1 Chapter 4 Valuing Bonds MULTIPLE CHOICE 1. A 15 year, 8%, $1000 face value bond is currently trading at $958. The yield to maturity of this bond must be a. less than 8%. b. equal to 8%. c. greater than 8%. d. unknown. 2. A bond that grants the investor the right to exchange their bonds for common stock, is called a a. zero-coupon bond. b. Treasury bond. c. convertible bond. d. mortgage bond. REF: 4.3 Types of Bonds 3. Of the following bonds, which one has the highest degree of interest rate risk? a. 20 year 8% bond b. 5 year 8% bond c. 10 year 8% bond d. Not enough information. 4. Which of the following information cannot be found in a bond s indenture? a. The coupon rate. b. The maturity of the bond. c. The price of the bond. d. None of the above. REF: 4.3 Types of Bonds 5. Bonds issued by US states or local governments are called... a. Treasury bonds. b. Municipal bonds. c. Corporate bonds. d. Yankee bonds. REF: 4.3 Types of Bonds 6. Bavarian Sausage just issued a 10 year 7% coupon bond. The face value of the bond is $1,000 and the bond makes annual coupon payments. If the required return on the bond is 10%, what is the bond s price? a. $ b. $ c. $1, d. $1,256.35
2 FV:1000 PMT: 70 I/Y: 10 N: 10 PV: Bavarian Sausage just issued a 10 year 7% coupon bond. The face value of the bond is $1,000 and the bond makes semiannual coupon payments. If the required return on the bond is 10%, what is the bond s price? a. $ b. $1,000 c. $ d. $1, PMT: 70/2 I/Y: 10/2 N: 10*2 PV: Bavarian Sausage just issued a 10 year 12% coupon bond. The face value of the bond is $1,000 and the bond makes annual coupon payments. If the required return on the bond is 10%, what is the bond s price? a. $ b. $1,000 c. $1, d. $ PMT: 120 I/Y: 10 N: 10 PV: Bavarian Sausage just issued a 10 year 12% coupon bond. The face value of the bond is $1,000 and the bond makes semiannual coupon payments. If the required return on the bond is 10%, what is the bond s price? a. $1, b. $ c. $1, d. $1, PMT: 120/2 I/Y: 10/2 N: 10*2
3 PV: Bavarian Sausage just issued a 10 year 12% coupon bond. The face value of the bond is $1,000 and the bond makes annual coupon payments. If the bond is trading at $967.25, what is the bond s yield to maturity? a % b % c % d % PV: PMT: 120 N: 10 I/Y: Bavarian Sausage just issued a 10 year 12% coupon bond. The face value of the bond is $1,000 and the bond makes semiannual coupon payments. If the bond is trading at $867.25, what is the bond s yield to maturity? a % b % c % d % PV: PMT: 120/2 N: 10*2 I/Y : 7.28 yield to maturity: 2*7.28 = Bavarian Sausage just issued a 10 year 12% coupon bond. The face value of the bond is $1,000 and the bond makes semiannual coupon payments. If the bond is trading at $1,267.25, what is the bond s yield to maturity? a % b. 8.06% c % d % PV: PMT: 120 N: 10 I/Y: 8.06
4 13. Bavarian Sausage wants to issue a 10 year coupon bond. The face value of the bond is $1,000 and the bond makes semiannual coupon payments. Outstanding Bavarian Sausage 8% bonds with a remaining maturity of 10 years are currently trading at $1,145. These bonds also have a face value of $1,000 and make semiannual payments. If Bavarian Sausage wants the new bonds to sell at par, what should be the coupon rate on these bonds? a. 8.00% b. 6.05% c. 7.25% d. 9.35% PV: 1145 PMT: 80/2 N: 10/2 I/Y: coupon rate = 3.025*2 = You just bought a bond with a yield to maturity of 9.5%. If the rate of inflation is expected to be 4%, what is the real return on your investment? a. 9.50% b. 5.29% c. 4.00% d. Not enough information. r = 1.095/ = What is the value of a 15 year 10% coupon bond with a face value of $1,000. The required return on the bond is 12% and the bond makes semiannual payments. a. $ b. $1, c. $ d. $1,000 PMT: 100/2 I/Y: 12/2 N: 15*2 PV: You are offered a zero-coupon bond with a $1,000 face value and 5 years left to maturity. If the required return on the bond is 8%, what is the most you should pay for this bond? a. $ b. $ c. $1,000 d. $1,126.94
5 PMT: 0 I/Y: 8 N: 5 PV: REF: 4.3 Types of Bonds 17. You just bought a 5 year zero coupon bond with a $1,000 face value for $ What is the yield to maturity of this bond? a % b. 6.33% c. 4.69% d. 8.18% PV: PMT: 0 N: 5 I/Y: 6.33 REF: 4.3 Types of Bonds 18. You just bought a 5 year zero coupon bond with a $1,000 face value for $ What is the taxable capital gain on this bond next year? a. $ b. $68.51 c. $ d. $46.64 PV: PMT: 0 N: 5 I/Y: 6.33 PMT: 0 N: 4 I/Y: 6.33 PV: capital gain: = REF: 4.4 Bond Markets 19. The real return is 10% and the expected rate of inflation is 4.5%. What is the nominal rate? a. 4.50% b % c % d. 8.69%
6 R = (1.1)(1.045) - 1 = A one year bond offers a yield of 6% and a two year bond offers a yield of 7.5%. Under the expectations theory what should be the yield on a one year bond next year? a % b. 4.52% c. 7.38% d. 9.02% (1.075)^2 = (1.06)(1+r) r =.0902 REF: 4.5 Advanced Bond Valuation - The Term Structure of Interest Rates 21. A two year bond offers a yield of 6% and a three year bond offers a yield of 7.5%. Under the expectations theory what should be the yield on a one year bond in two years? a. 5.95% b % c. 3.06% d % (1.075)^3 = (1.06)^2(1+r) r =.1056 REF: 4.5 Advanced Bond Valuation - The Term Structure of Interest Rates 22. The yield on a one year bond is 6% today and is expected to be 8.5% next year. Based on the expectations theory, what is the yield of a two year bond today? a % b % c. 5.67% d. 7.24% (1+r)^2 = (1.06)(1.085) r =.0724 REF: 4.5 Advanced Bond Valuation - The Term Structure of Interest Rates 23. You are looking up bond prices in the newspaper and you find the following quote for a $1,000 face value treasury bond: 103:26. What is the price of this bond? a. $ b. $1, c. $1, d. $1, :26 = ( ) =
