Tutorial 13

1. Define the following types of bonds :

(a) Catastrophe bond

(b) Eurobond
(c) Zero-coupon bond
(d) Samurai bond
(e) Junk bond
(f) Convertible bond
(g) Serial bond
(h) Equipment obligation bond
(i) Original-issue discount bond
(j) Indexed bond

2. What is the option embedded in a callable bond ? A putable bond ?

3. What would be the likely effect on a bond’s yield-to-maturity (YTM) of:

(a) An increase in the issuing firm’s times-interest-earned ratio ?
(b) An increase in the issuing firm’s debt-equity ratio ?
(c) An increase in the issuing firm’s quick ratio ?

4. A coupon bond paying semiannual interest is reported as having an ask price of 117%
of its $1,000 par value. If the last interest payment was made 1 month ago and the
coupon rate is 6%, what is the invoice price of the bond ?

5. A zero-coupon bond with face value $1,000 and maturity of 5 years sells for $746.22.
(a) What is its yield-to-maturity (YTM) ?
(b) What will happen to its YTM if its price falls immediately to $730 ?

6. Why do bond prices go down when interest rates go up ? Don’t bond investors like to
receive high interest rates ?

7. Two bonds have identical times to maturity and coupon rates. One is callable at 105,
the other at 110. Which should have the higher YTM ? Why ?

8. Consider a bond with a 10% coupon and with YTM = 8%. If the bond’s YTM remains
constant, then in 1 year will the bond price be higher, lower or unchanged ? Why ?

9. A bond with an annual coupon rate of 4.8% sells for $970. What is the bond’s current
yield ?

10. An investor believes that a bond may temporarily increase in credit risk. Which of the
following would be the most liquid method of exploiting this ?
(a) The purchase of a credit default swap.
(b) The sale of a credit default swap.
(c) The short sale of the bond.