Question

Bananic Ltd. raised $30 million by issued a 10-year, 7 percent semi-annual coupon bonds one year ago. The bond was rated grade A when issued at par. Today, the yield-to-maturity (YTM) of the bond yields an effective annual rate of return of 12 percent.

a) How many bonds did Bananic issue?

e) You friend, Mary, tells you that a speculator (i.e. an investor who speculates on short term profits) should purchase a higher coupon bond rather than a lower coupon bond if a credit event (a “credit event” occurs when a person or organization defaults on a significant transaction, in which he or she is unable to honor the terms of the contract entered) is foreseen. Do you agree with her? Explain your answer. [within 60 words]

Answer 1

A)

In here bond was issued at the par value and as per the United Nations have a face par value =$1000

No of bonds issued baniac Ltd = Raised amount by baniac ltd / Face value of every bond

Numbers of bonds issued by baniac ltd= $30,000,000 / $1000 = $ 30,000

E)

In my opinion, iam not agree with her as there is available in the risks in the deals and event of bonds.If a credit event is expect then in this case the bonds will controls a lots of risk in it and after all the bonds will sold out with some discounted prices with the higher coupon rate and lower bond price, so the current yield will also increases by declining in here. It's iam not agree with her.