7 REF: 4.4 Bond Markets 24. You have the choice between investing in a corporate bond with a yield of 8% or a municipal bond. If your marginal tax rate is 28%, what should be the yield on the municipal bond in order to be competitive? a. 8.00% b. 5.76% c % d %.08(1-.28) =.0576 REF: 4.3 Types of Bonds 25. You have the choice between investing in a corporate bond or a municipal bond with a yield of 8%. If your marginal tax rate is 28%, what should be the yield on the corporate bond in order to be competitive? a. 8.00% b. 5.76% c % d %.08 = r(1-.28) r =.1111 REF: 4.3 Types of Bonds 26. McLaughlin Enterprises has an outstanding $1,000 par value bond with a 11% coupon that pays at the end of each year. The bond matures in nine years. Bonds of similar risk have a required return of 10%. What is the market value of the McLaughlin bond? a. $ b. $1, c. $1, d. $1, FV = 1,000 N = 9 I/YR = 10 PMT = 110 PV =? = 1, Winburn Sports & Entertainment has an outstanding $1,000 par value bond with a 11% coupon that pays semiannually at the end of each period. The bond matures in nine years. Bonds of similar risk have a required return of 10%. What is the market value of the Winburn bond? a. $1, b. $1, c. $1, d. $1,073.05
8 P/YR = 2 FV = 1,000 N = 18 I/YR = 10 PMT = 55 PV =? = 1, A 10-year Treasury bond with par value of $1,000 has a 6% coupon rate and pays interest every six months. The bond is three years old and has just made its sixth payment. The market now only requires a 5% return on the bond. What is the expected price of the bond? a. $ b. $1, c. $1, d. $1, P/YR = 2 FV = 1,000 N = 14 I/YR = 5 PMT = 30 PV =? = 1, A $1,000 par value bond that makes annual interest payments of $50 and matures in four years sells for $980. What is the yield to maturity of the bond? a. 5.57% b. 2.47% c. 4.54% d. 2.04% FV = 1,000 N = 4 PMT = 50 PV =? = 980 I/YR = Alexis Media issued five-year bonds one year ago with a 7.5% coupon that pays semi-annually (the bonds just paid the second coupon payment). Alexis announced a revised advertising revenue forecast that is quite bleak compared with the prevailing forecast at the time of the bond issuance. Investors now require a 9% return on Alexis bonds. What is the percent change in price of the bonds associated with the change in business conditions? a. 4.95% decrease b. 8.30% decrease c % decrease d % increase e. Can t determine with the information given
9 P/YR = 2 FV = 1,000 N = 8 I/YR = 9 PMT = PV =? = ( ,000)/1000 = -4.95% 31. A new one-year bond pays interest of 1.04%. A new two-year bond pays interest of 1.46%. Using expectations theory of term structure and assuming the market is in equilibrium, what interest rate does the market expect a new one year bond to have one year from now? a. 0.42% b. 1.18% c. 1.25% d. 1.88% / =.0188 REF: 4.5 Advanced Bond Valuation 32. The value of any asset a. is based upon the benefits provided by the asset in prior years. b. is based upon the benefits that the asset will provide the owner of the asset this year. c. equals the present value of future benefits accruing to the asset s owner. d. is not described by any of the above. REF: Learning Objectives 33. The greater the uncertainty about an asset s future benefits, a. the lower the discount rate investors will apply when discounting those benefits to the present. b. the higher the discount rate investors will apply when discounting those benefits to the present. c. the greater is the present value of those benefits. d. none of the above. REF: 4.1 Valuation Basics 34. You will be recieving $204, at the end of each year for the next 20 years. If the correct discount rate for such a stream of cash flows is 10% then what is the present value of the cash flows? a. $1,736, b. $4,080, c. $185, d. none of the above 204,000 * (1/.1) - ((1/.1) (1.1) 20 = 1,736, REF: 4.1 Valuation Basics, The Fundamental Valuation Model 35. A bond s coupon rate
10 a. equals its annual coupon payment divided by the bonds current market price. b. varies during the life of the bond. c. equals its annual coupon payment divided by its par value. d. both a and b are correct. 36. WeOweYou, Inc. has a 12 year bond outstanding that makes 9.5% annual coupon payments. If the appropriate discount rate for such a bond is 7%, what the the appropriate price for the bond? a. $1, b. $1, c. $1, d. $ ( (1/.07) - ((1/.07) (1.07) -12 ) ) + 1,000 (1.07) -12 = 1, WeOweEveryone, Inc. has a 12 year bond outstanding that has 9.5% coupon rate. If the appropriate discount rate for such a bond is 7%, what the the appropriate price for the semi-annual coupon paying bond? a. $1, b. $1, c. $1, d. $ ( (1/.035) - ((1/.035) (1.035) -24 ) ) + 1,000 (1.035) -24 = 1, Astro Investors is interested in purchasing the bonds of the Jetson Company. Jetson s bonds are currently priced at $1, and have 14.5 years to maturity. If the bonds have a 6% coupon rate what is the yield-to-maturity of these semi-annual coupon paying bonds? a. 5.00% b. 5.02% c. 2.51% d. 2.50% 30 ( (1/y) - ((1/.y) (1+ y) -29 ) ) + 1,000 (1 + y) -29 = 1, y =.0251 ====> 2 y = 5.02% 39. Elroy Investors is interested in purchasing the bonds of the Judy Company. Judy s bonds are currently priced at $1, and have 14 years to maturity. If the bonds have a 6% coupon rate what is the yield-to-maturity of these annual coupon paying bonds? a. 5.00% b. 4.99% c. 2.50% d. none of the above.
