Question 1

What would you pay for a bond that pays an annual coupon of $35, has a face value of $1,000, matures in seven years, and has a yield to maturity of 8%?

Accepted Answer

To calculate the price of the bond, we need to use the formula:
Price of the bond = (Coupon payment / (1 + Yield to maturity)^Years to maturity) + (Coupon payment / (1 + Yield to maturity)^(Years to maturity - 1)) + ... + (Coupon payment + Face value / (1 + Yield to maturity)^Years to maturity)

Plugging in the values:
Coupon payment = $35
Yield to maturity = 8% = 0.08
Face value = $1,000
Years to maturity = 7

Price of the bond = (35 / (1 + 0.08)^1) + (35 / (1 + 0.08)^2) + ... + (35 + 1,000 / (1 + 0.08)^7)
Price of the bond = 35 / 1.08 + 35 / 1.08^2 + ... + 1,035.71 / 1.08^7
Price of the bond = $765.71

Therefore, the best choice is A) $765.71.

Question 2

You purchase a bond with an invoice price of $960. The bond has a coupon rate of 5.5%, and there are three months to the next semiannual coupon date. What is the clean price of the bond?

Accepted Answer

The answer of You purchase a bond with an invoice...

Question 3

Sara wants to buy a zero coupon bond that will pay her $1,000 ten years from today. How much should Sara pay today to buy this bond if she wants to earn 7.5% on her investment?

Accepted Answer

To find the present value of the zero-coupon bond, use the formula PV = FV / (1 + r)^n, where PV is the present value, FV is the future value ($1,000), r is the annual interest rate (7.5% or 0.075), and n is the number of years (10). Plugging in the values, PV = $1,000 / (1 + 0.075)^10 = $485.19.

Question 4

Bastion Corporation issued $100 million bonds that mature in 30 years and have a 5% coupon rate that is paid annually. If the bonds were sold to yield 5.4%, determine the price of the bonds at the
End of year 5.

Accepted Answer

The answer of Bastion Corporation issued $100 million bonds that...

Question 5

Bastion Corporation issued $100 million bonds that mature in 30 years and have a 5% coupon rate that is paid annually. If the bonds were sold to yield 5.4%, determine the price of the bonds at the
End of year 15.

Accepted Answer

We can use the following formula to calculate the price of the bond at the end of year 15, which is the present value of the remaining cash flows:

P = (C/r) * [1 - 1/(1+r)^n] + F/(1+r)^n

Where:
P = price of the bond
C = annual coupon payment = 5% * $100 million = $5 million
r = yield to maturity = 5.4%
n = number of periods remaining until maturity = 30 - 15 = 15
F = face value of the bond = $100 million

Plugging in the numbers, we get:

P = ($5 million/0.054) * [1 - 1/(1+0.054)^15] + $100 million/(1+0.054)^15
P = $95,958,151

Therefore, the answer is C) $95,958,151.

Question 6

If the following bonds are identical except for coupon, what is the price of bond B?

Accepted Answer

Since the bonds are identical except for coupon, the bond with the lower coupon will have a lower price. Bond A has the lowest coupon at 4%, so it will have the lowest price. Bond B has a coupon of 6%, which is higher than Bond A's coupon but lower than Bond C's coupon. Bond C has the highest price, so Bond B's price must be between Bond A's price and Bond C's price. The only answer choice between $901.04 and $1,037.86 is $925.31, which is therefore the price of Bond B.

Question 7

The bonds of Microhard, Inc. carry a 10% annual coupon, have a $1,000 face value, and mature in four years. Bonds of equivalent risk yield 15%. Microhard is having cash ﬂow problems and has
Asked its bondholders to accept the following deal: The ﬁrm would like to make the next three
Coupon payments at half the scheduled amount, and make the ﬁnal coupon payment be $250. If
This plan is implemented, the market price of the bond will (rise/fall) to ___________. (Continue to
Assume a 15% required return.)

Accepted Answer

The answer of The bonds of Microhard, Inc. carry a...

Question 8

Bastion Corporation issued $100 million bonds that mature in 30 years and have a 5% coupon rate that is paid annually. If the bonds were sold to yield 5.4%, determine the price of the bonds at the
End of year 25.

Accepted Answer

The answer of Bastion Corporation issued $100 million bonds that...

