This excerpt is taken from an article titled “Caywood Looks for Convertibles,” which appeared in the January 13, 1992, issue of BondWeek, p. 7:

Caywood Christian Capital Management will invest new money in its $400 million high-yield portfolio in “busted convertibles,” double- and triple-B rated convertible bonds of companies . . . , said James Caywood, CEO. Caywood likes these convertibles as they trade at discounts and are unlikely to be called, he said.

Why is Mr. Caywood interested in call protection?

On October 1, 2005, Fannie Mae issued a mortgage pass-through security and the prospectus supplement stated the following:

                        FANNIE MAE*
            MORTGAGE-BACKED SECURITIES PROGRAM
        SUPPLEMENT TO PROSPECTUS DATED JULY 01, 2004

                     $464,927,576.00
              ISSUE DATE OCTOBER 01, 2005
        SECURITY DESCRIPTION FNMS 05.0000 CL-844801
            5.0000 PERCENT pass-through RATE
            FANNIE MAE POOL NUMBER CL-844801
                    CUSIP 31407YRW1
            
PRINCIPAL AND INTEREST PAYABLE ON THE 25TH OF EACH MONTH
              BEGINNING NOVEMBER 25, 2005
      
                    POOL STATISTICS
                    
SELLER                                      WELLS FARGO BANK, N.A.
SERVICER                                    WELLS FARGO BANK, N.A.
NUMBER OF MORTGAGE LOANS                    1,986
AVERAGE LOAN SIZE$234,312.06
MATURITY DATE                               10/01/2035
WEIGHTED AVERAGE COUPON RATE                5.7500%
WEIGHTED AVERAGE LOAN AGE                   1 mo
WEIGHTED AVERAGE LOAN TERM                  360 mo
WEIGHTED AVERAGE REMAINING MATURITY         359 mo
WEIGHTED AVERAGE LTV                        73%
WEIGHTED AVERAGE CREDIT SCORE               729

What is the prefix for this security, and what does a prefix indicate?

This excerpt is taken from an article titled “Caywood Looks for Convertibles,” which appeared in the January 13, 1992, issue of BondWeek, p. 7:

Caywood Christian Capital Management will invest new money in its $400 million high-yield portfolio in “busted convertibles,” double- and triple-B rated convertible bonds of companies . . . , said James Caywood, CEO. Caywood likes these convertibles as they trade at discounts and are unlikely to be called, he said.

Why does Mr. Caywood seek convertibles with higher investment-grade ratings?

This excerpt is taken from an article titled “Caywood Looks for Convertibles,” which appeared in the January 13, 1992, issue of BondWeek, p. 7:

Caywood Christian Capital Management will invest new money in its $400 million high-yield portfolio in “busted convertibles,” double- and triple-B rated convertible bonds of companies . . . , said James Caywood, CEO. Caywood likes these convertibles as they trade at discounts and are unlikely to be called, he said.

What is the premium over straight value at which these bonds would trade?

Tracy Company, a manufacturer of air conditioners, sold 100 units to Thomas Company on November 17, 2021. The units have a list price of $500 each, but Thomas was given a 30% trade discount. The terms of the sale were 2/10, n/30. Thomas uses a perpetual inventory system.

1. Prepare the journal entries to record the (a) purchase by Thomas on November 17 and (b) payment on November 26, 2021. Thomas uses the gross method of accounting for purchase discounts.
2. Prepare the journal entry for the payment, assuming instead that it was made on December 15, 2021.
3. Repeat requirements 1 and 2 using the net method of accounting for purchase discounts.

What is the S-curve for prepayments? Explain the reason for the shape.

What is a mandatory convertible?

Upon exercise of the conversion option for a convertible bond, all issuers must exchange shares of stock for the bond. Explain whether you agree or disagree.

Explain the two ways in which a bank can sell its position in a syndicated loan.

What kinds of cases are heard by the Court of International Trade?

What is a cash flow arbitrage strategy involving convertible bonds?

What is the difference between a busted convertible and a distressed convertible?

Why is a volatility trading strategy considered to be a nondirectional strategy?

The Pacific Boat Company, which is under contract to the U.S. Navy, assembles troop deployment boats. As part of its research program, it completes the assembly of the first of a new model (PT 109) of deployment boats. The Navy is impressed with the PT 109. It requests that Pacific Boat submit a proposal on the cost of producing another six PT109s. Pacific Boat reports the following cost information for the first PT 109 assembled and uses a $90\%$ cumulative average-time learning model as a basis for forecasting direct manufacturing labor-hours for the next six PT109s. (A $90\%$ learning curve means $b = −0.152004$.)

$$\begin{matrix} \text{Direct material cost} & \text{\$ 199.000}\\ \text{Direct manufacturing labor time for first boat} & \text{14.700} & \text{labor hours}\\ \text{Direct manufacturing labor rate} & \text{\$ 42} & \text{per direct manufacturing labor-hour}\\ \text{Variable manufacturing overhead cost} & \text{\$ 26} & \text{per direct manufacturing labor-hour}\\ \text{Other manufacturing overhead cost} & \text{20 \\\%} & \text{of direct manufacturing labor costs}\\ \text{Tooling costs }{^2} & \text{\$ 279.000}\\ \text{Learning curve for manufacturing labor time per boat} & \text{90 \\\%} & \text{cumulative average time }{ ^b}\\ \end{matrix}$$

$a)~~$ Tooling can be reused at no extra cost because all of its cost has been assigned to the first deployment boat. $b)~~$ Using the formula for a $90 \%$ learning curve,

$\mathrm{b}=\frac{\ln 0.9}{\ln 2}=\frac{-0.105361}{0.693147}=-0.152004$

1. Calculate predicted total costs of producing the six PT109s for the Navy. (Pacific Boat will keep the first deployment boat assembled, costed at $\$1.477.600$ as a demonstration model for potential customers.)

2. What is the dollar amount of the difference between (a) the predicted total costs for producing the six PT109s in requirement 1 and (b) the predicted total costs for producing the six PT109s, assuming that there is no learning curve for direct manufacturing labor? That is, for (b) assume a linear function for units produced and direct manufacturing labor hours.