11 60 ( (1/y) - ((1/.y) (1+ y) -14 ) ) + 1,000 (1 + y) -14 = 1, y = 4.99% 40. You recently earned a 13% return on an investment during the preceding year. If the rate of inflation during that period is 8% what was your real return during that period? a. 5% b. 4.63% c. 4.42% d. none of the above. ( (1.13/1.08) -1) = You are considering the purchase of a motorized scooter where the price of the scooter is based upon the miles per gallon (mpg) of gasoline that the scooter can achieve. That is, the current price of the scooter that you want is $1,000 because the scooter can achieve 100 miles per gallon and the cost per mpg is $10. Right before you are about to purchase the scooter, your best friend requests that you loan him $1,000 for one year. You make the loan in order to be able to buy a 105 mpg scooter at the conclusion of the loan. If you anticipate that the cost per mpg will increase to $11, what rate of interest do you charge your friend? a. 5% b. 10% c. 15% d. 15.5% real rate = 5%, inflation rate = 10% ======> ((1.05) (1.1)) - 1 = Unsecured bonds that have legal claims inferior to other outstanding bonds are a. debentures. b. mortgage bonds. c. subordinated debentures. d. discount bonds. 43. With respect to the company that has issued a callable bond, a. the value of the call increases as the stock price increases. b. the value of the call increases as interest rates increase. c. the value of the call increases as interest rates decrease. d. none of the above. 44. With respect to the owner of a putable bond,
12 a. the value of the put increases as interest rates increase. b. the value of the put increases as interest rates decrease. c. the value of the put increases as the value of the stock decreases. d. none of the above. 45. You notice that the price of a 4.0% coupon, 12-year Treasury Note is priced at 90:16 in the Wall Street Journal. What is the bonds yield to maturity? a. 2.56% b % c. 5.07% d. 5.13% 90:16 = /32 = 90.5 ====> $ ( (1/y) - ((1/.y) (1+ y) -24 ) ) + 1,000 (1 + y) -24 = 905 y =.02535====> 2 y = 5.07% 46. You read in the financial press that a company s Moody s debt rating is one step above junk. What is the rating? a. Ba1 b. BB+ c. Baa3 d. BBB-, Bond Ratings 47. You are trying to find the correct yield spread for a Standard and Poor s rated A+, 7-year maturity bond. You find that a 7-year maturity, AA- bond s spread is 65 basis points while that of a 7-year maturity A bond s spread is 80 basis points. Which of the following should be a possibility for the spread of the A+ rated bond? a. 64 basis points b. 70 basis points c. 80 basis points d. both b and c are possible spreads for the bond. REF: 4.4 Bond Markets, Bond Ratings 48. The relationship between time to maturity and yield to maturity for bonds of equal risk is referred to as a. the term structure of interest rates. b. the forward rate. c. the spot curve. d. the forward curve. REF: 4.5 Advanced Bond Valuation - The Term Structure of Interest Rates 49. You find that the yield on a 4-year bond is 10% while that of a 2-year bond is 8%. What should be the yield on a 2-year bond beginning two years from now as predicted by the expectations theory?
