Question 1

Wesley-Townsend bonds have an 8.25% coupon and pay interest annually. The face value is $1,000 and the current market price is $1,004.60 per bond. The bonds mature in 17.5 years. What is the
Yield to maturity?

Accepted Answer

The answer of Wesley-Townsend bonds have an 8.25% coupon and...

Question 2

Gerry Industries has some 8% coupon bonds on the market that are selling at $989, pay interest semi-annually, and mature in ﬁfteen years. The company would like to issue $1 million in new
ﬁfteen-year bonds. What coupon rate should be applied to the new bonds if Gerry Industries wants
To sell them at par (Use values in the dollar)?

Accepted Answer

To sell the new bonds at par, the coupon rate must equal the yield to maturity (YTM) of the existing bonds. The existing bonds have a YTM slightly higher than 8% since they are selling below par ($989). Calculating the YTM for the existing bonds gives approximately 8.13%, which should be the coupon rate for the new bonds to sell at par.

Question 3

Martha owns a 7% coupon bond that has 13 years to maturity. The bond pays interest annually and is currently selling for $1,034.50. What is the yield to maturity on this bond?

Accepted Answer

To calculate the yield to maturity, we need to solve for the discount rate that makes the present value of the bond's future cash flows equal to its current price. We can use the following formula to calculate yield to maturity:

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

Where: 
PV = Current price of the bond
C = Annual coupon payment
r = Yield to maturity
n = Number of years to maturity
F = Par value

Substituting the given values, we get:

1034.50 = 70/(1+r)^1 + 70/(1+r)^2 + ... + 70/(1+r)^13 + 1000/(1+r)^13

Using a financial calculator or trial and error method, we find that the yield to maturity is approximately 6.60%, which is closest to option B.

Question 4

Klapol, Inc. has a 20-year bond issue outstanding that pays a 7.5% coupon. The bonds are currently priced at $987.50 and have a par value of $1,000. Interest is paid semi-annually. What is the yield to
Maturity?

Accepted Answer

The answer of Klapol, Inc. has a 20-year bond issue...

Question 5

The bonds issued by Hardwood Floors & More have a 9.25% coupon and pay interest annually. The face value is $1,000 and the current market price is $1,014.60. The bonds mature in 16 years. What
Is the yield to maturity on these bonds?

Accepted Answer

To calculate yield to maturity, we use the following formula:
YTM = (Annual interest payment + (Face value - Market price) / Number of years to maturity) / ((Face value + Market price) / 2)
Plugging in the values, we get:
YTM = (92.50 + (1000 - 1014.60) / 16) / ((1000 + 1014.60) / 2) = 0.0907 or 9.07%
Therefore, the answer is choice C, 9.07%.

Question 6

Culpepper Supply has a bond issue outstanding that pays a 7.5% coupon and matures in 14 years. The bonds have a par value of $1,000 and a market price of $942.90. Interest is paid semiannually.
What is the yield to maturity?

Accepted Answer

To solve for the yield to maturity, we need to use the bond pricing formula:

PV = (C / 2) * [1 - (1 + r / 2) ^ - (n * 2)] / (r / 2) + FV / (1 + r / 2) ^ (n * 2)

Where:
PV = present value, which is the market price of the bond
C = coupon payment
r = yield to maturity (our unknown)
n = number of years to maturity

We are given that the coupon payment is 7.5% * $1,000 / 2 = $37.50, the market price is $942.90, the par value is $1,000, and the time to maturity is 14 years. Plugging these values into the formula and using a financial calculator or spreadsheet, we get a yield to maturity of 8.19%. Therefore, the best choice is C.

Question 7

The bonds issued by B&H Enterprises bear a 7% coupon which is payable semi-annually. The bonds mature in 11 years and have a $1,000 face value. Currently, the bonds sell at par. What is the yield to
Maturity?

Accepted Answer

Since the bonds sell at par, the yield to maturity will be equal to the coupon rate, which is 7%. Therefore, the correct answer is D) 7.00%.

Question 8

The semi-annual, 8% coupon bonds of Merriweather, Inc. are selling at par. The effective annual rate of these bonds must be equal to:

Accepted Answer

The answer of The semi-annual, 8% coupon bonds of Merriweather,...

Question 9

A General Co. bond has an 8% coupon and pays interest annually. The face value is $1,000 and the current market price is $1,020.50. The bond matures in 20 years. What is the yield to maturity?

Accepted Answer

Using a financial calculator, the yield to maturity is calculated to be 7.79%. This is the rate at which the present value of the bond's cash flows equals the current market price.

Question 10

The bonds issued by Jordache Jewelers of Toronto bear a 7.5% coupon, payable semiannually. The bonds mature in 13 years and have a $1,000 face value. Currently, the bonds sell at par. What is the
Yield to maturity?

Accepted Answer

Since the bond is selling at par, the yield to maturity is equal to the coupon rate. Thus, the yield to maturity is 7.5%. Therefore, the answer is (D) 7.50%.

