Question 1

Suppose a new company decides to raise a total of $200 million, with $100 million as common equity and $100 million as long-term debt. The debt can be mortgage bonds or debentures, but by an iron-clad provision in its charter, the company can never raise any additional debt beyond the original $100 million. Given these conditions, which of the following statements is CORRECT?

Accepted Answer

The mix of debentures versus first mortgage bonds could affect the interest rate on each type of bond, but it is uncertain whether it would materially affect the firm's total interest charges. The exact average cost of the mix cannot be determined and would depend on various factors, such as market conditions and investor demand. Therefore, we cannot tell for sure how, or even whether, the firm's total interest expense on the $100 million of debt would be affected by the mix of debentures versus first mortgage bonds.

Question 2

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. The ability to convert the bond into shares of the issuer's common stock provides an additional benefit to bondholders, which offsets the lower coupon rate. Essentially, investors are willing to accept a lower coupon rate in exchange for the potential to benefit from an increase in the issuer's stock price if it performs well.

Question 3

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
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Question 4

Assuming all else is constant, which of the following statements is CORRECT?

Accepted Answer

This statement is true because the price sensitivity of a bond is inversely related to its duration, and duration increases with maturity. Therefore, as maturity increases, the price sensitivity decreases, meaning that a given change in interest rates will have a smaller impact on the bond's price. Additionally, when interest rates increase, bond prices decrease and vice versa. Since a 1.0 percentage point increase in interest rates causes a greater increase in required yield for longer-term bonds, they will experience a larger decrease in price than shorter-term bonds in response to interest rate changes.

Question 5

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
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Question 6

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

We can use the financial calculator to solve for YTM. 
Inputs: N = 15, PV = -1040, PMT = 65, FV = 1000, CPT → I/Y = 6.09% 
Alternatively, we can use the approximate formula: 
YTM = (annual coupon payment + (par value - bond price) / years to maturity) / ((par value + bond price) / 2) 
YTM = (65 + (1100 - 1040) / 10) / ((1000 + 1040) / 2) = 6.09% 
Therefore, the best choice is B.

Question 7

A company is planning to raise $1,000,000 to finance a new plant. Which of the following statements is CORRECT?

Accepted Answer

The interest rate on the first mortgage bonds would be lower because they are backed by a specific asset and are therefore less risky for investors. The debentures, which are unsecured, would be riskier and therefore carry a higher interest rate.

Question 8

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...

Question 9

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 10

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 11

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
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Question 12

Which of the following statements is CORRECT?

Accepted Answer

When interest rates are below the coupon rate, the issuer is more likely to call the bond and issue new ones at a lower rate, and thus the price of the callable bond will be lower than the noncallable bond.

Question 13

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
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Question 14

Listed below are some provisions that are often contained in bond indentures. Which of these provisions, viewed alone, would tend to reduce the yield to maturity that investors would otherwise require on a newly issued bond? 1. $\text {Fixed assets are used as security for a bond.}$
2. $\text {A given bond is subordinated to other classes of debt.}$
3. $\text {The bond can be converted into the firm's common stock.}$
4. $\text {The bond has a sinking fund.}$
5. $\text {The bond has a call provision.}$
6. $\text {The indenture contains covenants that restrict the use of additional debt.}$

Accepted Answer

The answer of Listed below are some provisions that are...

Question 15

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 16

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

Using the financial calculator or Excel, the yield to maturity on the bonds can be calculated as follows:
N = 12 (since the bonds mature in 12 years)
PV = -$1,130 (negative since it is the amount paid out)
PMT = $73.50 (7.35% of the par value of $1,000)
FV = $1,000 (since this is the par value and will be paid at maturity)
Solving for the rate (yield to maturity) gives a result of approximately 5.82%. Therefore, the best choice is B.

Question 17

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
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Question 18

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 19

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
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Question 20

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

1. Determine the present value of the annual interest payments:
PV of annuity = ($65 / 0.082) x [1 - (1 / (1 + 0.082)^8)] = $422.96

2. Determine the present value of the principal:
PV of principal = $1,000 / (1 + 0.082)^8 = $480.08

3. Add the present value of the interest payments and the principal:
Bond price = $422.96 + $480.08 = $903.04

Therefore, the best choice is A, with a bond price of $903.04.

Quiz 7: Bonds and Their Valuation

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Assuming all else is constant, which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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) ?

A company is planning to raise $1,000,000 to finance a new plant. Which of the following statements is CORRECT?

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) ?

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?

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?

Which of the following statements is CORRECT?

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?

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?

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?

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?