13 a. 2.00% b % c % d. none of the above (1.1) 4 = (1.08) 2 (1 + r) 2 ====> (1.1) 4 /(1.08) 2 = (1 + r) 2 =====> r =.1204 REF: 4.5 Advanced Bond Valuation - The Term Structure of Interest Rates 50. You find that the yield on a 6-year bond is 12% while that of a 4-year bond is 9%. What should be the yield on a 2-year bond beginning four years from now as predicted by the expectations theory? a. 3.00% b % c % d. none of the above (1.12) 6 = (1.09) 4 (1 + r) 2 ====> (1.12) 6 /(1.09) 4 = (1 + r) 2 =====> r =.1825 REF: 4.5 Advanced Bond Valuation - The Term Structure of Interest Rates 51. You find that the yield on a 4-year bond is 9% while the yield on a 2-year bond beginning four years from now is 10%. What should be the yield on a 6-yr bond as predicted by the expectations theory? a. 1.00% b. 9.33% c % d % (1 + r) 6 = (1.09) 4 (1.1) 2 ====> (1 + r) 6 = ( ) 6 =====> r =.0933 REF: 4.5 Advanced Bond Valuation - The Term Structure of Interest Rates 52. If you were trying to describe the effect on the yield curve that certain investors have a definite preference for the maturity of the bonds that they invest in, then you would be referring to a. the expectations theory. b. the liquidity preference theory. c. the preferred habitat theory. d. none of the above. REF: 4.5 Advanced Bond Valuation - The Term Structure of Interest Rates 53. Fence Place Diary Company (FPD) has a 15-year maturity bond outstanding that is currently convertible into 50 shares of FPD common stock. FPD common stock currently sells for $25 a share and the coupon rate (semi-annual coupons) for the bond is 5%. If the yield on a similarly rated convertible bond (on The New York Calendar Corp.) is 5%, then what should be the correct price of the FPD convertible bond? a. $ b. $1,000 c. $1,250 d. either a or b
14 Conversion Price: 50 * 25 = 1,250 Pure Bond Price: Coupon Rate = Yield ===> 1,000 Max(1,000, 1,250) = 1,250 REF: 4.3 Types of Bonds 54. You own a bond that pays a 12% annualized semi-annual coupon rate. The bond has 10 years to maturity. If the discount rate suddenly moves from 14% to 16%, then what is the dollar increase (decrease) in value for the bond? a. ($90.42) b. ($89.01) c. $89.01 d. $90.42 Price before shift: 60PVIFA(7%,20) PVIF(7%,20) = Price after shift: 60PVIFA(8%,20) PVIF(8%,20) = Difference: Price after shift - Price before shift = = You own a bond that pays a 12% annualized semi-annual coupon rate and has 10 years to maturity. If the discount rate increases from 14% to 16% during the next two years of the bonds life, then what is the dollar increase (decrease) in value for the bond during the two year period? a. ($69.42) b. ($71.09) c. $69.42 d. $71.09 Price before: 60PVIFA(7%,20) PVIF(7%,20) = Price after 2 years: 60PVIFA(8%,16) PVIF(8%,16) = Difference: Price after 2 years - Price before = = Oogle Corp. has decided to do things differently with respect to their corporate bond issue. They have a bond outstanding that makes quarterly coupon payments instead of semi-annually. The stated coupon rate on the bond is 10% and the yield to maturity on the 5-year bond is 12%. What is the price of the bond? a. $ b. $ c. $ d. none of the above Price : 25PVIFA(3%,20) PVIF(3%,20) =
15 57. Suppose investment A and investment B have identical cash flows. Why would an investor pay more for investment A than investment B? a. This is incorrect. You would always pay the same amount for two investments with equal future cash flows. b. The risk in the cash flows for investment A is greater than the risk of the cash flows of investment B. c. The risk in the cash flows for investment B is greater than the risk of the cash flows of investment A. d. The return required for investment B is lower than the return required for investment A. REF: 4.1 Valuation Basics 58. A bond pays an annual coupon rate of 7% with a face value of $1,000. The bond is scheduled to mature in two years and currently trades at $ What is the coupon yield of the bond currently? a. 7.00% b. 7.61% c % d % 7%*$1000/$920= 7.61% 59. Consider the following details for a bond issued by Bravo Incorporated. Issue Date 8/5/2000 Maturity Date 8/5/2030 Coupon Rate (annual coupons) 9% Face Value $1,000 Suppose that today s date is 8/5/2004, what should the current trading price be for this bond if investors want a 12% annual return? a. $ b. $ c. $ d. $1, n = 26, r = 12%, PV =?, PMT = 9%*1000, FV = $1000 PV = $ Consider the following details for a bond issued by Bravo Incorporated. Issue Date 8/5/2000 Maturity Date 8/5/2030 Annual Coupon Rate (semi-annual coupons) 9% Face Value $1,000 Suppose that today s date is 8/5/2004, what should the current trading price by for this bond if investors want a 12% annual return?
16 a. $ b. $ c. $ d. $1, n = 52, r = 6%, PV =?, PMT = 9%*1000/2, FV = $1000 PV = $ Which answer is FALSE regarding bond prices and interest rates? a. Bond prices and interest rates move in opposite directions. b. The price of a bond is the present value of the coupon payments and the face value. c. The prices of short-term bonds display greater price sensitivity to interest rate changes than do the prices of long-term bonds. d. Interest rate risk can be described as the risk that changes in market interest rates will cause fluctuations in the bond s price. 62. A bond is priced such that it has a 9% yield to maturity. However, inflation is expected to be 2% per year over the remaining life of the bond. What is the real return for this investment? a. 4.50% b. 6.86% c. 7.00% d. 9.00% 1 + real return = (1.09)/(1.02) 63. A bond issued by the Federal Home Loan Bank or the Federal Home Loan Mortgage Corporation are examples of what type of bond? a. Treasury bond b. Corporate bond c. Municipal bond d. Agency bond REF: 4.3 Types of Bonds 64. The Treasury Department sells a zero-coupon bond that will mature in two years. The bond has a face value of $10,000, and sold at auction for $9,400. What is the annual return for an investor buying the bond? a. 3.00% b. 3.14% c. 6.38% d. 7.00% n = 2, r = YTM =?, PV = -$9400, PMT = 0, FV = $10,000 r = 3.14%