Question 9

You are purchasing a 30-year, zero coupon bond. The yield to maturity is 9.1% and the face value is $1,000. What is the current market price?

Accepted Answer

The answer of You are purchasing a 30-year, zero coupon...

Question 10

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 is the present
Value of the bond's face value?

Accepted Answer

The answer of J&J Manufacturing just issued a bond with...

Question 11

The Goodie Barn has a 7% coupon bond outstanding that matures in 13.5 years. The bond pays interest semiannually. What is the market price per bond if the face value is $1,000 and the yield to
Maturity is 14.78%?

Accepted Answer

The market price of a bond can be calculated using the present value of its future cash flows, which include the semiannual coupon payments and the face value at maturity. Given the bond's coupon rate, yield to maturity, and time to maturity, the bond's price is calculated to be approximately $550.40.

Question 12

You purchase a bond with an invoice price of $988. The bond has a coupon rate of 7.4%, and there are ﬁve months to the next semiannual coupon date. What is the clean price of the bond?

Accepted Answer

The clean price of a bond is the invoice price minus the accrued interest. The accrued interest for five months on a 7.4% annual coupon rate (3.7% semiannual) is calculated as (5/6) * (3.7% of face value). Subtract this from the invoice price to find the clean price.

Question 13

Your ﬁrm offers a 10-year, zero coupon bond. The yield to maturity is 8.8%. What is the current market price of a $1,000 face value bond?

Accepted Answer

The current market price of a zero-coupon bond is calculated using the formula: Price = Face Value / (1 + Yield)^Years. For a $1,000 bond with an 8.8% yield over 10 years, the price is $1,000 / (1 + 0.088)^10 = $430.24.

Question 14

Westover Ridge offers a 9% coupon bond with semiannual payments and a yield to maturity of 11.68%. The bonds mature in 16 years. What is the market price per bond if the face value is $1,000?

Accepted Answer

The market price of a bond can be calculated using the formula for the present value of an annuity (for the coupon payments) plus the present value of a lump sum (for the face value of the bond at maturity). Given a 9% annual coupon rate with semiannual payments, the semiannual coupon rate is 4.5% (9% / 2) of the $1,000 face value, which equals $45 per period. With a yield to maturity of 11.68% annually, the semiannual yield is 5.84% (11.68% / 2). The bond matures in 16 years, which equals 32 semiannual periods. The present value of the annuity (coupon payments) is calculated using the formula PV = C * [1 - (1 + r)^-n] / r, where C is the coupon payment per period, r is the semiannual yield rate as a decimal, and n is the total number of periods. The present value of the lump sum (face value) is calculated using the formula PV = F / (1 + r)^n, where F is the face value. Adding these two present values gives the market price of the bond. Plugging in the given values, the calculation confirms that the correct market price is closest to option A, $807.86.

Question 15

Canadian Treasury bills are yielding 2.63%. Inﬂation is 2.45%. What is the real rate of return on the Treasury bill?

Accepted Answer

The real rate of return is calculated by subtracting the inflation rate from the nominal yield: 2.63% - 2.45% = 0.18%.

Question 16

The Jaxson Company offers a 6% coupon bond with semi-annual payments and a yield to maturity of 7.27%. The bonds mature in 6 years. What is the market price of a $1,000 face value bond?

Accepted Answer

The answer of The Jaxson Company offers a 6% coupon...

Question 17

Atlas Movers is issuing $1,000 face value zero coupon bonds at a quoted price of 38.70. What is the amount you would pay to purchase one of these bonds?

Accepted Answer

The quoted price of 38.70 indicates that the bond is being sold at a discount from its face value of $1,000. To calculate the amount you would pay for the bond, you need to multiply the quoted price by the face value and convert the percentage to a decimal:

$1,000 x 0.387 = $387

Therefore, the amount you would pay to purchase one of these bonds is $387.

Question 18

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 is the total
Present value of the bond's coupon payments?

Accepted Answer

To calculate the present value of the bond's coupon payments, we need to use the formula:

PV = C x [1 - (1 + r)-n / r] + FV / (1 + r)n

Where:
PV = Present value of the coupon payments
C = Annual coupon payment
r = Yield to maturity
n = Number of years
FV = Face value of the bond

Plugging in the numbers, we get:

PV = 70 x [1 - (1 + 0.068)-30 / 0.068] + 1,000 / (1 + 0.068)30
PV = 886.37

Therefore, the total present value of the bond's coupon payments is $886.37. Option C is the correct choice.

