CH 6 Questions

1. A call provision on a bond issue allows the issuer to pay off the bond debt early at a cost of the
principal plus any call premium. Most of the time a bond issuer is called, it is because interest
rates have substantially declined in the economy. The issuer calls the existing bonds and issues
new bonds at the lower interest rate. This reduces the interest payments the issuer must pay each
year.

5. The 5 percent coupon bond pays annual interest of 5 percent of the bonds par value. For
$1,000 par value bond, this would be $50 per year. This interest might be paid in two payments
of $25. The price of the coupon bond tends to stay near its par value. The zero coupon bond pays
no interest payments. The bondholder earns a return from the increase of the bonds market price
over time. The bonds price is initially much lower than its par value. When the zero coupon
bond finally matures, the par value is paid.


12. Individual bondholders do not owe taxes on interest payments received from municipal
bonds. This tax advantage is more valuable to individuals who are in a higher marginal tax
bracket. Because wealth individuals are usually in a higher tax bracket, this tax advantage is
more valuable to them.



6-12

: use semi-annual compounding:
( )
61 . 343 $
910 . 2
000 , 1 $
03625 . 1
000 , 1 $
1
30
= = =
+
=
N
N
i
FV
PV


6-13

5.5% 102.08% = 0.05388 = 5.39%

6-16

Use equation 6.4:
% 33 . 4
33 . 0 1
% 9 . 2
1
yield taxable Equivalent =

=
rate tax
yield Muni



6-22

( )
( )
51 . 900 $ 56 . 502 $ 95 . 397 $
035 . 0 1
000 , 1
035 . 0
035 . 0 1
1
1
$28.00 Price Bond
20
20
= + =
+
+
(
(
(
(

=

Or N=20, I=3.5, PMT=28, FV=1000 CPT PV = -900.51
Since this is less than $1,000, it is a discount bond.

CH 7 Questions
1. They are able to participate in the economic growth of publicly traded firms without having to
manage business entities directly. They have the right to residual cash flows of corporate profits
and often receive some of these cash flows through dividends. In addition, shareholders vote on
the members for board of directors and other proposals for the company. Shareholder capital
losses are capped in that they can only lose their initial investment. Stocks are very liquid and
investors can enjoy this liquidity in both their entrance into the stock market and their exit from
it.


9. Market makers fill market orders immediately at the current stock price. This provides the
liquidity an investor needs to buy and sell stocks quickly. However, the price at which the stock
will fill cannot be guaranteed. With limit orders, the market maker will only fill the order when
the stated price is reached. This means that you can count on the execution only after your target
buy or sell price is reached, but you cannot guarantee your trade will execute with a limit order.

7-1

FV = PV (1 + i)
12,582.59 = (12,582.59-26.51) (1 + i)
i = (12,582.59/12,556.08)-1 = 0.2111%


7-7

($3.96/share 500 shares) = $1,980.00


7-19

( ) ( )
00 . 66 $
10 . 0 12 . 0
10 . 0 1 20 . 1 $ 1
model growth Constant
0
0
=

+
=

+
= =
g i
g D
P


7-21

First convert D
0
to D
1
by $0.46(1+0.145) = $0.527. Then use equation 7-7:

% 69 . 15 145 . 0 ) 12 . 44 / 527 . 0 ( return Expected
0
1
= + = + = = g
P
D
i










7-34
( ) ( )
( )
( )
( )
( )
( ) ( )
( )
( ) ( )
( )
( )
( )
( )
( ) ( )
( )
21 . 47 $ 725 . 45 549 . 0 494 . 0 444 . 0
125 . 1
11 . 0 125 . 0
11 . 0 1 25 . 1 40 . 0
25 . 1 40 . 0
125 . 1
25 . 1 40 . 0
125 . 1
25 . 1 40 . 0
125 . 0 1
25 . 0 1 40 . 0
1
1 1
1
1
1
1
1
1
1
4
4
4
3
3
2
2
0
4
2
2
4
1 0 4
1 0
3
3
1 0
2
2
1 0 1 0
0
= + + + =

+
+
+ + +
+
+
=
+

+ +
+ +
+
+
+
+
+
+
+
+
+
=
P
i
g i
g g D
g D
i
g D
i
g D
i
g D
P