Management Chapter 11 The Differences Between The Japanese And Us

Solutions for Chapter 11: Questions and Problems

CHAPTER 11

BOND FUNDAMENTALS

Answers to Questions

1. A bond is said to be “called” when the issuer, at its own discretion, “calls” in the bond,

2. The three factors affecting the price of a bond are coupon, yield, and term to maturity.

The relationship between price and coupon is a direct one – the higher the coupon, the

3. For a given change in the level of interest rates, two factors that will influence the relative

change in bond prices are the coupon and maturity of the issues. Bonds with longer

4. A call feature and a sinking fund are bond indenture provisions that can affect the

maturity of the bond issue. Specifically there are three alternative call features: (1) freely

5. The interest income off of all three instruments are taxed the same. The difference

between the purchase price and maturity value of T-bills is considered interest, not capital

6. Several institutions that participate in the market are life insurance companies,

commercial banks, property and liability insurance companies, private and governmental

retirement and pension funds, and mutual funds. They participate in the market because

Solutions for Chapter 11: Questions and Problems

7. An investor should be aware of the trading volume for a particular bond because a lack of

8. Bond ratings provide a very important service in the market for fixed income securities

because they provide the fundamental analysis for thousands of issues. The rating

9. The differences between the Japanese and U.S. debt markets are clear from Exhibit 11.1.

The Japanese bond market is dominated by government bonds, partly due nearly a decade

10. Government agency issues, although not direct issues of the government itself, typically

11. The difference between a foreign bond and a Eurobond can be broken down as a

difference in issuer and the market in which they are issued. For example, a foreign bond

in Japan (e.g., a Samurai) is denominated in the domestic currency (yen) and is sold in

Solutions for Chapter 11: Questions and Problems

– 86 –

CHAPTER 11

Answers to Problems

1.

Assuming all other relevant factors are equal, the corporate bond carrying an 8% coupon

and selling at par offers a better return than a 5 1/2% zero coupon bond in an RSP.

2(b). PV = $1,000 / (1.05)40 = 142.05

The discount rate is 10% annually/2 interest payments per year which equals 5% for 40

semi-annual periods (20 years × 2 interest payments per year)

3(b). PV = $1,000 / (1.04)24 = 390.12

The discount rate is 8% annually/2 interest payments per year which equals 4% for 24

semi-annual periods (12 remaining years × 2 interest payments per year)

07639.

72.

055.

28.1

055.

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Solutions for Chapter 11: Questions and Problems

– 87 –

4(b). PV = $1,000 / (1 + r)n inserting the known items,

$601 = $1,000 / (1.04)n

Solving algebraically or with a financial calculator (PV=-601; FV=1000; r=4; CPT