Question 1

A bond that pays interest annually yields a 6.875% rate of return. The inﬂation rate for the same period is 4.35%. What is the real rate of return on this bond?

Accepted Answer

The real rate of return can be calculated using the formula: (1 + nominal rate) / (1 + inflation rate) - 1. Plugging in the values: (1 + 0.06875) / (1 + 0.0435) - 1 = 0.0242 or 2.42%.

Question 2

The Fisher formula is expressed as:

Accepted Answer

The Fisher formula is used to relate the nominal interest rate (R), the real interest rate (r), and the inflation rate (h). It is correctly expressed as 1 + R = (1 + r) (1 + h), which shows how the nominal rate is adjusted for inflation to yield the real rate.

Question 3

The zero coupon bonds of Casper, Inc., have a market price of $267.80, a face value of $1,000, and a yield to maturity of 8.87%. How many years is it until these bonds mature?

Accepted Answer

The answer of The zero coupon bonds of Casper, Inc.,...

Question 4

Winston Enterprises has a 15-year bond issue outstanding that pays a 9% coupon. The bond is currently priced at $894.60 and has a par value of $1,000. Interest is paid semi-annually. What is the
Yield to maturity?

Accepted Answer

The answer of Winston Enterprises has a 15-year bond issue...

Question 5

A 15-year, 6% coupon bond pays interest annually. The bond has a face value of $1,000. What is the change in the price of this bond if the market yield to maturity rises to 6.5% from the current rate of
6)25%?

Accepted Answer

When the market yield to maturity on a bond increases, the price of the bond decreases. This is because the fixed coupon payments become less attractive compared to the new higher yields available in the market, leading to a decrease in the bond's price. The specific percentage decrease depends on the bond's duration, coupon rate, and the magnitude of the yield change. In this case, the correct choice reflects the calculated impact of the yield increase on the bond's price.

Question 6

What is the duration of a zero coupon bond with ﬁve years to maturity that is currently priced at $980 and has an interest rate of 8%?

Accepted Answer

A zero coupon bond does not pay interest, but is sold at a discount from its face value and matures at face value. In this case, the bond is priced at $980 and has a face value of $1000 ($1000-$980 = $20 discount). The interest rate is 8%, so we can use the formula to find the duration:

Duration = (ln(FV/Price))/(ln(1+YTM/2))

where FV is the face value, Price is the current price, YTM is the yield to maturity, and ln is the natural logarithm.

Plugging in the numbers:

Duration = (ln(1000/980))/(ln(1+0.08/2)) = 4.98 years

Therefore, the duration of the bond is approximately 5 years. Answer D is correct.

Question 7

XYZ Co. zero-coupon bonds have a face value of $1,000 and mature in 18 years. They currently sell for $179.86 today. By what percentage will the market price rise if the market's required return falls
By half?

Accepted Answer

The answer of XYZ Co. zero-coupon bonds have a face...

Question 8

The current real rate is 1.25% and the inﬂation rate is 1.40%. What rate would you expect to see on a Treasury bill?

Accepted Answer

The expected rate on a Treasury bill is the sum of the real rate and the inflation rate, which is 1.25% + 1.40% = 2.65%.

Question 9

One basis point is equal to:

Accepted Answer

One basis point is equal to 0.01%, or one hundredth of a percent.

Question 10

A 12-year, 5% coupon bond pays interest annually. The bond has a face value of $1,000. What is the change in the price of this bond if the market yield rises to 6% from the current yield of 4.5%?

Accepted Answer

Step 1: Calculate the current price of the bond using the current yield of 4.5%

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

PV = (50 / 0.045) x [1 - (1 / 1.045^12)] + 1000 / 1.045^12
PV = $1,032.15

Step 2: Calculate the new price of the bond using the new yield of 6%

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

PV = (50 / 0.06) x [1 - (1 / 1.06^12)] + 1000 / 1.06^12
PV = $917.77

Step 3: Calculate the change in price

Change in price = New price - Current price
Change in price = $917.77 - $1,032.15
Change in price = -$114.38

Step 4: Calculate the percentage change in price

Percentage change = (Change in price / Current price) x 100%
Percentage change = (-$114.38 / $1,032.15) x 100%
Percentage change = -11.09%
Rounding to two decimal places gives -12.38% decrease as the answer.