Question 11

Mayﬂower, Inc. has some 7% semi-annual coupon bonds on the market selling at $1,012. The bonds have 9 years left to maturity. What is the effective annual yield on these bonds?

Accepted Answer

The effective annual yield can be calculated using the formula for the yield to maturity (YTM) on a semi-annual coupon bond. First, calculate the semi-annual yield using the bond price, coupon rate, and time to maturity, then convert it to an effective annual yield. The calculation shows that the effective annual yield is approximately 6.94%.

Question 12

The Exley Company bonds are currently selling for $1,041.30. These bonds mature in seven years, pay semi-annual interest and have a yield to maturity of 6.75%. What is the coupon rate?

Accepted Answer

The answer of The Exley Company bonds are currently selling...

Question 13

On January 1, 1997, HomeSafe Cab Co. will issue new bonds to ﬁnance its expansion plans. Currently outstanding 9%, January 1, 2010 HomeSafe bonds are selling for $1,067.91. If interest is
Paid semi-annually for both bonds, what must the coupon rate of the new bonds be in order for the
Issue to sell at par?

Accepted Answer

The answer of On January 1, 1997, HomeSafe Cab Co....

Question 14

Cornerstone Industries has a bond outstanding that has a 7% coupon rate and a market price of $887.71. If the bond matures in ﬁve years and interest is paid semiannually, what is the YTM?

Accepted Answer

The answer of Cornerstone Industries has a bond outstanding that...

Question 15

Which one of the following bonds has the greatest interest rate risk?

Accepted Answer

E) 9-year; 7% coupon bonds have the greatest interest rate risk because they have the longest maturity and the lowest coupon rate, making them more sensitive to changes in interest rates.

Question 16

The outstanding bonds of Frank's Welding provide a real rate of return of 2.87%. The current rate of inﬂation is 4.64%. What is the nominal rate of return on these bonds?

Accepted Answer

The nominal rate of return can be calculated using the Fisher equation: (1 + nominal rate) = (1 + real rate) * (1 + inflation rate). Solving for the nominal rate gives approximately 7.64%.

Question 17

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% of the bond's
Total price is represented by the present value of the coupons?

Accepted Answer

The present value of the coupons is calculated using the formula for the present value of an annuity. The bond's total price is the sum of the present value of the coupons and the present value of the face value. The percentage of the bond's total price represented by the present value of the coupons is approximately 86.4%.

Question 18

You earn a 5% real return. If the inﬂation rate is 4%, what is your nominal return?

Accepted Answer

Nominal return = Real return + Inflation rate
= 5% + 4%
= 9%
Therefore, the nominal return is 9.20%, which is closest to option D (9.00% is too low and 10.92% is too high).

Question 19

Three years ago, the French Co. issued twenty-year bonds with a 9% coupon rate and semi-annual interest payments. Today these bonds are quoted at a price of 105.75. What is the yield-to-maturity?

Accepted Answer

The yield-to-maturity (YTM) of a bond is the internal rate of return (IRR) if the bond is held until maturity, considering all its payments (coupons and principal) at their present values. Given the bond's price is above par (105.75), the YTM must be lower than the coupon rate (9%). Among the options, 8.36% is the only rate lower than the coupon rate and reasonably close to it, considering the bond's price premium. Calculating the exact YTM requires financial calculations involving the bond's price, coupon payments, years to maturity, and face value, which typically results in a rate between the coupon rate and the current market rates for similar bonds.

Question 20

D&G Enterprises issues bonds with a $1,000 face value that make coupon payments of $30 every three months. What is the coupon rate?

Accepted Answer

The coupon rate is calculated on an annual basis. Since the bond makes quarterly payments of $30, the total annual payment is $30 x 4 = $120. To find the coupon rate, divide the annual payment by the face value of the bond: $120 / $1,000 = 0.12 or 12%.

Quiz 7: Interest Rates and Bond Valuation

Wesley-Townsend bonds have an 8.25% coupon and pay interest annually. The face value is $1,000 and the current market price is $1,004.60 per bond. The bonds mature in 17.5 years. What is the Yield to maturity?

Martha owns a 7% coupon bond that has 13 years to maturity. The bond pays interest annually and is currently selling for $1,034.50. What is the yield to maturity on this bond?

Klapol, Inc. has a 20-year bond issue outstanding that pays a 7.5% coupon. The bonds are currently priced at $987.50 and have a par value of $1,000. Interest is paid semi-annually. What is the yield to Maturity?

The bonds issued by Hardwood Floors & More have a 9.25% coupon and pay interest annually. The face value is $1,000 and the current market price is $1,014.60. The bonds mature in 16 years. What Is the yield to maturity on these bonds?

Culpepper Supply has a bond issue outstanding that pays a 7.5% coupon and matures in 14 years. The bonds have a par value of $1,000 and a market price of $942.90. Interest is paid semiannually. What is the yield to maturity?

The bonds issued by B&H Enterprises bear a 7% coupon which is payable semi-annually. The bonds mature in 11 years and have a $1,000 face value. Currently, the bonds sell at par. What is the yield to Maturity?