Question 1

Consider some bonds with one annual coupon payment of 7.25%. The bonds have a par value of $1,000, a current price of $1,125, and they will mature in 13 years. What is the yield to maturity on these bonds?

Accepted Answer

Using a financial calculator, we can solve for the yield to maturity (YTM) using the given information: 
N = 13 (number of years to maturity)
PV = -1125 (current price, negative because it represents a cash outflow)
FV = 1000 (par value)
PMT = 72.50 (annual coupon payment, calculated as 7.25% of the par value)
Solving for I/Y (interest rate, which is the YTM in this case), we get approximately 5.85%. Therefore, the answer is choice B.

Question 2

Keenan Industries has a bond outstanding with 15 years to maturity, an 8.75% coupon paid semiannually, and a $1,000 par value. The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,050. What is the bond's nominal yield to call?

Accepted Answer

We need to calculate the bond's yield to call. Since the bond can be called in 6 years, we need to calculate the bond's yield to call using the following formula:
YC = (C + (FV - Call Price)/n) / ((FV + Call Price)/2)
Where:
YC = yield to call
C = annual coupon payment
FV = face value
n = number of periods to call
Using the values given in the question, we get:
YC = (87.5 + (1000 - 1050)/30) / ((1000 + 1050)/2)
YC = 5.27%
Therefore, the answer is B.

Question 3

A 25-year, $1,000 par value bond has an 8.5% annual coupon. The bond currently sells for $875. If the yield to maturity remains at its current rate, what will the price be 5 years from now?

Accepted Answer

First, we need to calculate the current yield to maturity (YTM) based on the given information. Using a financial calculator or Excel, we can solve for the YTM as follows:

N = 25 (since it's a 25-year bond)
PMT = 85 (8.5% annual coupon rate * $1,000 par value)
FV = 1,000 (par value)
PV = -875 (current market price)
Solving for I/Y = 10.96%

Next, we need to calculate the future value of the bond in 5 years based on the YTM we just calculated. Again, using a financial calculator or Excel, we can solve for the future value (FV) as follows:

N = 20 (since we're looking 5 years into the future, which is 20 years from the bond's original maturity date)
PMT = 85 (same as before)
FV = -1,000 (since the bond will be redeemed at par value when it matures)
PV = 875 (current market price)
I/Y = 10.96% (same as before)
Solving for FV = $882.90

Therefore, the best choice is (C) $882.90, as this is the expected price of the bond 5 years from now based on the current yield to maturity.

Question 4

In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures to a market value basis. KJM Corporation's balance sheet as of today is as follows: Long-term debt (bonds, at par)Preferred stock 2,000,000
Common stock ($10 par)Retained earnings 4,000,000
Total debt and equity $26,000,000
The bonds have a 4.0% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 12%, so the bonds now sell below par. What is the current market value of the firm's debt?

Accepted Answer

First, we need to calculate the current market value of the bonds. We know that the bond has a 4.0% annual coupon rate and pays semiannually, so the coupon payment is $20 ($1,000 * 0.04 * 0.5). We also know that the yield to maturity is 12%, which means the bond sells at a discount. We can use the bond pricing formula to find the current market price:

PV = (C / r) x (1 - 1 / (1 + r)^n) + F / (1 + r)^n
PV = (20 / 0.06) x (1 - 1 / 1.06^20) + 1,000 / 1.06^20
PV = $578.12 + $219.61
PV = $797.73

Therefore, the current market value of the bonds is $797.73 per bond.

To calculate the total market value of the debt, we need to multiply the current market value per bond by the number of bonds outstanding:

Total market value of debt = $797.73 x 2,000 = $1,595,460

Therefore, the current market value of the firm's debt is $1,595,460. However, this is just the market value of the bonds. We do not have enough information to calculate the market value of any other debt the firm may have.

Question 5

Zumwalt Corporation's Class S bonds have a 12-year maturity, $1,000 par value, and a 5.75% coupon paid semiannually (2.875% each 6 months), and those bonds sell at their par value. Zumwalt's Class A bonds have the same risk, maturity, and par value, but the A bonds pay a 5.75% annual coupon. Neither bond is callable. At what price should the annual payment bond sell?

Accepted Answer

The answer of Zumwalt Corporation's Class S bonds have a...

Question 6

Wachowicz Corporation issued 15-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 14 years to maturity?

Accepted Answer

The answer of Wachowicz Corporation issued 15-year, noncallable, 7.5% annual...

Question 7

McCue Inc.'s bonds currently sell for $1,250. They pay a $120 annual coupon, have a 15-year maturity, and a $1,000 par value, but they can be called in 5 years at $1,050. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM.)

Accepted Answer

The answer of McCue Inc.'s bonds currently sell for $1,250....

Question 8

Sadik Inc.'s bonds currently sell for $1,280 and have a par value of $1,000. They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050. What is their yield to call (YTC)?

Accepted Answer

The answer of Sadik Inc.'s bonds currently sell for $1,280...

Question 9

Garvin Enterprises' bonds currently sell for $1,150. They have a 6-year maturity, an annual coupon of $85, and a par value of $1,000. What is their current yield?

