solution manual for 《investment analysis and portfolio management》 ch18

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1、CHAPTER 18BOND FUNDAMENTALSAnswers to Questions1. A bond is said to be “called” when the issuer, at its own discretion, “calls” in the bond, and purchases it from the holder at a price stipulated in the bond indenture. When a bond is “refunded,” it is called, but the firm reissues bonds for the same

2、 amount with a lower coupon rate. On a pure call (without refunding), the issue is usually retired.2. The three factors affecting the price of a bond are coupon, yield, and term to maturity. The relationship between price and coupon is a direct one - the higher the coupon, the higher the price. The

3、relationship between price and yield is an inverse one - the higher the yield the lower the price, all other factors held constant. The relationship between price and maturity is not so clearly evident. Price changes resulting from changes in yields will be more pronounced, the longer the term to ma

4、turity.3. For a given change in the level of interest rates, two factors that will influence the relative change in bond prices are the coupon and maturity of the issues. Bonds with longer maturity and/or lower coupons will respond most vigorously in a given change in interest rates. Other factors l

5、ikewise cause differences in price volatility, including the call features, but these factors are typically much less important.4. A call feature and a sinking fund are bond indenture provisions that can affect the maturity of the bond issue. Specifically there are three alternative call features: (

6、1) freely callable provision that allows the issuer to retire the bond at any time during the life of the bond issue, (2) noncallable provision that does not allow the issuer to retire the bond prior to its maturity, and (3) deferred call provision that allows the issuer to retire the bond after a d

7、esignated period of time. A sinking fund requires that a bond be paid off during the life of the issue rather than at maturity.5. Interest income from municipal bonds is normally not taxable by the federal government or by the state or city in which it is issued. Interest income on U.S. Treasury bon

8、ds is taxable at the federal level, but not by state or local governments. Corporate bond interest is taxable at all levels, as are capital gains from any of the bonds.6. Several institutions who participate in the market are life insurance companies, commercial banks, property and liability insuran

9、ce companies, private and governmental retirement and pension funds, and mutual funds. They participate in the market because of restrictions on equity purchases (banks), the need for predictable cash flows (insurance companies), the tax exposure of the institutions, and the nature of the institutio

10、ns liabilities. Commercial banks are subject to normal tax exposure and have fairly short-term liability structures, so they tend to favor intermediate term municipals. Pension funds and are virtually tax-free institutions with long-term commitments, so they generally prefer high yielding long-term

11、corporate bonds.7. An investor should be aware of the trading volume for a particular bond because a lack of sufficient trading volume may make selling the bond in a timely manner impossible. As a result, prices may vary widely while the investor is trying to change his position in the bond.8. Bond

12、ratings provide a very important service in the market for fixed income securities because they provide the fundamental analysis for thousands of issues. The rating agencies conduct extensive analyses of the intrinsic characteristics of the issue to determine the default risk for the investor and in

13、form the market of the analyses through their ratings.9. Based on the data presented in Exhibit 18.1, the United States bond market share has shown the largest percentage increase, that is, a 4-percentage point increase from 1998 to 2000 (47.7% in 1998 to 51.7% in 2000). Other countries that have sh

14、own an increase in market share in that time period were Japan (18.2% to 18.6%) and the United Kingdom (3.3% to 3.6%). Euroland, the countries that have adopted the Euro as their currency, showed a decline between 1999 and 2000 from 21.5% to 20.9%. The market share for the remaining individual count

15、ries listed in Exhibit 18.1 either remained the same or had very small changes. 10. Due to the budget surpluses of the late 1990s, U.S. Government bonds share of the U.S. market dropped from 20.7% to 15.0% between 1998 and 2000. The share of all levels of government debt fell from 56.7% to 35.6%. In

16、 Germany, governments share of the domestic bond market rose form 31.8% to 35.6%. The major change in the German bond market has been the increase of bonds issued by non-bank corporations, rising from 36.8% to 44%. 11. In the United States, government agency issues although not direct issues of the

17、Treasury, carry the full faith and credit of the U.S. government. The rate of interest on these securities is higher than the rate of interest on straight Treasury bond issues. However, some of the government agency issues are subject to state and local income tax, whereas interest received on Treas

18、ury issues is exempt from state and local levies.12. The difference between a foreign bond and a Eurobond can be broken down as a difference in issuer and the market in which they are issued. For example, a foreign bond in Japan (e.g., a Samurai) is denominated in the domestic currency (yen) and is

19、sold in the domestic market (Japan), but it is sold by non-Japanese issuers. On the other hand, a Eurobond (e.g., an Euro-DM) is denominated in the domestic currency (deutschemark) but it is sold outside the domestic country in a number of national markets. These bonds are typically underwritten by

20、international syndicates. The relative size of these two markets varies by country.13. CFA Examination I (1993)The following differences exist between Eurodollar and Yankee bonds:Differences in:Eurodollar YankeePrimary market tradingOutside of U.S. U.S.Major secondary market tradingOutside of U.S. U

21、.S.RegistrationNone S.E.C.UnderwriterInternational syndicate U.S. syndicateIssuerAny entity Non-U.S. entityCouponUsually annually SemiannuallyCHAPTER 18Answers to Problems1.Assuming all other relevant factors are equal, the corporate bond carrying an 8 percent coupon and selling at par offers a bett

22、er return than a 5 1/2 percent municipal bond (with an equivalent tax yield of 7.639 percent).2(a).Present Value = Future Value x Present Value FactorPV = $1,000 x .17411 = $174.11where .17411 is the present value factor for 6% interest (12% annually/2 interest payments per year) for 30 semi-annual

23、periods (15 years x 2 interest payments per year)2(b).PV = $1,000 x .14205 = $142.05where .14205 is the present value factor for 5% interest (semi-annually) for 40 semi-annual periods.3. 3(a).For the 15% tax bracket3(b).For the 25% tax bracket3(c).For the 35% tax bracket4(a).Present Value = Future V

24、alue x Present Value FactorPV = 1,000 x .30832 = $308.32where .30832 is the present value factor for 4% interest (8% annually/2 interest payments per year) for 30 semi-annual periods (15 years x 2 interest payments per year)4(b).PV = $1,000 x 0.39012 = $390.12where .39012 is the present value factor

25、 for 4% interest for 24 semi-annual periods.4(c).PV = $1,000 x .31007 = $310.07where .31007 is the present value factor for 5% interest for 24 semi-annual periods.5(a).PV=FV x PV factor=1,000 x .09722 = $97.22where .09722 is the present value factor for 6% interest for 40 semi-annual periods.5(b).PV

26、 = FV x PV factor$601 = $1,000 x PV factor for 4% and 2N periodsSolving for the unknown (4%, 2N PV factor) = .601Using the PV table, the solution is 13 semi-annual periods, or 6 1/2 years (time to maturity). 5(c).PV = FV x PV factor$350 = $1,000 x PV factor for N/2% and 18 semi-annual periodsSolving for the unknown (N/2%, 18 periods PV factor)= .350Using the PV table, the solution is 6% semi-annual or 12% annual interest.18 - 5