Question

In: Accounting

Your father is retired and living on his pension benefits and the interest he gets from...

Your father is retired and living on his pension benefits and the interest he gets from savings.
However, the interest income he receives has dwindled to only 2 percent a year on his
RM200,000 in savings as interest rates in the economy have dropped. You have been
thinking about recommending that he purchase some corporate bonds with at least part of his
savings as a way of increasing his interest income.
Specifically, you have identified three corporate bond issues for your father to consider. The
first is an issue from the Lazza Bhd that pays annual interest based on a 7.5% coupon rate and
has 10 years before it matures. It is an AA rating bond and currently is selling at RM1,100.
The second bond with B rating was issued by Pleton Bhd, and it pays 7.8% semi-annually
interest has 7 years until it matures. The market price of the bond is RM980. The final bond
issue was sold by Zellig Bhd, and it pays an annual coupon interest payment based on a rate
of 7.25%. It was 20 years bond and has been issued for 7 years. The bond is currently selling
at RM1,050 and it has BBB rating. All three bond issues have a RM1,000 par value.
Required:


6. What is the yield to maturity for each bond?
A. 6.19%; 8.88%; 6.7%.
B. 6.19%; 4.08%; 6.7%.
C. 6.19%; 4.08%; 6.38%.
D. 6.19%; 8.88%; 6.38%.

7. From (a), determine the value of each bond.
A. RM1487.23; RM945.43; RM1,047.91
B. RM1487.23, RM945.43, RM1046.76.
C. RM1487.23; RM1224.55; RM1046.76.
D. RM1487.23; RM1224.55; RM1047.91.

8. The importance of bond ratings as follows ACCEPT ……..
A. it is an indicator of its default risk
B. most bonds purchased by institutions rather than individuals
C. lower grade bonds have lower required rates of return than high grade bonds
D. If a firm’s bonds fall below BBB, it will have a difficult time selling new bonds.

9. Which of the following statements is CORRECT?
A. A bond is likely to be called if its coupon rate is below its YTM.
B. A bond is likely to be called if its market price is below its par value.
C. A bond is likely to be called if its market price is equal to its par value.
D. A bond is likely to be called if it sells at a discount below par.

10. When comparing annuity due to ordinary annuities, annuity due annuities will have
higher ______________.
A. present values.
B. annuity payments.
C. future values.
D. both A and C.

Solutions

Expert Solution


Related Solutions

Your father is retired and living on his pension benefits and the interest he gets from...
Your father is retired and living on his pension benefits and the interest he gets from savings. However, the interest income he receives has dwindled to only 2 percent a year on his RM200,000 in savings as interest rates in the economy have dropped. You have been thinking about recommending that he purchase some corporate bonds with at least part of his savings as a way of increasing his interest income. Specifically, you have identified three corporate bond issues for...
Your father gets a good job and wants to deposit in his account $1200 at the...
Your father gets a good job and wants to deposit in his account $1200 at the end of each year for 3 years. He earns 2% interest paid annually. How much will be in his account after 3 years? *
Amir Labib gets a reduced rate from his auto insurance company because he represents in his...
Amir Labib gets a reduced rate from his auto insurance company because he represents in his application that he commutes less than ten miles a day to work. Three years later, he and his wife buy a new residence, farther away from work, and he begins a fifteen-mile-a-day commute. The rate would be raised if he were to mention this to his insurance company. The insurance company sees that he has a different address, because they are mailing invoices to...
Your father turned 55 today, and he is planning to save $12,000 per year for his...
Your father turned 55 today, and he is planning to save $12,000 per year for his retirement (assume that he deposits this amount today and at the start of each year). These savings should earn 7.10% per annum. He plans to retire on the day he reaches his 64th birthday. He already has $584,000 in his retirement fund. After his retirement, his savings can be assumed to earn 6.40% per annum. Assuming he lives until his 85th birthday, how much...
Doug​ Klock, 56​, just retired after 31 years of teaching. He is a husband and father...
Doug​ Klock, 56​, just retired after 31 years of teaching. He is a husband and father of three​ children, two of whom are still dependent. He received a ​$154 comma 000 ​lump-sum retirement bonus and will receive ​$2 comma 500 per month from his retirement annuity. He has saved  $ 145 comma 000 in a​ 403(b) retirement plan and another ​$97 comma 000 in other accounts. His​ 403(b) plan is invested in mutual​ funds, but most of his other investments...
Doug​ Klock, 56 just retired after 31 years of teaching. He is a husband and father...
Doug​ Klock, 56 just retired after 31 years of teaching. He is a husband and father of three​ children, two of whom are still dependent. He received a $140,000​lump-sum retirement bonus and will receive 2,700 per month from his retirement annuity. He has saved $151,000 in a​ 403(b) retirement plan and another​$93,000 in other accounts. His​ 403(b) plan is invested in mutual​ funds, but most of his other investments are in bank accounts earning 2 or 3 percent annually. Doug...
Your mother and father are retired and need income to live on. The local financial advisor...
Your mother and father are retired and need income to live on. The local financial advisor offers to sell them a product that will provide them $75,000 a year for 15 years. Prevailing interest rates are 8%. The cost to purchase the product is $750,000. They asked you to evaluate the offer. Do you recommend they purchase the product? Why? If prevailing interest rates were 5%, would it change your recommendation? Why?
Mr. Jones is a retired 84 year-old farmer. He is still living in the farmhouse, but...
Mr. Jones is a retired 84 year-old farmer. He is still living in the farmhouse, but rents the farm land. He has an 8th grade education. He is recently widowed, living alone, and adjusting to managing his health care on his own since his wife passed away. One area of concern is his medication management since he is taking 10 different prescription medications plus his 6 nonprescription medications. Mr. Jones is currently taking: Ferrous sulfate 240 mg daily for anemia...
Mr. Jones is a retired 84 year-old farmer. He is still living in the farmhouse, but...
Mr. Jones is a retired 84 year-old farmer. He is still living in the farmhouse, but rents the farm land. He has an 8th grade education. He is recently widowed, living alone, and adjusting to managing his health care on his own since his wife passed away. One area of concern is his medication management since he is taking 10 different prescription medications plus his 6 nonprescription medications. Mr. Jones is currently taking: Ferrous sulfate 240 mg daily for anemia...
You grandfather has retired with a pension that is worth $370,000. His life expectancy is 19...
You grandfather has retired with a pension that is worth $370,000. His life expectancy is 19 more years. If the pension payments are based on an assumed return of 8 percent per year, What will be your grandfather's annuity payment at the end of each year?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT