Question 1

On January 1, 1997, HomeSafe Cab Co. will issue new bonds to finance its expansion plans. Currently outstanding 9%, January 1, 2010 HomeSafe bonds are selling for $1,067.91. If interest is paid semi-annually for both bonds, what must the coupon rate of the new bonds be in order for the issue to sell at par?

Accepted Answer

The answer of On January 1, 1997, HomeSafe Cab Co....

Question 2

The bonds issued by B&H Enterprises bear a 7% coupon which is payable semi-annually. The bonds mature in 11 years and have a $1,000 face value. Currently, the bonds sell at par. What is the yield to maturity?

Accepted Answer

Since the bonds sell at par (their face value), the yield to maturity is equal to the coupon rate, which is 7%.

Question 3

Mayflower, Inc. has some 7% semi-annual coupon bonds on the market selling at $1,012. The bonds have 9 years left to maturity. What is the effective annual yield on these bonds?

Accepted Answer

The effective annual yield (EAY) can be calculated using the bond's price, the coupon rate, and the time to maturity. Given that the bond is selling for $1,012, has a 7% semi-annual coupon, and 9 years to maturity, we can calculate the yield to maturity (YTM) on a semi-annual basis and then convert it to an effective annual yield. The YTM found through calculation or financial calculator considering the semi-annual periods would be close to 6.94% when annualized correctly, taking into account the compounding effect.

Question 4

Wesley-Townsend bonds have an 8.25% coupon and pay interest annually. The face value is $1,000 and the current market price is $1,004.60 per bond. The bonds mature in 17.5 years. What is the yield to maturity?

Accepted Answer

The answer of Wesley-Townsend bonds have an 8.25% coupon and...

Question 5

Which one of the following bonds has the greatest interest rate risk?

Accepted Answer

E) 9-year; 7% coupon bonds have the greatest interest rate risk because they have the longest maturity and the lowest coupon rate, making them more sensitive to changes in interest rates.

Question 6

The bonds issued by Jordache Jewelers of Toronto bear a 7.5% coupon, payable semiannually. The bonds mature in 13 years and have a $1,000 face value. Currently, the bonds sell at par. What is the yield to maturity?

Accepted Answer

Since the bonds sell at par (their face value), the yield to maturity is equal to the coupon rate, which is 7.5%.

Question 7

A General Co. bond has an 8% coupon and pays interest annually. The face value is $1,000 and the current market price is $1,020.50. The bond matures in 20 years. What is the yield to maturity?

Accepted Answer

The yield to maturity (YTM) is the rate of return anticipated on a bond if held until it matures. It can be calculated using a financial calculator or spreadsheet by inputting the bond's current market price, face value, coupon rate, and time to maturity. For this bond, the YTM is approximately 7.79%.

Question 8

The bonds issued by Hardwood Floors & More have a 9.25% coupon and pay interest annually. The face value is $1,000 and the current market price is $1,014.60. The bonds mature in 16 years. What is the yield to maturity on these bonds?

Accepted Answer

The yield to maturity (YTM) is calculated using the formula that equates the present value of future cash flows (coupon payments and face value) to the current market price. The YTM for these bonds is approximately 9.07%.

Question 9

D&G Enterprises issues bonds with a $1,000 face value that make coupon payments of $30 every three months. What is the coupon rate?

Accepted Answer

The coupon rate is calculated on an annual basis. Since the bond makes quarterly payments of $30, the total annual payment is $30 x 4 = $120. To find the coupon rate, divide the annual payment by the face value of the bond: $120 / $1,000 = 0.12 or 12%.

Question 10

Three years ago, the French Co. issued twenty-year bonds with a 9% coupon rate and semi-annual interest payments. Today these bonds are quoted at a price of 105.75. What is the yield-to-maturity?

