31 Aug CT5 Option 1
Option #1
Question 1: Expected Yield
You own a 5% bond maturing in two years and priced at87%. Suppose that there is a 10% chance that at maturity the bond will defaultand you will receive only 40% of the promised payment. What is the bond’spromised yield to maturity? What is its expected yield (i.e., the possibleyields weighted by their probabilities)?
Question 2: Default Probability
The following table shows some financial data for twocompanies:
|
|
A |
B |
|
Total assets |
$1,552.1 |
$1,565.7 |
|
EBITDA |
-60 |
70 |
|
Net income + interest |
-80 |
24 |
|
Total liabilities |
814.0 |
1537.1 |
a. Calculate the probability of default for the twocompanies.
b. Which company has the higher probability?
Question 3: Bond Contracts
Refer to the following information:
|
Amount issued |
$400 million |
|
Offered |
Issued at a price of 101.50% plus accrued interest (proceeds to company 101.300%) through First Boston Corporation. |
|
Interest |
9.25% per annum, payable February 15 and August 15. |
a. Supposethe debenture was issued on September 1, 1992, at 101.50%. How much would youhave to pay to buy one bond delivered on September 15? Don’t forget to includeaccrued interest.
b. Whatis the amount of the first interest payment?
Question 4: Covenants
ABC Corp. is prohibited from issuing more senior debtunless net tangible assets exceed 150% of senior debt. Currently, the companyhas outstanding $100 million of senior debt and has net tangible assets of $201million. How much more senior debt can ABC Corp. issue?
Question 5: Convertible Bonds
ZEN Inc. is financed by 3 million shares of commonstock and by $5 million face value of 8% convertible debt maturing in 2026.Each bond has a face value of $1,000 and a conversion ratio of 200. What is thevalue of each convertible bond at maturity if ZEN’s net assets are:
a. $30million?
b. $4million?
c. $20million?
d. $5million?
Your paper should be three pages in length (excludingcover page and references)