17 REF: 4.3 Types of Bonds 65. A bond is trading on the secondary market and will mature in 10 years. The bond has a face value of $1,000 that will be paid at maturity. Further, the bond pays an annual coupon at 9% of face value. What should the trading price be for the bond if investors seek a 12% on their investment? a. $1, b. $ c. $ d. $ n = 10, r = 12%, PV =?, PMT = 9%*1000, FV = $1,000 PV = $ Which type of bond has the highest daily trading volume in our economy? a. Treasury bonds b. Agency bonds c. Corporate bonds d. Municipal bonds REF: 4.3 Types of Bonds 67. A bond currently trades at $975 on the secondary market. The bond has 10 years until maturity and pays an annual coupon at 9% of face value. The face value of the bond is $1,000. What is the yield to maturity for this bond? a. 8.86% b. 9.00% c. 9.23% d. 9.40% n = 10, r = YTM=?, PV = -$975, PMT = $90, FV = $1,000 r = 9.40% REF: 4.4 Bond Markets 68. A bond currently trades at $980 on the secondary market. The bond has 10 years until maturity and pays a semi-annual coupon at 9% APR of face value. The face value of the bond is $1,000. What is the yield to maturity for this bond? a. 9.00% b. 9.18% c. 9.25% d. 9.31% n = 20, r = YTM/2, PV = -$980, PMT = 9%*1000/2, FV = $1,000 r = 4.656% YTM = 4.656% * 2 = 9.31% REF: 4.4 Bond Markets
18 69. A bond currently trades at $975 on the secondary market. The bond has 10 years until maturity and pays an annual coupon at 9% of face value. The face value of the bond is $1,000. What is the coupon yield for this bond? a. 8.86% b. 9.00% c. 9.23% d. 9.40% $90/$975 = 9.23% REF: 4.4 Bond Markets NARRBEGIN: Exhibit 4-1 Exhibit 4-1 In the financial section of your local paper, you see the following bond quotation: Company RATE MATURITY BID ASK CHG ASK MO/YR YLD BIG CITY 7.00% Aug :07 104:08 2????? NARREND 70. Given Exhibit 4-1, what is the current ask yield of the Big City bond? Assume that today s date is August, a. 6.14% b. 6.31% c. 6.58% d. 6.73% N = 8, r =?, PV = -$ , PMT = $70, FV = $1,000 r = 6.31% REF: 4.4 Bond Markets NAR: Exhibit Given Exhibit 4-1, what is the current coupon yield of the Big City bond? Assume that today s date is August, a. 6.14% b. 6.34% c. 6.58% d. 6.71% $70/$ REF: 4.4 Bond Markets NAR: Exhibit What is the minimum rating required for a bond to be considered investment grade? a. AA b. A c. BBB d. BB REF: 4.4 Bond Markets
19 73. Your friend wants you to invest in his new sporting goods store. For an initial investment, he will pay you $2,000 per year for the next twenty years. All payments are at the end of the year. You realize that this is a very risky investment and want a 20% return on each invested dollar. How much are you willing to loan him today for his new store? a. $5,946 b. $9,739 c. $10,000 d. $17,027 n = 20, r = 20%, PV =?, PMT = $2,000, FV = $0 PV = $9,739 REF: 4.1 Valuation Basics 74. A $1,000 par value bond makes two coupon payments per year of $60 each. What is the bonds yield to maturity if the bond currently trades at $1,200 and will mature in two years? a. 1.78% b. 3.48% c. 6.00% d. 6.43% n = 4, r = YTM/2, PV = -$1,200, FV = $1,000, PMT = $60 r =0.888% YTM =1.78% 75. A one-year Treasury security currently returns a 4.50% yield to maturity. A two-year Treasury security offers a 4.80% yield to maturity. If the expectations hypothesis is true, what is the expected return on a one-year security next year? a. 4.80% b. 4.90% c. 5.00% d. 5.10% (1.045)*(1+x)=(1.048)*(1.048) REF: 4.5 Advanced Bond Valuation 76. A TIPS bond issued by the Treasury Department was issued with an annual coupon of 5%. The bond has a par value of $1,000 and will mature in 10 years. Suppose that inflation during the first year of the bond s life was 3%. What is the new coupon payment for this bond? a. $50.97 b. $51.50 c. $53.00 d. $ %*1000 = $50 $50 * (1+.03) = $51.50
20 REF: 4.3 Types of Bonds 77. Suppose you have a chance to buy a Treasury strip. The strip is from a government bond with a 6% coupon rate (face value of $1,000). You will receive this strip in one year and have a discount rate of 10%. What is the price you are willing to pay for this strip? a. $36.87 b. $54.55 c. $60.00 d. $ %*1000 = $60 PV = $60/1.10 REF: 4.3 Types of Bonds NARRBEGIN: EarthCOM EarthCOM On October 4 th, 2000, long distance company, EarthCOM, issued bonds to finance a new wireless product. The bonds were issued for 30 years (mature on October 4 th, 2030), with a face value of $1,000, and semi-annual coupons. The coupon rate on these bonds is 8% APR. Over the last 4 years, the company has experienced financial difficulty as the long distance market has grown more competitive. NARREND 78. Refer to EarthCOM. The risk associated with EarthCOM bonds has increased dramatically, as investors now want a 15% APR return to hold the bonds. What price should the bonds trade at TODAY (October 4 th, 2004)? a. $ b. $ c. $ d. $ n = 26, r = 7.50%, PV =?, PMT = 8%*1000/2 = $40, FV = $1,000 PV = $ NAR: EarthCOM 79. Refer to EarthCOM. Suppose that today (October 4 th, 2002), EarthCOM admits to fraud in reporting revenues over the last 3 years. The price of EarthCOM immediately tumbles to $500. What is the new yield-to-maturity on EarthCOM bonds? (Express as an APR) a % b % c % d % n = 52, r = YTM/2, PV = -$500, PMT = 8%*1000/2 = $40, FV = $1,000 r = 8.104% YTM = 16.21% NAR: EarthCOM 80. Which of the following statements are CORRECT?
21 Statement I: Statement II: Statement III: A change in a bond s interest rate risk has a greater price impact on bonds with longer maturities. Government bonds have lower default risk than corporate bonds or municipal bonds. Trading volume is greater for corporate bonds than government bonds. a. Statement I only b. Statement II only c. Statements I and II only d. Statements II and III only 81. A bond pays $60 interest payments twice a year. What is the coupon rate for the bond if the par value of the bond is $1,000? a. 6.00% b. 9.00% c % d % $60 * 2 = $120 $120/$1,000 =.12 REF: 4.1 Valuation Basics
"Assignee" redirects here. For the racehorse, see Assignee (horse).
An assignment (Latin cessio) is a term used with similar meanings in the law of contracts and in the law of real estate. In both instances, it encompasses the transfer of rights held by one party, the assignor, to another party, the assignee. It can also be a transfer of a benefit, including an equitable interest, according to established rules (at common law or in equity). The rights may be vested or contingent. The details of the assignment determines some additional rights and liabilities (or duties).
Typically a third party is involved in a contract with the assignor, and the contract is, in effect, transferred to the assignee. For example, a borrower borrows money from a local bank. The local bank receives a mortgage note and can thereafter transfer that note to a financial institution in exchange for a lump-sum of cash, thereby assigning the right to receive payment from the borrower to another entity. Mortgages and lending contracts are relatively amenable to assignment since the lendor's duties are relatively limited; other contracts which involve personal duties such as legal counsel may not be assignable.
The related concept of novation is not assignment. Rather than assigning only the rights to another party, novation involves the replacement of the original party with a new party or the replacement of the original contract with a new contract. Since novation creates a new contract, it requires the consent of all parties, but assignment does not require the consent of the nonassigning party, but in the case of assignment, the consent of the nonassigning party may be required by a contractual provision.
The assignment does not necessarily have to be in writing; however, the assignment agreement must show an intent to transfer rights. The effect of a valid assignment is to extinguish privity (in other words, contractual relationship, including right to sue) between the assignor and the third-party obligor and create privity between the obligor and the assignee.
Liabilities and duties
Unless the contractual agreement states otherwise, the assignee typically does not receive more rights than the assignor, and the assignor may remain liable to the original counterparty for the performance of the contract. The assignor often delegates duties in addition to rights to the assignee, but the assignor may remain ultimately responsible.
However, in the United States, there are various laws that limit the liability of the assignee, often to facilitate credit, as assignees are typically lenders. Notable examples include a provision in the Truth in Lending Act and provisions in the Consumer Leasing Act and the Home Ownership Equity Protection Act.
In other cases, the contract may be a negotiable instrument in which the person receiving the instrument may become a holder in due course, which is similar to an assignee except that issues, such as lack of performance, by the assignor may not be a valid defense for the obligor. As a response, the United States Federal Trade Commission promulgated Rule 433, formally known as the "Trade Regulation Rule Concerning Preservation of Consumers' Claims and Defenses", which "effectively abolished the [holder in due course] doctrine in consumer credit transactions". In 2012, the commission reaffirmed the regulation.
Assignment of contract rights
Assignment of rights under a contract is the complete transfer of the rights to receive the benefits accruing to one of the parties to that contract. For example, if Party A contracts with Party B to sell Party A's car to Party B for $10, Party A can later assign the benefits of the contract - i.e., the right to be paid $10 - to Party C. In this scenario, Party A is the obligee/assignor, Party B is an obligor, and Party C is the assignee. Such an assignment may be donative (essentially given as a gift), or it may be contractually exchanged for consideration. It is important to note, however, that Party C is not a third party beneficiary, because the contract itself was not made for the purpose of benefitting Party C. When an assignment is made, the assignment always takes place after the original contract was formed. An Assignment only transfers the rights/benefits to a new owner. The obligations remain with the previous owner. Compare Novation.
When assignment will be permitted
The common law favors the freedom of assignment, so an assignment will generally be permitted unless there is an express prohibition against assignment in the contract. Where assignment is thus permitted, the assignor need not consult the other party to the contract. An assignment cannot have any effect on the duties of the other party to the contract, nor can it reduce the possibility of the other party receiving full performance of the same quality. Certain kinds of performance, therefore, cannot be assigned, because they create a unique relationship between the parties to the contract. For example, the assignment of a legal malpractice claim is void since an assignee would be a stranger to the attorney-client relationship, who was owed no duty by the attorney and would imperil the sanctity of the highly confidential and fiduciary relationship existing between attorney and client.
Torts are not assignable as public policy, and various statutes may prohibit assignment in certain instances. In addition, the Restatement (Second) of Contracts lists prohibitions in §317(2)(a) based upon the effect to the nonassigning party (obligor), with similar prohibitions in the Uniform Commercial Code §2-210. For example, UCC §2-210 states the following:
|“||Unless otherwise agreed all rights of either seller or buyer can be assigned except where the assignment would materially change the duty of the other party, or increase materially the burden or risk imposed on him by his contract, or impair materially his chance of obtaining return performance. A right to damages for breach of the whole contract or a right arising out of the assignor's due performance of his entire obligation can be assigned despite agreementotherwise [sic].||”|
Requirements for an effective assignment
For assignment to be effective, it must occur in the present. No specific language is required to make such an assignment, but the assignor must make some clear statement of intent to assign clearly identified contractual rights to the assignee. A promise to assign in the future has no legal effect. Although this prevents a party from assigning the benefits of a contract that has not yet been made, a court of equity may enforce such an assignment where an established economic relationship between the assignor and the assignee raised an expectation that the assignee would indeed form the appropriate contract in the future.