Accepted Answer

The yield-to-maturity (YTM) of a bond is the internal rate of return (IRR) if the bond is held until maturity, considering all its payments (coupons and principal) at their present values. Given the bond's price is above par (105.75), the YTM must be lower than the coupon rate (9%). Among the options, 8.36% is the only rate lower than the coupon rate and reasonably close to it, considering the bond's price premium. Calculating the exact YTM requires financial calculations involving the bond's price, coupon payments, years to maturity, and face value, which typically results in a rate between the coupon rate and the current market rates for similar bonds.

Question 11

Cornerstone Industries has a bond outstanding that has a 7% coupon rate and a market price of $887.71. If the bond matures in five years and interest is paid semiannually, what is the YTM?

Accepted Answer

The answer of Cornerstone Industries has a bond outstanding that...

Question 12

J&J Manufacturing just issued a bond with a $1,000 face value and a coupon rate of 7%. If the bond has a life of 30 years, pays annual coupons, and the yield to maturity is 6.8%, what% of the bond's total price is represented by the present value of the coupons?

Accepted Answer

The present value of the coupons is calculated using the formula for the present value of an annuity. The bond's total price is the sum of the present value of the coupons and the present value of the face value. The percentage of the bond's total price represented by the present value of the coupons is approximately 86.4%.

Question 13

Martha owns a 7% coupon bond that has 13 years to maturity. The bond pays interest annually and is currently selling for $1,034.50. What is the yield to maturity on this bond?

Accepted Answer

The answer of Martha owns a 7% coupon bond that...

Question 14

Klapol, Inc. has a 20-year bond issue outstanding that pays a 7.5% coupon. The bonds are currently priced at $987.50 and have a par value of $1,000. Interest is paid semi-annually. What is the yield to maturity?

Accepted Answer

The answer of Klapol, Inc. has a 20-year bond issue...

Question 15

The outstanding bonds of Frank's Welding provide a real rate of return of 2.87%. The current rate of inflation is 4.64%. What is the nominal rate of return on these bonds?

Accepted Answer

The nominal rate of return can be calculated using the Fisher equation: (1 + nominal rate) = (1 + real rate) * (1 + inflation rate). Solving for the nominal rate gives approximately 7.64%.

Question 16

Gerry Industries has some 8% coupon bonds on the market that are selling at $989, pay interest semi-annually, and mature in fifteen years. The company would like to issue $1 million in new fifteen-year bonds. What coupon rate should be applied to the new bonds if Gerry Industries wants to sell them at par (Use values in the dollar)?

Accepted Answer

The answer of Gerry Industries has some 8% coupon bonds...

Question 17

Culpepper Supply has a bond issue outstanding that pays a 7.5% coupon and matures in 14 years. The bonds have a par value of $1,000 and a market price of $942.90. Interest is paid semiannually. What is the yield to maturity?

Accepted Answer

The yield to maturity (YTM) can be calculated using the formula for bond pricing, which equates the present value of future cash flows (coupon payments and par value) to the current market price. Given the bond's coupon rate, market price, and maturity, the YTM is approximately 8.19%.

Question 18

The Exley Company bonds are currently selling for $1,041.30. These bonds mature in seven years, pay semi-annual interest and have a yield to maturity of 6.75%. What is the coupon rate?

Accepted Answer

The answer of The Exley Company bonds are currently selling...

Question 19

The semi-annual, 8% coupon bonds of Merriweather, Inc. are selling at par. The effective annual rate of these bonds must be equal to:

Accepted Answer

The effective annual rate is the rate that would produce the same total return as the semi-annual rate over a one-year period. In this case, the semi-annual rate is 4%, so the effective annual rate must be (1.04)²- 1, which is approximately 8.16%.

Question 20

You earn a 5% real return. If the inflation rate is 4%, what is your nominal return?

Accepted Answer

The nominal return can be calculated using the formula: (1 + real return) * (1 + inflation rate) - 1. So, (1 + 0.05) * (1 + 0.04) - 1 = 1.092 - 1 = 0.092 or 9.20%.

Quiz 7: Interest Rates and Bond Valuation