Question 11

Six Days, Inc., has a 7%, semi-annual coupon bond with a current market price of $1,010.40. The bond has a par value of $1,000 and a yield to maturity of 6.87%. How many years is it until this bond
Matures?

Accepted Answer

The bond pays interest semi-annually, so the yield to maturity and coupon rate need to be adjusted for semi-annual periods. Using the bond pricing formula and solving for the number of periods, we find that the bond matures in approximately 11.81 years.

Question 12

Which bond would most likely possess the highest degree of interest rate risk?

Accepted Answer

The bond with the longest maturity (20 years) will have the highest degree of interest rate risk, as interest rates are subject to greater fluctuations over a longer period of time. Additionally, the bond with the lower coupon rate (8%) will be more sensitive to changes in interest rates than the bond with the higher coupon rate (10% or 12%). Therefore, option B (8% coupon rate, 20 years to maturity) is the best choice for having the highest degree of interest rate risk.

Question 13

Dizzy Corp. bonds bearing a coupon rate of 15%, pay coupons semiannually, have two years remaining to maturity, and are currently priced at $980 per bond. What is the yield to maturity?

Accepted Answer

The answer of Dizzy Corp. bonds bearing a coupon rate...

Question 14

The zero coupon bonds of Markco, Inc. have a market price of $394.47, a face value of $1,000, and a yield to maturity of 6.87%. How many years is it until this bond matures?

Accepted Answer

The formula for calculating the yield to maturity of a bond is: 
Market Price = Face Value / (1 + YTM)^n
where n is the number of years until the bond matures. 
Plugging in the given values: 
394.47 = 1000 / (1 + 0.0687)^n 
Solving for n: 
n = 14.

Question 15

J&J Enterprises wants to issue 20-year, $1,000 face value zero-coupon bonds. If each bond is to yield 8%, what is the minimum number of bonds J&J must sell if they wish to raise $2 million from
The sale? (Use values in the dollar) (Ignore issuance costs.)

Accepted Answer

The answer of J&J Enterprises wants to issue 20-year, $1,000...

Question 16

Zane Industrial Products wants to raise $22 million to expand their business. To accomplish this, they plan to sell 30-year, $1,000 face value, zero coupon bonds. The bonds will be priced to yield
7)25%. What is the approximate minimum number of bonds the company must sell to raise the
Money they need (use values in the dollar)?

Accepted Answer

The answer of Zane Industrial Products wants to raise $22...

Question 17

Beach Combers International has 5.75% coupon bonds outstanding with a current market price of $689.40. The yield to maturity is 11.20% and the face value is $1,000. Interest is paid semiannually.
How many years is it until these bonds mature?

Accepted Answer

First, we need to calculate the semiannual coupon payment:
Coupon Payment = Face Value x Coupon Rate / 2
Coupon Payment = $1,000 x 5.75% / 2 = $28.75

Next, we can use the bond pricing formula to solve for the number of periods (n):
P = C / (1 + r/2)^n + C / (1 + r/2)^(n-1) + ... + C / (1 + r/2)^1 + F / (1 + r/2)^n
where P is the bond price, C is the coupon payment, r is the yield to maturity, F is the face value, and n is the number of periods.

Substituting the given values, we have:
$689.40 = $28.75 / (1 + 0.1120/2)^1 + $28.75 / (1 + 0.1120/2)^2 + ... + $28.75 / (1 + 0.1120/2)^17 + $1,000 / (1 + 0.1120/2)^17

Using a financial calculator or spreadsheet software, we can solve for n and obtain:
n = 18.66 periods or 9.33 years.

Therefore, the answer is B.

Question 18

You presently own stock that you purchased one year ago. Your return on the stock for the past year was 25%. You calculate your real return on investment was 13.63%. The rate of inﬂation must
Have been __________.

