Fin571/Week 2

Chapter 5 – Question 4

A bond indenture is a contract between the bond issuer and the bondholder that specifies the terms of the bond. It states the interest rate, the dates when the interest will be paid, the bond maturity date, and other terms and conditions of the bond issue.

Par value is the nominal value (face value), or apparent worth shown on the note (security, bond, share, etc.)

The principal is the total amount being borrowed.

Maturity is the end of the life of note (security, bond, share, etc.).

Call provision is a clause which allows the issuer to redeem the note before its maturity date.

A sinking fund is a financial reserve set aside for future repayment of a liability.

Chapter 5 – Question 11

The interest rate risk is the probability that market interest rates will rise higher than the interest rate earned on investments. The longer the term of the bond, the higher the interest rate risk. The interest rate risk is related to the maturity of a bond and its coupon rate in that market prices fluctuates. Drops and raises in interest rates raises and lowers the par value of the note.

Chapter 5 – Problem A6

1,120 = 46 [(1+r/2)12 – 1] + 1,000 = 7.81%

(r/2)(1+r/2)12 (1+r/2)12

1,000 = 46 [(1+r/2)12 – 1] + 1,000 = 9.20%

(r/2)(1+r/2)12 (1+r/2)12

785 = 46 [(1+r/2)12 – 1] + 1,000 = 12.43%

(r/2)(1+r/2)12 (1+r/2)12

Chapter 7 – Question 8

The market will pay an investor for taking on nondiversifiable risk, but not diversifiable risk because the risk is much higher when not diversified and in order to receive investors, the market must entice them. In diversification, a loss in one asset class is usually offset by a gain in another asset. This is not available in nondiversifiable.

Chapter 7 – Question 13

It is possible for an asset to have a negative beta. The asset does not have negative risk, but the asset will have lower returns...