Question

1.

In 1996, allegations were made against Moody’s that it was issuing ratings on bonds it had not been hired to rate, in order to pressure issuers to pay for their service.

The government conducted an inquiry, but charges of antitrust violations were dropped. Even though no legal action was taken, does an ethical issue exist?

2.

What is a bond indenture, and what are some of the important features?

3.

DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the:

A

Coupon rate will also increase.

B

Current yield will decrease.

C

Market price of the bond will decrease.

D

Coupon payment will increase.

E

Yield to maturity will be less than the coupon rate.

Answer 1

1)Yes ethical issue exists here since the company is not hired to rate the bonds it does not have rights to rate them and release in public . The due dilligence will not be accurate as it does not have enough information to rate the bonds if it not hired

2)Bond indenture is a legal contract between bond issuer and receiver which is having a legal implications and agreement. The data it includes are:
terms of bonds,maturity date,issue date, coupon rate, repayment frequency,any call provisions etc

3)the bond price and interest rate(market) are inversely proportional to each other , here the market rate increases so price of bond decreases
it is option C
there will be no change to coupon rate so coupon payment will not change