FIN 609A WEEK 3 CASE STUDY

1. What are the key features of bond?
2. What are call provisions and sinking fund provisions? Do these provisions make bonds more or less risky?
3. How does one determine the value of any asset whose value is based on expected future cash flows?
4. How is the value of bond determined? What is the value of a 10 year bond, $1,000 par value with 10% annual coupon if its required rate of return is 10%?
5. What would be the value of bond in part d if, just after it had been issued, the expected inflation rate rose by 3 percentage points, causing investors to require a 13% return? Would we know have a discount or a premium bond?
6. What would happen to the value of bond in part d if inflation fell and r_d declined to 7%? Would we know have a discount or a premium bond?
7. What would happen to the value of bond in part d over the time if the required rate of return remained 13%? If it remained at 7%?
8. What is the yield to maturity on a 10 year, 9% annual coupon, $1,000 par value bond sells at $887? That sells at $1,134.20? What does the fact that a bond sells at discount or at a premium tell you about the relationship between r_d and the bond’s coupon rate?