Bonds

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Question 1

True because the yield to maturity for bond B is always pre-determined and are therefore priced at a premium with lower yield to maturity by pricing them to the call thus depreciating the value of premium.

Question 2

Bond with greater interest risk is a 30 year BB rated bond from Canadian Duck Calls Incorporated because it is highly affected by risks such as inflation unlike a 30 year Canadian Government bond which is very certain and is not much affected because it is governments.

Question 3

Seniority of bonds is accompanied with lower coupon rates due to their less default risk because a company is likely to recover the assets on the most senior bonds compared to the junior bonds which have higher risk and pay rate.

Puttable bonds pay lower interest compared to other bonds without put option because an investor can recover all the investments in case the interest rates rise.

A Canada plus call feature has lower interest rate because an investor may refinance the bond in case the rates go high.

Bonds with deferred call provision normally experience lower interest rates which act as the tradeoff for the bond although the investor receives some stability for their investments in form of less money. This kind of bond protects bondholders from the risk of increasing interest rates.

Protective covenants are designed to protect lenders from issuer actions and a lender has a right to call back the obligations from the borrower. Protective covenants have lower interest rates and are mainly used to lower the risk of bonds. AAA represents a bond with very strong qualities and any investor would prefer investing in suck kind of a bond.

Interest payment on a floater may be lower compared to the rate paid on fixed rate bonds. At times, floaters tied to T-bills may further fall especially during political crisis. The coupon rates on floaters tends to reduce with short term benchmarks and have both high credit risk and sector risks because they are mostly issued by financial institutions.

Question 4

A three year 8% bonds will provide highest possible profits in case of any decrease in market interest rates since the maturity period is very low and is not subject to many risks such as interest risks. The other investments are related to longer periods (10 years) which may be subject to many risks such as inflation and interest rate risks.

Question 5

Companies would rate their bonds to attract more investors especially when their bonds offer better in an industry in terms of interest rates and other factors which may give a company good reputation.

A bond with AAA rating from DBRS would indicate that the bond has very low interest risks because AAA takes into consideration all the financial strengths of a particular company. AAA indicates superiority in financial strengths as well as stability in an organization’s economic environment after taking care of all the interest risks.