Question 1

Radoski Corporation's bonds make an annual coupon interest payment of 7.35%. The bonds have a par value of $1,000, a current price of $1,130, and mature in 12 years. What is the yield to maturity on these bonds?

Accepted Answer

To calculate the yield to maturity, we need to use the formula: 
YTM = (C + (F-P)/n) / ((F+P)/2)
Where:
C = annual coupon payment = $73.50 (7.35% x $1,000)
F = face value = $1,000
P = current price = $1,130
n = number of years to maturity = 12

Plugging in these values, we get:
YTM = (73.50 + (1000-1130)/12) / ((1000+1130)/2)
YTM = 5.82%

Therefore, the answer is B.

Question 2

Dyl Inc.'s bonds currently sell for $1,040 and have a par value of $1,000. They pay a $65 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to maturity (YTM)?

Accepted Answer

To calculate YTM, we need to use the present value formula and solve for the discount rate (YTM) that equates the present value of the bond's cash flows to its current market price:

PV = C/(1+r)^1 + C/(1+r)^2 + ... + C/(1+r)^n + M/(1+r)^n

Where:
PV = Present value of the bond
C = Annual coupon payment
r = Yield to maturity (discount rate)
n = Years to maturity
M = Par value

Given:
C = $65
M = $1,000
n = 15
PV = $1,040

If the bond is called in 5 years, then we need to calculate the present value of its cash flows until year 5 and add it to the present value of a $1,100 payment discounted back to year 5 at the YTM:

PV = C/(1+r)^1 + C/(1+r)^2 + ... + C/(1+r)^5 + M/(1+r)^5
PV = 65/(1+r)^1 + 65/(1+r)^2 + ... + 65/(1+r)^5 + 1,100/(1+r)^5

Using a financial calculator or Excel, we can find that the YTM that makes PV = $1,040 is approximately 6.09%. Therefore, the answer is B.

Question 3

Which of the following statements is CORRECT?

Accepted Answer

Convertible bonds generally have lower coupon rates than non-convertible bonds of similar default risk because they offer the possibility of capital gains. Convertible bonds give the holder the option to convert the bond into a predetermined number of shares of the issuing company's stock, which can potentially increase in value and provide a higher return than the bond's coupon rate.

Question 4

Malko Enterprises' bonds currently sell for $1,050. They have a 6-year maturity, an annual coupon of $75, and a par value of $1,000. What is their current yield?

Accepted Answer

The answer of Malko Enterprises' bonds currently sell for $1,050....

Question 5

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
...

Question 6

Short Corp. just issued bonds that will mature in 10 years, and Long Corp. issued bonds that will mature in 20 years. Both bonds promise to pay a semiannual coupon, they are not callable or convertible, and they are equally liquid. Further, assume that the Treasury yield curve is based only on expectations about future inflation, i.e., that the maturity risk premium is zero for T-bonds but not necessarily for corporate bonds. Under these conditions, which of the following statements is correct?

Accepted Answer

If the Treasury yield curve is upward sloping and Short has less default risk than Long, Short's bonds will have a lower yield due to lower default risk and shorter maturity.

Question 7

Assume that the current corporate bond yield curve is upward sloping. Under this condition, then we could be sure that

Accepted Answer

The answer of Assume that the current corporate bond yield...

Question 8

Morin Company's bonds mature in 8 years, have a par value of $1,000, and make an annual coupon interest payment of $65. The market requires an interest rate of 8.2% on these bonds. What is the bond's price?

Accepted Answer

The answer of Morin Company's bonds mature in 8 years,...

Question 9

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
...

Question 10

Grossnickle Corporation issued 20-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 19 years to maturity?

Accepted Answer

The answer of Grossnickle Corporation issued 20-year, noncallable, 7.5% annual...

Question 11

Which of the following statements is CORRECT?

Accepted Answer

When the current market interest rate is below the coupon rate, the issuer of the callable bond is more likely to call the bond and reissue it at a lower rate, which reduces the value of the bond to the investor. Therefore, the difference in prices between the callable bond and the noncallable bond will be greater in this case.

Question 12

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
...

Question 13

Ryngaert Inc. recently issued noncallable bonds that mature in 15 years. They have a par value of $1,000 and an annual coupon of 5.7%. If the current market interest rate is 7.0%, at what price should the bonds sell?

Accepted Answer

The answer of Ryngaert Inc. recently issued noncallable bonds that...

Question 14

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
...

Question 15

Bond A has a 9% annual coupon, while Bond B has a 7% annual coupon. Both bonds have the same maturity, a face value of $1,000, an 8% yield to maturity, and are noncallable. Which of the following statements is CORRECT?

Accepted Answer

The answer of Bond A has a 9% annual coupon,...

Question 16

Taussig Corp.'s bonds currently sell for $1,150. They have a 6.35% annual coupon rate and a 20-year maturity, but they can be called in 5 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?

Accepted Answer

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

Question 17

McCue Inc.'s bonds currently sell for $1,250. They pay a $90 annual coupon, have a 25-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; it is possible to get a negative answer.)

Accepted Answer

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

Question 18

Assume that you are considering the purchase of a 20-year, noncallable bond with an annual coupon rate of 9.5%. The bond has a face value of $1,000, and it makes semiannual interest payments. If you require an 8.4% 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 19

Adams Enterprises' noncallable bonds currently sell for $1,120. They have a 15-year maturity, an annual coupon of $85, and a par value of $1,000. What is their yield to maturity?

Accepted Answer

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

Question 20

Sadik Inc.'s bonds currently sell for $1,180 and have a par value of $1,000. They pay a $105 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to call (YTC)?

Accepted Answer

The answer of Sadik Inc.'s bonds currently sell for $1,180...

Quiz 7: Bonds and Their Valuation

Radoski Corporation's bonds make an annual coupon interest payment of 7.35%. The bonds have a par value of $1,000, a current price of $1,130, and mature in 12 years. What is the yield to maturity on these bonds?

Dyl Inc.'s bonds currently sell for $1,040 and have a par value of $1,000. They pay a $65 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to maturity (YTM) ?

Which of the following statements is CORRECT?

Malko Enterprises' bonds currently sell for $1,050. They have a 6-year maturity, an annual coupon of $75, and a par value of $1,000. What is their current yield?

Which of the following statements is CORRECT?

Assume that the current corporate bond yield curve is upward sloping. Under this condition, then we could be sure that

Morin Company's bonds mature in 8 years, have a par value of $1,000, and make an annual coupon interest payment of $65. The market requires an interest rate of 8.2% on these bonds. What is the bond's price?

Which of the following statements is CORRECT?

Grossnickle Corporation issued 20-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 19 years to maturity?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Ryngaert Inc. recently issued noncallable bonds that mature in 15 years. They have a par value of $1,000 and an annual coupon of 5.7%. If the current market interest rate is 7.0%, at what price should the bonds sell?

Which of the following statements is CORRECT?

Bond A has a 9% annual coupon, while Bond B has a 7% annual coupon. Both bonds have the same maturity, a face value of $1,000, an 8% yield to maturity, and are noncallable. Which of the following statements is CORRECT?

Adams Enterprises' noncallable bonds currently sell for $1,120. They have a 15-year maturity, an annual coupon of $85, and a par value of $1,000. What is their yield to maturity?

Sadik Inc.'s bonds currently sell for $1,180 and have a par value of $1,000. They pay a $105 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to call (YTC) ?