Ques1. Explain what a call provision enables bond issuers to do? Why would bond issuers exercise a call provision?
Answer: A call provision is a clause, mentioned in the bond certificate, which enables the bond issuer to repay or redeem bonds before its maturity date at a specified value (Sherman, 2011). Conditions related to time of redemption or buy back of bonds like amount to be repaid and manner in which payment is to be made are mentioned in advance. This call provision is exercised by the bond issuer at the time when the interest rates have fallen and debts are available at cheaper rate in the market. The issuer redeems the bond carrying high rate of interest and issues new bonds with low rate of interest.
Ques.2 Define a discount bond and premium bond. Provide example of each.
The bond issued by the company for the first time is a standard bond. It becomes discount bond or premium bond depending upon the price at which it is being traded in the market.
Discount bond: If the bond is being traded in the market at a price which is less than the face value, it will be termed as discount bond (Weaver & Weston, 2001). A bond becomes discount bond when it gives interest at a rate which is less than the market rate of interest. The investor will be ready to invest in bonds with lower interest rate if the purchase price of such bond is fixed in such a manner that it compensates the investor for less payment of interest in future. For example: A 5% bond is being issued at $1000. The market interest rate is 4%. The investor will be ready to invest in such bonds if the issue price is less than $1000.
Premium bond: If the bond is being traded in the market at a price which is higher than the face value, it will be termed as premium bond. A bond becomes premium bond, it its coupon rate of interest is more than the prevailing interest rate in the market. The issuer will be ready to issue such bonds if the price is fixed in such a manner that it compensates the issuer for higher payment of interest in future. For example: A 5% bond is being issued at $1000. The market interest rate is 6%. The issuer will be ready to issue such bonds if the price is more than $1000.
Ques3. What is the relationship between interest rates and bond prices?
Answer: The fundamental principle of investment in bond market is that there is inverse relationship between interest rates prevailing in the market and bond prices (SEC, 2013).
In market interest rate in bond price
In market interest rate in bond price
If the market interest rate goes up, the investor will be ready to buy bonds with low coupon rate if they are being offered at discount or low price. The investor want compensation for low interest payments to be received in future so he will be ready to buy such debentures if they are being offered at low prices. Similarly if the market interest rate goes down, the investor will be ready to buy the bonds with high coupon rate even at high prices. Thus prices of bond increase.
Ques 4: Describe the difference between coupon bond and zero coupon bond
Answer: The coupon bond is a bond which has coupon rate at which the interest is paid to the bondholder throughout the life of bonds (Sherman, 2011). The bonds are issued with interest coupons and interest is paid to the person who has the possession of coupon. The payment of interest is made at coupon rate and it may be paid quarterly, semi-annually or annually.
Zero coupon bond is a bond which does not carry any coupon of interest as no interest is payable on such bonds. These bonds are issued at deep discount and redeemed at face value on the maturity period. The difference between the issue price and the redemption value is the appreciation value and return for the investor (Weaver & Weston, 2001).
The return for the coupon bondholders is regular in nature whereas the return in case of zero coupon bonds is in the nature of capital appreciation.
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Minority Women in Poverty
Before the Covid-19 pandemic, the United States labor market experienced a decade of continuous job growth. The overall rate of unemployment fell to its lowest levels in the last 5 decades. Nonetheless, minority groups, and particularly minority women in poverty, still face more challenges when trying to secure a job, not to mention a well-paying one. As compared to their white counterparts, women of color have systematically faced higher rates of unemployment, less job opportunities, poor benefits, low salaries, and higher job instability (McLemore et al, 2018).
Minority women include Latino-Americans, African Americans, Indian-American, and Asian women. These women mostly stand at the intersection of a number of barriers and experience the combined impacts of ethnic, racial, gender, and other types of discrimination in their effort to navigate the institutional structures and labor systems where entrenched racial differences remain the norm.
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Often, minority women are disadvantaged by negative attitudes and stereotypes held by employers and senior managers which impacts the decisions on whether they are hired or not. Negative attitudes also affect how women of color are treated at work. Deep rooted stereotypes and cultural attitudes regarding women of color often devalue the productivity of these women and deprioritize their need for job motivation and satisfaction (McLemore et al, 2018).
Some of the commonly held stereotypes about women of color depict African American women as aggressive, loud, and uncontrollable. Latin-American women are perceived to be hypersexualized and pose a threat of maternity leaves. Asian women are seen to be ever agreeable, submissive, and incapable of leadership, invisible, cute, and small. Native American women are also seen as invisible and are overlooked for various leadership opportunities.
