Bond Markets Analysis and Strategies 8th Edition by Frank J. Fabozzi Solution manual

 
12. What does the put provision for a bond entitle the bondholder to do?
 
An issue with a put provision included in the indenture grants the bondholder the right to sell the issue back to the issuer at par value on designated dates. The advantage to the bondholder is related to the possibility that if interest rates rise after the issue date (thereby reducing a bond’s price) the bondholder can force the issuer to redeem the bond at par value.
 
13. The Export Development Canada issued a bond on March 17, 2009. The terms were as follows:
 
Currency of denomination:  Japanese yen (JPY)
Denomination:  JPY100,000,000
Maturity date: March 18, 2019, or an optional redemption date
Redemption/payment basis: Redemption at par value
Interest payment dates:  March 18 and September 18 in each year
Optional redemption dates:  The issuer has the right to call the instruments in whole (but not in part) at par starting on March 18, 2012
 
Interest rate:
 
Fixed rate for the first three years up to but excluding March 18, 2012: 1.5%
 
March 18, 2012-September 18, 2012      1.75% − 6 month JPY LIBORBBA
September 18, 2012-March 18, 2013      1.75% − 6 month JPY LIBORBBA
March 18, 2013-September 18, 2013      2.00% − 6 month JPY LIBORBBA
September 18, 2013-March 18, 2014      2.00% − 6 month JPY LIBORBBA
March 18, 2014-September 18, 2014      2.25% − 6 month JPY LIBORBBA
September 18, 2014-March 18, 2015      2.25% − 6 month JPY LIBORBBA
March 18, 2015-September 18, 2015      2.50% − 6 month JPY LIBORBBA
September 18, 2015-March 18, 2016      2.50% − 6 month JPY LIBORBBA
March 18, 2016-September 18, 2016      2.75% − 6 month JPY LIBORBBA
September 18, 2016-March 18, 2017      2.75% − 6 month JPY LIBORBBA
March 18, 2017-September 18, 2017      3.00% − 6 month JPY LIBORBBA
September 18, 2017-March 18, 2018      3.00% − 6 month JPY LIBORBBA
March 18, 2018-September 18, 2018      3.25% − 6 month JPY LIBORBBA
September 18, 2018-March 18, 2019      3.25% − 6 month JPY LIBORBBA
 
Answer the below questions.
 
(a) What is meant by JPY LIBORBBA?
 
The reference rate for most floating-rate securities is an interest rate or an interest rate index. The mostly widely used reference rate throughout the world is the London Interbank Offered Rate and referred to as LIBOR. In debt agreements LIBOR is often referred to as BBA LIBOR. The rate is reported for ten currencies including the Japanese yen (JPY). So, for example, the JPY BBA LIBOR is the rate for a LIBOR loan denominated in Japanese yens as computed by the British Bankers Association (BBA).
 
(b) Describe the coupon interest characteristics of this bond.
 
The characteristics are based on the floating-rate bonds, which are issues where the coupon rate resets periodically (the coupon reset date) based on a formula. The formula, referred to as the coupon reset formula, has the following general form:
reference rate + quoted margin
 
The quoted margin is the additional amount that the issuer agrees to pay above the reference rate. For example, suppose that the reference rate is 3.5% and the quoted margin is 150 basis points. Then the coupon reset formula is
 
1-month LIBOR + 150 basis points = 3.5% + 1.5% = 5.0%
 
If the 1-month LIBOR on the coupon reset date is 3.5%, the coupon rate is reset for that period at 5.0% .
 
(c) What are the risks associated with investing in this bond if the investor’s home currency is not in Japanese yen.
 
From the perspective of a U.S. investor, a non-dollar-denominated bond (i.e., a bond whose payments occur in a foreign currency) has unknown U.S. dollar cash flows. The dollar cash flows are dependent on the exchange rate at the time the payments are received. For our situation, an investor purchases a bond whose payments are in Japanese yen. If the yen depreciates relative to the U.S. dollar, fewer dollars will be received. The risk of this occurring is referred to as exchange-rate or currency risk. Of course, should the yen appreciate relative to the U.S. dollar, the investor will benefit by receiving more dollars.
 
14. What are a convertible bond and an exchangeable bond?
 
A convertible bond is an issue giving the bondholder the right to exchange the bond for a specified number of shares of common stock. Such a feature allows the bondholder to take advantage of favorable movements in the price of the issuer’s common stock. An exchangeable bond allows the bondholder to exchange the issue for a specified number of common stock shares of a corporation different from the issuer of the bond.