In: Accounting
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.