate is 7% annually. How much is the annual coupon?

  1. $0.7

  2. $7

  3. $70

  4. $700

c, Moody’s rating of this bond is Aa3. Who is Moody? What about the ranking, Aa3?

  1. Moody is MMM’s financial partner. Aa3 is a low ranking.

  2. Moody is a bank. Aa3 is a low ranking.

  3. Moody is a mutual fund. Aa3 is a top ranking.

  4. Moody is a bond ranking agency. Aa3 is a top ranking.


d, The current market price of this bond is 120, meaning the bond is traded at 120%*1000=$1200 in the market. This annual bond pays annual coupon at coupon rate of 7%. The bond has 10 years left to maturity. Calculate the yield to maturity (yield) of this bond? (hint: use rate function and consider this is an annual coupon bond)

  1. 4.07%

  2. 4.48%

  3. 5.08%

  4. 4.11%

Solutions

Expert Solution

Question (a)

This bond is callable. This means that:

Answer = b. MMM company is expected to call back this bond when the market interest rate decreases.

Question (b)

The coupon rate is 7% annually. How much is the annual coupon?

Answer = c. $70

(Reason = Market price is quoted at 120 (not dollar 120), which means that the market price is 120% of the par value $1000. Therefore, Par value of the bond is $1000, therefore annual coupon = $1000 x 7% = $70.)

Question (c)

Who is Moody? What about the ranking, Aa3?

Answer = d. Moody is a bond ranking agency. Aa3 is a top ranking.

Question (d)

FV = $1000

PV = -$1200

PMT = $70

N = 10

Inputting these values in financial calculator, then pressing "CPT", "I/Y", we get,

I/Y = 4.48%

Therefore, Answer = b. 4.48%

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

Describe, in at least 250 words, what bond it means for a bondto be Callable...
Describe, in at least 250 words, what bond it means for a bond to be Callable or Puttable. Why would someone call or put a bond?
Define a callable bond. How is a callable bond different from a non-callable bond? - Consider...
Define a callable bond. How is a callable bond different from a non-callable bond? - Consider a non-callable bond with an 8% coupon and with yield to maturity = 10%.  If the bond’s yield to maturity remains constant, then in one year will the bond price be higher, lower, or unchanged?  Why? - A 30-year maturity, 8% coupon bond paying coupons semiannually is callable in 5 years at a call price of $1100.  The bond currently sells at a yield to maturity (YTM)...
A.Define a callable bond. How is a callable bond different from a non-callable bond? Consider a...
A.Define a callable bond. How is a callable bond different from a non-callable bond? Consider a non-callable bond with an 8% coupon and with yield to maturity = 10%. If the bond’s yield to maturity remains constant, then in one year will the bond price be higher, lower, or unchanged? Why? Problem 3 (continued) B. A 30-year maturity, 8% coupon bond paying coupons semiannually is callable in 5 years at a call price of $1100. The bond currently sells at...
You bought a $1,000 par GM callable bond in January 2020 that is callable in 2025...
You bought a $1,000 par GM callable bond in January 2020 that is callable in 2025 at par. It has a coupon rate of 3.2%/year. When is GM likely to call the bond? You bought a $1,000 par Southern Company bond on April 1. The bond pays a coupon rate of 4%/year semiannually on December 1 and June 1. How much accrued interest did you pay?
A collateralized bond is always safer than a debenture bond. True False A callable bond is...
A collateralized bond is always safer than a debenture bond. True False A callable bond is superior to a non-callable bond because it is safer. True False
A bond is callable at the end of 10 years for $6910 or at the end...
A bond is callable at the end of 10 years for $6910 or at the end of 15 years for $8365. If the bond pays interest at j4=7%, matures at 95 in 20 years and has a face value of $8000, what price will guarantee the investor a yield of j4 =12%?
What is a corporate bond? what are the pros and con's? What is callable Bond? what...
What is a corporate bond? what are the pros and con's? What is callable Bond? what are the pros and con's?
Alex Smith, is considering an investment in a corporate bond, or a callable corporate bond. He...
Alex Smith, is considering an investment in a corporate bond, or a callable corporate bond. He has asked you to explain each and how they differ. Assume: Par=$1,000, Coupon Rate=4%, Market Rate=3%, Remaining Term=9yrs, Remaining Term to Call=4yrs, typical call premium applies • Provide a write up comparing and contrasting the different bond types • Under the assumption that Joe is very risk averse, make a recommendation, with support
A callable bond is the type of bond which can be redeemed before maturity by paying...
A callable bond is the type of bond which can be redeemed before maturity by paying extra redeem premium. The bond can be called by the issuer (company) when interest rate decreases. Gilt-Edged Bond is fixed income securities that are issued by the government of England. Because the bond is issued by the government, default risk on these bond is zero, and so it is considered as highly graded bond. Do you think it is a good idea to redeem...
How would we know the bond is Convertible, Vanilla Bond and Callable bond? If we have...
How would we know the bond is Convertible, Vanilla Bond and Callable bond? If we have to choose one bond which would be the most suitable for you?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT