Par Value Bond Essay

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Juan Martinez and Kara Sullivan are vice presidents of Eastern Money Management and co-directors of the company’s pension fund management division. A major new client, the North Carolina League of Cities, has requested that Eastern present an investment seminar to the mayors of the represented cities. Martinez and Sullivan, who will make the presentation, have asked you to help them by answering the following questions. 1. What are the four most fundamental factors that affect the cost of money (interest rates)? 2. What is the real risk-free rate of interest (r*) and the nominal risk-free rate (rrf) (definitions not values!)? 3. Explain the formula r=r* + IP +DRP+ LP + MRP in your own words. Why might these premiums vary over time? How do they vary among different types of bonds (treasuries, short term corporate bonds, long-term corporate bonds). 4. Explain how the term structure of interest rates determines a yield curve. What is the shape of the current yield curve for Treasuries? (show it or describe it). 5. What is the pure expectations theory? What does it imply about the term structure of interest rates? 6. What are the key features of a bond? 7. What are call provisions and sinking fund provisions? Should an investor avoid these provisions or are they desirable? 8. What are bond covenants? Give some examples of reasonable covenants. 9. What is the value of a 20 year $1,000 par value bond with a 10% annual coupon if the required return is 10% a. if interest rates rose to 12% what would be the value of the bond? Would you now have a premium or discount bond? 10. What is the YTM on a 10 year, 9%

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