Author Question: Gong Li has recently inherited 10,000 and is considering purchasing 10 bonds of the Lucky ... (Read 19 times)

jace · **on:** Jul 10, 2018

Gong Li has recently inherited 10,000 and is considering purchasing 10 bonds of the Lucky Corporation. The bond has a par value of 1,000 with 10 percent coupon rate and will mature in 10 years.

Does Gong Li have enough money to buy 10 bonds if the required rate of return is 9 percent?

Question 2

Describe the principal-agent relationship. In your answer, give an example of how a principal-agent problem arises in the corporate world. Can such a problem become costly? Explain.

What will be an ideal response?

olivia_paige29 · **Reply #1 on:** Jul 10, 2018

Answer to Question 1

No. Since the required rate of return (9) is less than the bond's coupon rate (10), the bond's price is greater than its par value (1,000). Thus, the total price of 10 bonds is greater than 10,000.

Answer to Question 2

Answer: The principal-agent relationship is a relationship between one party (principal) who hires another party (agent) to perform a task. Problems with a principal-agent relationship arise when the agent has interests that conflict with those of the principal. Any problem becomes costly when the principal cannot always know for sure if an agent is behaving in a trustworthy manner. If a principal fears the agent is not properly fulfilling the assigned duties, then the principal has to decide what costs should be undertaken to monitor the agent. Costs might include hiring another party to watch the agent or offering the agent pay based on certain performance criteria. A common performance cost for large companies is the giving of stock options to employees so that their wealth is tied to how well they do their job.