A contract may contain a non-assignment clause, which prohibits the assignment of specific rights and some various rights, or of the entire contract, to another. However, such a clause does not necessarily destroy the power of either party to make an assignment. Instead, it merely gives the other party the ability to sue for breach of contract if such an assignment is made. However, an assignment of a contract containing such a clause will be ineffective if the assignee knows of the non-assignment clause, or if the non-assignment clause specifies that "all assignments are void".
Two other techniques to prevent the assignment of contracts are rescission clauses or clauses creating a condition subsequent. The former would give the other party to the contract the power to rescind the contract if an assignment is made; the latter would rescind the contract automatically in such circumstances.
Requirement of a writing
There are certain situations in which the assignment must be in writing.
- Assignment of wages; additionally, statutes may prohibit this assignment
- Assignment of any interest in real property
- Assignment of choses in action worth over $5,000
A parallel concept to assignment is delegation, which occurs when one party transfers his duties or liabilities under a contract to another. A delegation and an assignment can be accomplished at the same time, although a non-assignment clause may also bar delegation.
Legal remedies may be available if the nonassigning party's rights are affected by the assignment.
Assignments made for consideration are irrevocable, meaning that the assignor permanently gives up the legal right to take back the assignment once it has been made. Donative assignments, on the other hand, are generally revocable, either by the assignor giving notice to the assignee, taking performance directly from the obligor, or making a subsequent assignment of the same right to another. There are some exceptions to the revocability of a donative assignment:
- The assignment can not be revoked if the obligor has already performed
- The assignment can not be revoked if the assignee has received a token chose (chose being derived from the French word for "thing", as in a chose of action) - a physical object that signifies a right to collect, such as a stock certificate or the passbook to a savings account.
- The assignment can not be revoked if the assignor has set forth in writing the assignment of a simple chose - a contract right embodied in any form of token.
- Estoppel can prevent the revocation of a donative assignment if the assignee changed their position in reliance on the assignment.
Finally, the death or declaration of bankruptcy by the assignor will automatically revoke the assignment by operation of law.
Breach and defenses
A cause of action for breach on the part of the obligor lies with the assignee, who will hold the exclusive right to commence a cause of action for any failure to perform or defective performance. At this stage, because the assignee "stands in the shoes" of the assignor, the obligor can raise any defense to the contract that the obligor could have raised against the assignor. Furthermore, the obligor can raise against the assignee counterclaims and setoffs that the obligor had against the assignor. For example, suppose that A makes a contract to paint B's house in exchange for $500. A then assigns the right to receive the $500 to C, to pay off a debt owed to C. However, A does such a careless job painting the house that B has to pay another painter $400 to correct A's work. If C sues B to collect the debt, B can raise his counterclaim for the expenses caused by the poor paint job, and can reduce the amount owed to C by that $400, leaving only $100 to be collected.
When the assignor makes the assignment, he makes with it an implied warranty that the right to assign was not subject to defenses. If the contract had a provision that made the assignment ineffective, the assignee could sue the assignor for breach of this implied warranty. Similarly, the assignee could also sue under this theory if the assignor wrongfully revoked the assignment.
Occasionally, an unscrupulous assignor will assign exactly the same rights to multiple parties (usually for some consideration). In that case, the rights of the assignee depend on the revocability of the assignment, and on the timing of the assignments relative to certain other actions.
In a quirk left over from the common law, if the assignment was donative, the last assignee is the true owner of the rights. However, if the assignment was for consideration, the first assignee to actually collect against the assigned contract is the true owner of the rights. Under the modern American rule, now followed in most U.S. jurisdictions, the first assignor with equity (i.e. the first to have paid for the assignment) will have the strongest claim, while remaining assignees may have other remedies. In some countries, the rights of the respective assignees are determined by the old common law rule in Dearle v Hall.
- Earlier donative assignees for whom the assignment was revocable (because it had not been made irrevocable by any of the means listed above) have no cause of action whatsoever.
- Earlier donative assignees for whom the assignment was made irrevocable can bring an action for the tort of conversion, because the assignment was technically their property when it was given to a later assignee.
- Later assignees for consideration have a cause of action for breaches of the implied warranty discussed above.
Special rules for assignment of certain rights
See also: Rule in Dumpor's Case and Privity of estate
Real property rights can be assigned just as any other contractual right. However, special duties and liabilities attach to transfers of the right to possess property. With an assignment, the assignor transfers the complete remainder of the interest to the assignee. The assignor must not retain any sort of reversionary interest in the right to possess. The assignee's interest must abut the interest of the next person to have the right to possession. If any time or interest is reserved by a tenant assignor then the act is not an assignment, but is instead a sublease.
The liability of the assignee depends upon the contract formed when the assignment takes place. However, in general, the assignee has privity of estate with a lessor. With privity of estate comes the duty on the part of the assignee to perform certain obligations under covenant, e.g. pay rent. Similarly, the lessor retains the obligations to perform on covenants to maintain or repair the land.
If the assignor agrees to continue paying rent to the lessor and subsequently defaults, the lessor can sue both the assignor under the original contract signed with the lessor as well as the assignee because by taking possession of the property interest, the assignee has obliged himself to perform duties under covenant such as the payment of rent.
Unlike a Novation where consent of both the lessor and lesse is required for the third party to assume all obligations and liabilities of the original lessee, an assignment does not always need the consent of all parties. If the contract terms state specifically that the lessor's consent is not needed to assign the contract, then the lesee can assign the contract to whomever the lesee wants to.
