The Valuation and Characteristics of Bonds
Unless otherwise indicated, assume that the par value for the following questions is $1,000.
1. Describe the bondhonlder's claim on the firm's assets and income.
2. What are the basic differences between book value, liquidation value, market value, and intrinsic value?
3. Here are data on $1,000 par value bonds issued by Microsoft, GE Capital, and Morgan Stanley at the end of 2012. Assume you are thinking about buying these bonds as of January 2013. Answer the following questions:
a. Assuming interest is paid annually, calculate the values of the bonds if your required rates of return are as follows: Microsoft, 6%; GE Capital, 8%; and Morgan Stanley, 10%; where
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Microsoft
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GE Capital
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Morgan Stanley
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Coupon interest rate
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5.25%
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4.25%
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4.75%
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Years to maturity
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30
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10
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5
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b. At the end of 2013, the bonds were selling for the following amounts:
Microsoft $1,100
GE Capital $1,030
Morgan Stanley $1,015
What are the expected rates of return for each bond?
c. How would the value of the bonds change if (1) your required rate of return (rb) increased 2 percentage points or (2) decreased 2 percentage points?
d. Explain the implication of your answers in part (b) in terms of interest rate risk, premium bonds, and discount bonds.
e. Should you buy the bonds? Explain.