Question 19

Norwegian Adventures offers a 6.5% coupon bond with annual payments. The yield to maturity is 6.71% and the maturity date is 7 years from today. What is the market price of this bond if the face
Value is $1,000?

Accepted Answer

To find the market price of the bond, we need to calculate the present value of all future cash flows. The cash flows consist of annual coupon payments of 6.5% of the face value and the face value itself. We can use the following formula to calculate the present value of an annuity:
PMT x (1 - 1/(1+r)^n) / r + FV / (1+r)^n
where PMT is the annual coupon payment, r is the yield to maturity, n is the number of periods, and FV is the face value.

Using the information given in the question:
PMT = 0.065 x 1000 = $65
r = 6.71%
n = 7
FV = $1000

Plugging in these values, we get:
PV = 65 x (1 - 1/1.0671^7) / 0.0671 + 1000 / 1.0671^7
PV = $988.57

Therefore, the market price of the bond is $988.57, which is closest to option D ($988.57).

Question 20

King Noodles' bonds have a 7.5% coupon rate. Interest is paid quarterly and the bonds have a maturity of eight years. If the appropriate discount rate is 8% on similar bonds, what is the price of
King Noodles' bonds?

Accepted Answer

The answer of King Noodles' bonds have a 7.5% coupon...

Quiz 7: Interest Rates and Bond Valuation

What would you pay for a bond that pays an annual coupon of $35, has a face value of $1,000, matures in seven years, and has a yield to maturity of 8%?

You purchase a bond with an invoice price of $960. The bond has a coupon rate of 5.5%, and there are three months to the next semiannual coupon date. What is the clean price of the bond?

Sara wants to buy a zero coupon bond that will pay her $1,000 ten years from today. How much should Sara pay today to buy this bond if she wants to earn 7.5% on her investment?

Bastion Corporation issued $100 million bonds that mature in 30 years and have a 5% coupon rate that is paid annually. If the bonds were sold to yield 5.4%, determine the price of the bonds at the End of year 5.

Bastion Corporation issued $100 million bonds that mature in 30 years and have a 5% coupon rate that is paid annually. If the bonds were sold to yield 5.4%, determine the price of the bonds at the End of year 15.

If the following bonds are identical except for coupon, what is the price of bond B?

Bastion Corporation issued $100 million bonds that mature in 30 years and have a 5% coupon rate that is paid annually. If the bonds were sold to yield 5.4%, determine the price of the bonds at the End of year 25.

You are purchasing a 30-year, zero coupon bond. The yield to maturity is 9.1% and the face value is $1,000. What is the current market price?

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 is the present Value of the bond's face value?

The Goodie Barn has a 7% coupon bond outstanding that matures in 13.5 years. The bond pays interest semiannually. What is the market price per bond if the face value is $1,000 and the yield to Maturity is 14.78%?

You purchase a bond with an invoice price of $988. The bond has a coupon rate of 7.4%, and there are ﬁve months to the next semiannual coupon date. What is the clean price of the bond?

Your ﬁrm offers a 10-year, zero coupon bond. The yield to maturity is 8.8%. What is the current market price of a $1,000 face value bond?

Westover Ridge offers a 9% coupon bond with semiannual payments and a yield to maturity of 11.68%. The bonds mature in 16 years. What is the market price per bond if the face value is $1,000?

Canadian Treasury bills are yielding 2.63%. Inﬂation is 2.45%. What is the real rate of return on the Treasury bill?

The Jaxson Company offers a 6% coupon bond with semi-annual payments and a yield to maturity of 7.27%. The bonds mature in 6 years. What is the market price of a $1,000 face value bond?

Atlas Movers is issuing $1,000 face value zero coupon bonds at a quoted price of 38.70. What is the amount you would pay to purchase one of these bonds?

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 is the total Present value of the bond's coupon payments?

Norwegian Adventures offers a 6.5% coupon bond with annual payments. The yield to maturity is 6.71% and the maturity date is 7 years from today. What is the market price of this bond if the face Value is $1,000?

King Noodles' bonds have a 7.5% coupon rate. Interest is paid quarterly and the bonds have a maturity of eight years. If the appropriate discount rate is 8% on similar bonds, what is the price of King Noodles' bonds?