Questions

Topics: Bond, Debt, Bonds Pages: 3 (679 words) Published: February 18, 2014

Assignment 2
Due Date: Feb 3rd, 2014 (Mon) by 5:00pm.

1. Consider the following two bond issues.
Bond A: 5% 15-year bond
Bond B: 5% 30-year bond
Neither bond has an embedded option. Both bonds are trading in the market at the same yield. Which bond will fluctuate more in price when interest rates change? Why?

The 30 year bond will fluctuate more in price. This is because of the sensitivity factor of bonds. The longer the bond is the more delayed the full payment is at the end of the bonds maturity. Therefore this bond is more sensitive and risky, and thus will fluctuate more in price.

2. A floating-rate issue has the following coupon formula:
1-year Treasury rate+ 30 basis points with a cap of 7% and a floor of 4.5% The coupon rate is reset every year. Suppose that at the reset date the 1-year Treasury rate is as shown below. Compute the coupon rate for the next year:

1-year Treasury rate Coupon rate
First reset date 6.1% - 6.4%
Second reset date 6.5%- 6.8%
Third reset date 6.9%- 7.0%
Fourth reset date 6.8% - 7.0%
Fifth reset date 5.7%- 6.0%
Sixth reset date 5.0%- 5.3%
Seventh reset date 4.1%- 4.5%
Eighth reset date 3.9%- 4.5%
Ninth reset date 3.2% - 4.5%
Tenth reset date 4.4%-4.7%

3. An excerpt from Cincinnati Gas & Electric Company's prospectus for the 10'/s% First Mortgage Bonds due in 2020 states,
The Offered Bonds are redeemable (though CG&E does not contemplate doing so) prior to May 1, 1995 through the use of earnings, proceeds from the sale of equity securities and cash accumulations other than those resulting from a refunding operation such as hereinafter described. The Offered Bonds are not redeemable prior to May 1, 1995 as a part of, or in anticipation of, any refunding operation involving the incurring of indebtedness by CG&E having an effective interest cost (calculated to the second decimal place in accordance with generally accepted financial practice) of less than the effective interest...
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