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Question

Answered

Question 1: Expected Yield

You own a 5% bond maturing in two years and priced at 87%. Suppose that there is a 10% chance that at maturity the bond will default and you will receive only 40% of the promised payment. What is the bond’s promised yield to maturity? What is its expected yield (i.e., the possible yields weighted by their probabilities)?

Question 2: Default Probability

The following table shows some financial data for two companies:

 

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 two companies.

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.Suppose the debenture was issued on September 1, 1992, at 101.50%. How much would you have to pay to buy one bond delivered on September 15? Don’t forget to include accrued interest.

b.What is the amount of the first interest payment?

Question 4: Covenants

ABC Corp. is prohibited from issuing more senior debt unless net tangible assets exceed 150% of senior debt. Currently, the company has outstanding $100 million of senior debt and has net tangible assets of $201 million. How much more senior debt can ABC Corp. issue?

Question 5: Convertible Bonds

ZEN Inc. is financed by 3 million shares of common stock 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 the value of each convertible bond at maturity if ZEN’s net assets are:

a.$30 million?

b.$4 million?

c.$20 million?

d.$5 million?

FIN500-Principles of Finance

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