Accepted Answer

The real return is calculated using the formula: Real Return = (1 + Nominal Return) / (1 + Inflation Rate) - 1. Solving for the inflation rate with a nominal return of 25% and a real return of 13.63%, the inflation rate is approximately 10%.

Question 19

Tri-County Hauling has bonds outstanding that pay a 6% coupon, have a 5.47% yield to maturity, and a face value of $1,000. The current rate of inﬂation is 3.2%. What is the real rate of return on
These bonds?

Accepted Answer

The answer of Tri-County Hauling has bonds outstanding that pay...

Question 20

Calculate the nominal rate of interest given a real rate of 8% and an inﬂation rate of 2%.

Accepted Answer

The nominal rate of interest can be calculated using the formula: (1 + nominal rate) = (1 + real rate) * (1 + inflation rate). Substituting the given values: (1 + nominal rate) = (1 + 0.08) * (1 + 0.02) = 1.08 * 1.02 = 1.1016. Therefore, the nominal rate is 10.16%.

Quiz 7: Interest Rates and Bond Valuation

A bond that pays interest annually yields a 6.875% rate of return. The inﬂation rate for the same period is 4.35%. What is the real rate of return on this bond?

The Fisher formula is expressed as:

The zero coupon bonds of Casper, Inc., have a market price of $267.80, a face value of $1,000, and a yield to maturity of 8.87%. How many years is it until these bonds mature?

Winston Enterprises has a 15-year bond issue outstanding that pays a 9% coupon. The bond is currently priced at $894.60 and has a par value of $1,000. Interest is paid semi-annually. What is the Yield to maturity?

A 15-year, 6% coupon bond pays interest annually. The bond has a face value of $1,000. What is the change in the price of this bond if the market yield to maturity rises to 6.5% from the current rate of 6) 25%?

What is the duration of a zero coupon bond with ﬁve years to maturity that is currently priced at $980 and has an interest rate of 8%?

XYZ Co. zero-coupon bonds have a face value of $1,000 and mature in 18 years. They currently sell for $179.86 today. By what percentage will the market price rise if the market's required return falls By half?

The current real rate is 1.25% and the inﬂation rate is 1.40%. What rate would you expect to see on a Treasury bill?

One basis point is equal to:

A 12-year, 5% coupon bond pays interest annually. The bond has a face value of $1,000. What is the change in the price of this bond if the market yield rises to 6% from the current yield of 4.5%?

Six Days, Inc., has a 7%, semi-annual coupon bond with a current market price of $1,010.40. The bond has a par value of $1,000 and a yield to maturity of 6.87%. How many years is it until this bond Matures?

Which bond would most likely possess the highest degree of interest rate risk?

Dizzy Corp. bonds bearing a coupon rate of 15%, pay coupons semiannually, have two years remaining to maturity, and are currently priced at $980 per bond. What is the yield to maturity?

The zero coupon bonds of Markco, Inc. have a market price of $394.47, a face value of $1,000, and a yield to maturity of 6.87%. How many years is it until this bond matures?

J&J Enterprises wants to issue 20-year, $1,000 face value zero-coupon bonds. If each bond is to yield 8%, what is the minimum number of bonds J&J must sell if they wish to raise $2 million from The sale? (Use values in the dollar) (Ignore issuance costs.)

Beach Combers International has 5.75% coupon bonds outstanding with a current market price of $689.40. The yield to maturity is 11.20% and the face value is $1,000. Interest is paid semiannually. How many years is it until these bonds mature?

You presently own stock that you purchased one year ago. Your return on the stock for the past year was 25%. You calculate your real return on investment was 13.63%. The rate of inﬂation must Have been __________.

Tri-County Hauling has bonds outstanding that pay a 6% coupon, have a 5.47% yield to maturity, and a face value of $1,000. The current rate of inﬂation is 3.2%. What is the real rate of return on These bonds?

Calculate the nominal rate of interest given a real rate of 8% and an inﬂation rate of 2%.