Absent language to the contrary, a tenant may assign their rights to an assignee without the landlord's consent. In the majority of jurisdictions, when there is a clause that the landlord may withhold consent to an assignment, the general rule is that the landlord may not withhold consent unreasonably unless there is a provision that states specifically that the Landlord may withhold consent at Landlord's sole discretion.
A person can also assign their rights to receive the benefits owed to a partner in a partnership. However, the assignee can not thereby gain any of the assignor's rights with respect to the operation of the partnership. The assignee may not vote on partnership matters, inspect the partnership books, or take possession of partnership property; rather, the assignee can only be given the right is to collect distributions of income, unless the remaining partners consent to the assignment of a new general partner with operational, management, and financial interests. If the partnership is dissolved, the assignee can also claim the assignor's share of any distribution accompanying the dissolution.
Intellectual property rights
See also: transfer (patent)
Ownership of intellectual property, including patents, copyrights, and trademarks, may be assigned, but special conditions attach to the assignment of patents and trademarks. In the United States, assignment of a patent is governed by statute, 35 U.S.C. § 261. Patent rights are assignable by an "instrument in writing." Title in a patent can also be transferred as a result of other financial transactions, such as a merger or a takeover, or as a result of operation of law, such as in an inheritance process, or in a bankruptcy. An assignment of a patent can be recorded with the United States Patent and Trademark Office. Although such recording is not required, if an assignment is not recorded at the USPTO within three (3) months or prior to a subsequent assignment, the assignment will be void against a subsequent assignee without notice of the earlier, unrecorded assignment.
With respect to a trademark, the owner of the mark may not transfer ownership of the mark without transferring the goodwill associated with the mark.
Companies sometimes request from employees that they assign all intellectual property they create while under the employment of the company. This is typically done within an Employment Agreement, but is sometimes done through a specific agreement called Proprietary Information and Inventions Agreement (PIIA).
Personal injury torts
The standard rule is that personal injurytort causes of action are nonassignable as a matter of public policy. These should be distinguished from final settlements or judgments resulting from lawsuits brought on such causes of action, which may be assignable.
In the majority of jurisdictions, assignments of legal malpractice causes of action are void as against public policy.
An equitable assignment is an assignment, or transfer of rights, in equity.
There are numerous requirements that exist for an equitable assignment of property, outside the 'standard' clear and unconditional intention to assign. These requirements are fundamental characteristics of a statutory assignment: Absolute assignment (an unconditional transfer: conditions precedent or part of a debt are not absolute) and the assignment must be made in writing and signed by the assignor, and in particular, this applies to real property.
Assigning future property in equity cannot be gratuitous. The assignor must receive consideration for the agreement, otherwise the assignment will be ineffective. However, an absolute assignment does not require consideration to be given. Secondly, between the period of agreement between assignor and assignee and acquisition by the assignor, the assignees rights are not contractual, but rather a proprietary right to the property. This means the assignee has an interest in this future property, in the same manner any owner has over property.
In equity, these principles operate to protect both the assignor and the assignee. In Norman v Federal Commissioner of Taxation, a taxpayer attempted to assign by deed, to his wife certain moneys which he was eventually going to receive. This included dividends and interest due on loans. The court held the interest and the dividends were expectancies or possibilities which could not be assigned without consideration. The court's worry was that assignments without consideration might be used as instruments of fraud, to avoid creditors and tax collection.
Courts will not enforce a contract to assign an expectancy unless there is a valuable consideration. For example, under a settlement of property the respondent "the son" would have been entitled to an equal portion of properties along with his other siblings which was gained in a settlement by his mother. This portion was only his when allocated to him at his mothers discretion. Prior to this allocation being made, the respondent allotted his benefit to trustees for a voluntary settlement. He was assigning or purporting to assign something which he might become entitled to in the future, not a contingent interest. The judgment held it ineffective and elaborated on previous points to state the respondent cannot be compelled to allow the trustees to retain the appointed sum.
- ^For the assignment of claim see Trans-Lex.org
- ^Australian Law Dictionary (second ed.). oxford university press.
- ^ abcNorman v Federal Commissioner of Taxation HCA 21, (1963) 109 CLR 9, High Court (Australia).
- ^Tips and traps in contracting: novation versus assignmentArchived January 26, 2013, at the Wayback Machine.. Association for General Counsel. (Australia).
- ^ abAssignee Liability: Through the Minefield. Arnstein & Lehr LLP.
- ^See 15 U.S.C. 1641(a).
- ^ abCommercial Paper: Holder in Due Course & DefensesArchived 2012-11-28 at the Wayback Machine..
- ^FTC Opinion Letter Affirms Consumers' Rights under the Holder Rule. FTC.
- ^ abcdStark T. (2003). Negotiating and Drafting Contract Boilerplate, Ch. 3: Assignment and Delegation. ALM Publishing.
- ^Chapter 18: Assignment and Delegation. LexisNexis study outline.
- ^Uniform Commercial Code § 2-210. Delegation of Performance; Assignment of Rights.
- ^Pony v. County of Los Angeles, 433 F.3d 1138 (9th Cir. 2006).
- ^Cowan Liebowitz & Latman, PC v. Kaplan, 902 So. 2d 755, 759-760 (Fla. 2005).
- ^Westbourne Grammar School v Sanget Pty VSCA 39, Court of Appeal (Vic, Australia).
- ^Conveyancing Act 1919 (NSW) s 23C.
- ^Federal Commissioner of Taxation v Everett FCA 39, (1978) 21 ALR 625 at p. 643, Federal Court (Full Court) (Australia).
- ^Northumberland (Duke) v Inland Revenue Comrs