Question

A company has a 6% coupon bond maturing in 2030. The bond has a call feature that can be exercised after 2020. Based on the current price, the yield to call on this bond is 6.4% and the yield to maturity is 6.7%. The yield to worst is: (Check correct answer.)                                               

______a.)	6.4%
______b.)	6.0%
______c.)	6.7%

A private placement of bonds (Indicate True or False for each statement):

______a.)	Is preceded by the filing of a registration statement and prospectus with the SEC
______b.)	Is usually completed with a small number of institutional investors
______c.)	Can easily be sold to retail investors
______d.)	Is the same as a revolving credit

Subordinated debt: (Indicate True or False for each statement)                                                  

______a.)	Ranks behind senior debt in priority of claims on the assets of the issuer
______b.)	Earns a lower rate of interest than senior debt
______c.)	Earns a higher rate of interest than senior debt

A company issued at par a 10 year 5% coupon bond four years ago. Today, with 6 years remaining to maturity bonds of comparable risk and maturity are yielding 3.5%. The company’s bond now trades (check correct answer):                                                                                                                         (3%)

______a.)	At a discount from par
______b.)	At par
______c.)	At a premium to par

Answer 1

1) ANSWER: The yield-to-worst is 6.4%.

YTM=6.7%, YTC=6.4%. The Yield-To-Worst is the least of { YTM,YTC}.

Yield-To-Maturity (YTM) is the effective Rate of Return (ROR) if the bond is held to maturity.

Yield-To-Call (YTC) of a callable bond is the effective Rate of Return (ROR) if the call option is exercised before the maturity of the bond.

Yield-To-Worst (YTW) is the worst possible ROR for the bond.

2) A private placement is a NON-PUBLIC offering. Most private placements are offered under the Regulation D and are exempt from SEC registration.

a) FALSE. Exempt from SEC registration.

b) TRUE. Usually a small number of Institutional Investors or High-Networth-Individuals (HNI's).

c) FALSE. Its is difficult to sell to reatil investors because it is a non-public offering and only HNI's are eligible.

d) FALSE. A bank provides a Revolving Credit facility to individuals and corporations with short term loan requirements.

3) A subordinated debt are debts with the lowest seniority. This means, in case of banruptcy, subordinated debt will be reapaid only after all other un-subordinated/Senior debt is repaid.

a) TRUE. In case of banruptcy, subordinated debt will be reapaid only after all other un-subordinated/Senior debt is repaid.

b) FALSE.  In case of banruptcy, subordinated debt will be reapaid only after all other un-subordinated/Senior debt is repaid. Hence, subordinated is more risky demading a higher interest rate.

c) TRUE.

4) C.

Coupon rate= 5%.

Market rate= 3.5%.

If market rate < Coupon rate, the bond trades at a PREMIUM to par value.