According to a research done by Washington and Roberts (2019), women of color are confident, ambitious, determined, and have a great desire to excel in their place of work. However, they lack managers and employers who understand their struggles and can assist them to overcome the challenges that prevent them from achieving their best. Due to lack of supportive work environments, women of color are laid off or quit their jobs leading high unemployment rates among them.
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Minority Women in Poverty
Most companies fail to understand that having organizational policies that prohibit biasness and discrimination is one thing while have an employer who is truly supportive is another. Managers can help the high unemployment rates among women of color in various ways (Flores, 2018). First, they should make the first move in social situation by engaging then in conversations and in the decision making process.
Secondly, they should give credit where it is deserved. Employees should be rewarded and promoted according to their skills and work experience and not based on their sex or color. More so, employees who do well in various projects should be recognized regardless of their sex or color. Thirdly, managers should not shy away from giving candid feedback during projects (Flores, 2018).
Fourthly, managers should check for bias during hiring. Lastly, managers should use exit interviews so as to get feedback from people who wish to quit. Most women of color quit because the working environment was not conducive which and their reasons can help managers improve the workplace.
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Childcare is a basic need for all children. However, most of the minority women who are the caregivers live in low-income, are undervalued in their places of work, and are invisible for promotions. Presently, most women of color with young children have to make difficult choices between using a considerable amount of their low income on childcare, find cheaper but generally lower-quality care options, or leave their work to become full-time caregivers (Schochet, 2019).
In most cases, women of color cannot afford to pay hired help to look after their small children. Nonetheless, leaving the children on their own or under the care of younger siblings is not also an option. Most minority families have found themselves in trouble with children care services because they were reported of leaving their children seemingly unattended at home. Most parents have lost custody of their children on charges related to neglect yet these women have to work to take care of their families.
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Minority Women in Poverty
As a result, child care problems have become a significant barrier to work among minority women. According to a survey conducted in 2018 by the Center for American Progress, women of color reported higher rates of experiencing the negative effects of child care as compared to men of any race and white women (Schochet, 2019). More often women of color have been forced to make employment decision based on the most favorable child care options as compared to their financial situations, personal interests, and career goals.
Presently, there is a growing awareness regarding the correlation between parental employment, child care, and economic growth (Schochet, 2019). While companies rely on the reliability of employees, most minority women with young children rely on the available child care options. When challenges with child care occur, these women must struggle to find other options as soon as possible or miss work. This means that apart from poor salaries and benefits, minority women also have to suffer from pay cuts, working lessor hours, or staying unemployed altogether.
Minority Women in Poverty
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References
Flores, C. (2018). Spotlight on Women of Color in STEM. Industrial and Organizational Psychology, 11(2), 291-296.
McLemore, M. R., Altman, M. R., Cooper, N., Williams, S., Rand, L., & Franck, L. (2018). Health care experiences of pregnant, birthing and postnatal women of color at risk for preterm birth. Social Science & Medicine, 201, 127-135.
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Transactions cost economics
Firm v market, transactions cost economics (TCE), make-or-buy dilemma, vertical boundaries of the firm, vertical chain.
Firms are important when contracts are incomplete, and firms make large specific investments. Firms are complex, a nexus of contracts where management take the view that vertical integration is useful for assuring input supply in an uncertain world. However coordination can be a problem in vertical chains yet management need to obtain economies of scale and size in production in order to be profitable. A critical task for management is to define the boundaries of the firm by determining what to make and what to buy.
Transaction Cost Economics and Vertical Boundaries of a Firm
Introduction
The conditions under which businesses are being done are dramatically changing, with the continuous infrastructure improvement marked by communications, transportation and technologies, as well as revolutionizing the environment of business operations and stakeholders of business institutions as well as the interactions with suppliers, competitors, customers and other stakeholders (Williamson, 2002).
Therefore, given the above changes in infrastructure, vertical integration turns out to be a logical option for firms due to the tremendous increase in market size and the demand of product thereby allowing high-volume production. Hence, with the continuous telecommunications technologies and production advancements, one of the most significant firm’s strategic decisions is defining their boundaries under the circumstances which they consider using market rather than using internal organization in coordinating exchange (Milgrom & Roberts, 1992).
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This essay provides a keen examination of the key characteristics of Transaction Cost Economics (TCE), as well as analyzing the role that co-ordination plays in a vertical chain with the use of the issue tree. The essay has two parts where the first part starts by describing the TCE followed by the reviewing of the assumptions and the role of TCE. The second part provides a discussion of the role played by co-ordination in a vertical chain while the final part provides a conclusion of the essay.