Accepted Answer

The answer of Garvin Enterprises' bonds currently sell for $1,150....

Question 10

Taussig Corp.'s bonds currently sell for $1,150. They have a 6.75% annual coupon rate and a 15-year maturity, but they can be called in 6 years at $1,067.50. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. Under these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds, the YTC or the YTM?

Accepted Answer

The answer of Taussig Corp.'s bonds currently sell for $1,150....

Question 11

Moerdyk Corporation's bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 4.75%, based on semiannual compounding. What is the bond's price?

Accepted Answer

The answer of Moerdyk Corporation's bonds have a 10-year maturity,...

Question 12

Quigley Inc.'s bonds currently sell for $1,080 and have a par value of $1,000. They pay a $100 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,125. What is their yield to maturity (YTM)?

Accepted Answer

To calculate the yield to maturity (YTM), you need to find the interest rate that makes the present value of the bond's future payments (coupon payments and principal) equal to its current price. Using a financial calculator or spreadsheet program, the YTM for these bonds is approximately 9.01%. Therefore, the best choice is B.

Question 13

Ezzell Enterprises' noncallable bonds currently sell for $1,165. They have a 15-year maturity, an annual coupon of $95, and a par value of $1,000. What is their yield to maturity?

Accepted Answer

The answer of Ezzell Enterprises' noncallable bonds currently sell for...

Question 14

Cosmic Communications Inc. is planning two new issues of 25-year bonds. Bond Par will be sold at its $1,000 par value, and it will have a 10% semiannual coupon. Bond OID will be an Original Issue Discount bond, and it will also have a 25-year maturity and a $1,000 par value, but its semiannual coupon will be only 6.25%. If both bonds are to provide investors with the same effective yield, how many of the OID bonds must Cosmic issue to raise $3,000,000? Disregard flotation costs, and round your final answer up to a whole number of bonds.

Accepted Answer

First, we need to calculate the effective yield of the bond with a 10% coupon:

- Each coupon payment will be $50 (=$1,000 par value x 10% coupon rate x 6/12)
- There will be 50 coupon payments over 25 years, so the total coupon payments will be $2,500 (=50 x $50)
- At maturity, the bondholder will also receive the par value of $1,000
- Therefore, the total future cash flows for this bond are $3,500 (= $2,500 + $1,000)

Using a financial calculator or spreadsheet function, we can solve for the yield to maturity (YTM) that makes the present value of these future cash flows equal to the price of the bond:

PV = $1,000 (for a par bond)
PMT = $50
N = 50 x 2 = 100 (since there are two payments per year)
FV = $1,000
Solving for I/Y gives a YTM of 7.22%

Now, we need to find the number of OID bonds Cosmic Communications must issue to raise $3,000,000 while providing investors with the same effective yield as the bond with a 10% coupon.

Let's assume they issue X number of OID bonds. The total dollar amount raised by the OID bonds will be:

$1,000 per bond x (1 - price of OID bond) x X bonds = $3,000,000

Since the OID bond has a 6.25% coupon rate, the effective yield will be lower than 7.22%. We need to find the price of the OID bond that will give us the same effective yield as the bond with a 10% coupon and use it to solve for X.

Using the same method as before, the YTM of the OID bond that makes the present value of its future cash flows equal to its price can be found:

PV = price of OID bond
PMT = $31.25 (= $1,000 x 6.25% / 2)
N = 50 x 2 = 100
FV = $1,000
Solving for I/Y gives a YTM of 9.479%

To make the effective yields of the two bonds equal, we need to find the price of the OID bond that gives a YTM of 7.22%:

PV = $31.25 / (1 + 0.0361)^1 + $31.25 / (1 + 0.0361)^2 + ... + $31.25 / (1 + 0.0361)^100 + $1,000 / (1 + 0.0361)^100 = $608.01

Therefore, the number of OID bonds needed to raise $3,000,000 is:

X = $3,000,000 / [$1,000 x (1 - $608.01 / $1,000)] = 4,562.16

Rounding up to the nearest whole number gives us 4,562 bonds. Therefore, the best answer is D) 4,562.

Question 15

Assume that you are considering the purchase of a 15-year bond with an annual coupon rate of 9.5%. The bond has face value of $1,000 and makes semiannual interest payments. If you require an 11.0% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

Accepted Answer

The answer of Assume that you are considering the purchase...

Question 16

5-year Treasury bonds yield 5.5%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year bonds is 0.4%. What is the real risk-free rate, r*?

Accepted Answer

The answer of 5-year Treasury bonds yield 5.5%. The inflation...

Question 17

O'Brien Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 25 years. Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $850. What is the bond's nominal (annual) coupon interest rate?

Accepted Answer

The answer of O'Brien Ltd.'s outstanding bonds have a $1,000...

Question 18

If 10-year T-bonds have a yield of 6.2%, 10-year corporate bonds yield 8.5%, the maturity risk premium on all 10-year bonds is 1.3%, and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond?

Accepted Answer

The answer of If 10-year T-bonds have a yield of...

Quiz 5: Bonds, Bond Valuation, and Interest Rates