Chapter 17: Q 12. (page 426)
What is a bond?
A financial instrument that constitutes a loan made by an investor to a debtor.
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Imagine that a local water company issued \(10,000
ten-year bond at an interest rate of 6%. You are thinking about buying this bond one year before the end of the ten years, but interest rates are now 9%.
a. Given the change in interest rates, would you
expect to pay more or less than \)10,000 for the
bond?
b. Calculate what you would actually be willing to
pay for this bond.
You and your friend have opened an account on
E-Trade and have each decided to select five similar companies in which to invest. You are diligent in monitoring your selections, tracking prices, current events, and actions the company has taken. Your friend chooses his companies randomly, pays no attention to the financial news, and spends his leisure time focused on everything besides his investments. Explain what might be the performance for each of your portfolios at
the end of the year.
The Darkroom Windowshade Company has
100,000 shares of stock are outstanding. The investors in the firm own the following numbers of shares: investor 1 has 20,000 shares; investor 2 has 18,000 shares; investor 3 has 15,000 shares; investor 4 has 10,000 shares; investor 5 has 7,000 shares, and investors 6 through 11 have 5,000 shares each. What is the minimum number of investors it would take to vote to change the company's top management? If investors 1 and 2 agree to vote together, can they be certain of always getting their way in how the company will be run?
If you receive \(500 in simple interest on a loan that you made for \)10,000 for five years, what was the interest rate you charged?
Suppose Ford Motor Company issues a five year
bond with a face value of \(5,000 that pays an annual coupon payment of \)150.
a. What is the interest rate Ford is paying on the
borrowed funds?
b. Suppose the market interest rate rises from 3% to 4% a year after Ford issues the bonds. Will the
value of the bond increase or decrease?
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