Question

1. Assume you are the Mayor of New Orleans and you just approved the issuance of a municipal bond of par value $23 million to pay for the repairs one of the flood management turbines in the midst of the 2020 hurricane season. Your finance executive has included a sinking fund provision in the bond contract. Which of these would you likely ask her about the bond? (Select one of the following)
   1. “Do you think the 2020 hurricane season will affect the maturity of the municipal bond?”
   2. “Do we have enough tax receipts planned over time to pay back portions of the bond as required per year?”
   3. “Do we have to repay the bond at all?”
   4. “What does the call provision in a bond mean?
2. As finance executive of Marriott International, your company’s CEO wants you to manage the issuance of a 2-year zero-coupon bond with par value of $40 million. He also wants you to educate him on what the issuance would entail. Which of these would you tell her? (Select one of the following)
   1. “We will have to focus on only the maturity risk premium for the Treasury bonds we have bought”
   2. “We will have to decide what the discount on the par value would be in order to sell the bond so the buyers are compensated with some capital appreciation upon maturity”
   3. “The maturity of the zero-coupon bonds does not matter”
   4. “We will have to decide on the discount rate for the zero-coupon bond’s maturity”

Answer 1

1.
“Do we have enough tax receipts planned over time to pay back portions of the bond as required per year?”

2.
“We will have to decide what the discount on the par value would be in order to sell the bond so the buyers are compensated with some capital appreciation upon maturity”