Discuss the relationship between bond prices and interest rates. What impact do changing interest rates have on the price of long-term bonds versus short-term bonds? (LO16-2)
The bond prices and interest rates have an inverse relationship. When prices of bonds increase, the interest rates go down.
The term bond refers to a fixed-income financial instrument representing the money invested by an investor in a corporation for generating interest income and the principal amount.
The interest rates and bonds prices move precisely in the opposite directions. If interest rates go up in the market, then the prices of a bond will go down.
The long-term bonds are impacted more because of interest rate variations in the market. Short-term bonds’ maturity date is closer than long-term debts.
Long-term debts are more sensitive to interest rate changes because they contain a longer duration than short-term bonds.
Using the information in Problem 3, assume that American Health Systems’ 1,700,000 additional share can only be issued at $18 per share.
a. Assume that American Health Systems can earn 6 percent on the proceeds. Calculate earnings per share.
b. Should the new issue be undertaken based on earnings per share?
Question: The trustee in the bankruptcy settlement for Titanic Boat Co. lists the following book values and liquidation values for the assets of the corporation. Liabilities and stockholders’ claims are also shown.
Machinery and equipment
Building and plant
|Liabilities and stockholder’s claims|
First lien, secured by machinery and equipment
Senior unsecured debt
Total stockholder’s claims
Total liabilities and stockholder’s claims
e. List the remaining asset claims of unsatisfied secured debt holders and unsecured debt holders in a manner similar to that shown at the bottom portion of Table16A-3.
Question: The Bailey Corporation, a manufacturer of medical supplies and equipment, is planning to sell its shares to the general public for the first time. The firm’s investment banker, Robert Merrill and Company, is working with Bailey Corporation in determining a number of items. Information on the Bailey Corporation follows:
For the year 20X1
Sales (all on credit)
Cost of goods sold
Selling and administrative expenses
Net income before taxes
As of December 31, 20X1
Total current assets
Net plant and equipment
Liabilities and stockholders’ equity
Total current liabilities
Common stock (1,800,000 shares at $1 par)
Capital in excess of par
Total stockholder’s equity
Total liabilities and stockholder’s equity
e. Assuming an underwriting spread of 5 percent and out-of-pocket costs of $300,000, what will net proceeds to the corporation be?
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