The key characteristics of transaction cost
Milgrom & Roberts (1992) defines transaction cost economics as the search, bargain, monitoring, enforcing as well as other cost not in direct relation to production of both services and goods. The use of the principle of TCE has been extensive and managers utilize it to determine the goods and services’ which are needed in a production process for make-or-buy decisions. Williamson (1981) states the assumptions of TCE as bounder rationality which referring to the rate as well as storage limits on the individual’s capacities for retrieving, storing and processing information without errors.
However, the key characteristics of TCE would be discussed in terms of relationship specific assets, as well as the concept of fundamental transformation of rent, hold-up and quasi-rent (Milgrom & Roberts, 1992). Moreover, relationship specific assets are a set of investments or assets which are made towards supporting a given transaction particularly for improving efficiency of the given transaction whose redeployment to another transaction is not possible without incurring cost or affecting the asset productivity. Besanko, Dranove, Shanley & Schaefer (2010) described the key characteristics of CTE as well as the relationship specific asset which takes four forms discussed below:
1. Site specificity: These investments in assets can be referred to as the located side-by -side with the aim of taking advantage of efficiency in processing while making it economical to transport as well as minimizing inventory cost. Willamson (1981) provides an example of location of this as successive stations in check-by-jowl relation to each other in the attempts of economizing of the transportation and inventory expenses.
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2. Physical Asset Specificity: Assets that are particularly tailored to a specific transaction in both physical properties and engineering. Willamson (1981) gives an example of a situation whereby specialized or unique resources are needed in a component.
3. Dedicated Assets: this is a situation whereby an investment is not necessarily profitable, in equipment and plant induced by a contract or promise of a buyer.
4. Human Asset Specificity: a set of know-how, skills as well as information acquired by a group of workers or workers who have valuable significance inside a particular transaction relationship compared to when it is outside of it. Milgrom & Roberts (1992) states that, this is likely to occur through a process of learning or by doing. Moreover, Besanko, Dranove, Shanley & Schaefer (2010) brings the fundamental transformation associated concepts of assets specific relationship as rent, holdup and quasi-rent problems.
The vertical boundaries of a firm and the role of coordination
Generally, the flow of goods occurs along a vertical chain, that is, from the component parts and raw materials to manufacturing through distribution and finally retailing. Williamson (2002) observed that, in making decisions on firm boundaries, managers and entrepreneurs weigh the internal production benefits against the risks and costs of using markets.
For instance, in the oil and gas industry, the vertical chain of petroleum products is from crude oil which is the raw material being explored and produced, to storage and/or transportation through vessels and pipelines to a refineries for processing to various other petroleum products such as diesel, petrol, aviation fuel and other associated products. This also involves later storage and distribution of the finished petroleum products to various channels for retailing.
Irrespective of the position of a firm along the vertical chain, it has to define boundaries of the firm as well as the firm as a pool of experience, abilities and knowledge in addition to undertaking stages in which the application of the existing capabilities occur. In the attempts to resolve the associated make-or-buy decisions, there must be a comparison of the benefits as well as cost of using the market compared to performing the activities in house by the firm.
Besanko, Dranove, Shanley & Schaefer (2010) reiterates that a firm uses the market mainly due to the fact that the market firm are in most cases very efficient because of the exploitation of the learning curve and economics of scale as well as eliminating bureaucracy, and vertical integration of a firm makes links with products in adjacent stages that are within the value chain as well as internalizing exchanges taking place in open market.
Milgrom & Roberts (1992) states the cost incurred as a result of the use of the market as well as the reasons which makes the firm to embrace vertical integration such as the poor coordination cost between the vertical chain steps, asymmetric information and transaction cost.
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Coordination is the management of the business activities dependencies (Besanko, Dranove, Shanley & Schaefer, 2010), and thereby make it a core aspect of the market utilization within the vertical chain. This implies that in coordination a set of two or more actors are involved in performing economic activities or exchanges in order to ensure goals are achieved within the vertical chain (Williamson, 2002).
Using the issue tree in Figure 5.4 pp144 Besanko as guide for the critical role played by coordination in the vertical chain and how firms make or buy decision; the use of the market firm as well as vertically integration are very essential. Therefore, this implies that coordination arises in using the market, and the following of the issue tree would be achieved in using the market.
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Conclusion
In this essay there has been identification of the key characteristics of TCE in terms of its relation asset specific as well as evaluating the assumptions of bounder opportunism and rationality. The discussion of the vertical chain as well as the essential role that coordination plays, have also been discussed in the essay.
References
Besanko, D., Dranove, D., Shanley, M. & Schaefer, S. (2010). Economics of strategy, 5th ed. Hoboken, NJ: John Wiley& Sons.
Milgrom, P., & Roberts, J. (1992). Economics, Organization and Management. Englewood Cliffs, NJ: Prentice-Hall.
