# Financial Management

Submitted By Nisa5353
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Chapter 4: mini case

a. What are the key features of a bond? • Par Value • Coupon Rate • Maturity Date • Provisions to Call or Redeem Bonds • Issue Date • Default Risk b. c. What are call provisions and sinking fund provisions? Do these provisions make bonds more or less risky?

Bonds that have call provisions allow the firms who issued the bonds to recall (redeem) them back.

However, sinking fund provisions allows firms to retire funds in an orderly manner. Firms can retire funds by two ways: 1) they can call in a percentage of bonds each year or 2) they can buy them through the open market.

d. How is the value of an asset whose value is based on expected future cash flows determined?

It is determined by the present value of all future cash flows the assets will generate.

e. How is the value of a bond determined? What is the value of a 10yr, \$1000 par value bond with a 10% annual coupon if its required rate of return is 10%?

The value of a bond is determined by using the following equation: V b= INT / (1+ rd) 1 + INT / (1+ rd) 2 + … + INT / (1+ rd) n

The value of a bond with a 10yr maturity, \$1,000 par, 10% coupon rate, and a required rate of 10% is \$1000. Hence, the coupon is equal to the required rate; therefore, it’s equal to its par value.

|N |PMT |Required |FV |PV |
|10 |100 |10% |1000 |\$1,000.00 |

f. 1) What would be the value of the bond described in part d if, just after it had been issued, the expected inflation rate rose by 3% points causing investors to require a 13% return? Would we now have a discount or premium bond?

The value of the bond would fall to \$837.21. The bond would be selling…...

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