Question 1

You are considering the purchase of an AT&P bond with a 13% coupon rate. Interest is paid and compounded semiannually. The bond will mature in 8 years, and has a $1,000 face value. The bond currently sells for $867. Calculate the ANNUAL yield to maturity for this bond. (Round to nearest percentage)

Accepted Answer

To calculate the yield to maturity, we need to use the following formula:

P=D/(1+r)^1 + D/(1+r)^2 + ... + D/(1+r)^n + F/(1+r)^n

Where:
P = market price of the bond
D = semiannual coupon payment
r = annual interest rate (yield to maturity)
n = number of semiannual periods (in this case, 8 years * 2 = 16 semiannual periods)
F = face value of the bond

Plugging in the numbers, we get:

867 = 65/(1+r)^1 + 65/(1+r)^2 + ... + 65/(1+r)^16 + 1000/(1+r)^16

Using a financial calculator or spreadsheet software to solve for r, we get an annual yield to maturity of approximately 16%. Therefore, the best choice is C.

Question 2

With a coupon rate of 8% and a current market price of $955.17, the bond's current yield, assuming six years to maturity, is:

Accepted Answer

The current yield of a bond is calculated by dividing the annual coupon payment by the bond's current market price. With a coupon rate of 8%, on a $1,000 face value bond, the annual coupon payment is $80. Therefore, the current yield = $80 / $955.17 = 0.0838 or 8.38%.

Question 3

Riordan Inc. has a bond outstanding that has a $1,000 par value, semiannual coupon rate of 4% and a current yield of 7.9%. What is the price of the bond? (Round to nearest $)

Accepted Answer

The bond pays a semiannual coupon of 4% of $1,000 or $40 per year ($20 every six months). The current yield is 7.9%, so the annual coupon payment of $40 represents 7.9% of the bond price. Setting up an equation: 
$40 / 0.079 = x, where x is the bond price
x = $506.33 (the present value of the semiannual payments)
However, because the bond has a $1,000 par value, there are two semiannual payments per year, so we need to double the present value: 
$506.33 x 2 = $1,012.66
Rounding to the nearest dollar gives us the answer of $1,013. Therefore, the correct answer is Choice C.

Question 4

Alpha Inc. has a $1,000 par value bond that was issued ten years ago for a thirty year term. Interest rates were very high at that time and the bond's coupon rate is 22%. The relevant bond market interest rate is now 10%. All of Alpha's bonds have a call feature. It allows the company to pay off the bond any time after the first fifteen years, but requires that bondholders be compensated with an extra year's interest at the coupon rate if such a payoff is exercised. What is the bond's market price assuming investors expect it will be called as soon as possible?

Accepted Answer

First, we need to calculate the current value of the bond using the current market interest rate of 10%.

PV = 220 / (1.1)^1 + 220 / (1.1)^2 + ... + 220 / (1.1)^30 + 1000 / (1.1)^30
PV = $1598.35

Next, we need to adjust for the possibility of the bond being called. If it is called, the investor would receive an extra year's interest at the coupon rate of 22%, or $220.

Adjusted PV = $1598.35 - $220
Adjusted PV = $1378.35

Therefore, the market price of the bond assuming investors expect it will be called as soon as possible is $1378.35, or choice B.

Question 5

A bond is available for purchase that has a face value of $10,000, an 8% coupon, payable semiannually, and 20 years of its original 25 years left to maturity. Approximately how much would you pay for the bond if the market return on similar bonds is 10%?

Accepted Answer

Step 1: Calculate semiannual coupon payment:
Coupon payment = Face value x Coupon rate / 2
= $10,000 x 8% / 2 
= $400

Step 2: Calculate the present value of coupon payments:
PV of coupon payments = Coupon payment x [(1 - (1 / (1 + r)^n)) / r]
where r is the semiannual market rate of return (10%/2 = 5%) and n is the number of semiannual periods left until maturity (20 years x 2 = 40)

PV of coupon payments = $400 x [(1 - (1 / (1.05)^40)) / 0.05]
= $400 x 16.2869
= $6,514.76

Step 3: Calculate the present value of the face value:
PV of face value = Face value / (1 + r)^n
PV of face value = $10,000 / (1.05)^40
= $10,000 / 9.6464
= $1,035.75

Step 4: Calculate the total price of the bond:
Total price = PV of coupon payments + PV of face value
= $6,514.76 + $1,035.75
= $7,550.51

Therefore, approximately you would pay $8,283.64 for the bond. (closest answer option: C)

Question 6

Marshall Industries has a bond outstanding that has a $1,000 par value and a market price of $1,322. The bond has 25 years remaining to maturity. Assuming an annual market interest rate of 8% and that the bond pays interest semiannually, calculate the ANNUAL coupon rate on the bond. (Round to nearest whole percentage)

Accepted Answer

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

Question 7

Willamson Inc.'s bonds have a coupon rate of 12% and a par value of $1,000. The bonds have 15 years left to maturity. If Williamson's bonds are currently selling for $1,430, calculate their yield to maturity. Assume semiannual coupon payments.

Accepted Answer

Using a financial calculator or Excel formula, we can find that the yield to maturity is 7.2%. Therefore, the best choice is (C).

Question 8

Which of the following statements about leasing is correct?

Accepted Answer

All the statements are correct regarding leasing. Approximately 30% of all equipment is leased, indicating the prevalence of leasing in acquiring equipment. Financial leases must indeed be capitalized on the balance sheet, reflecting the lessee's obligation to pay lease payments as well as the right to use the asset. Leased assets are depreciated over their useful life, similar to purchased assets, to account for their wear and tear. Lastly, lease obligations are amortized as loans, meaning the lease payments are spread out over the lease term, typically including interest and principal repayment components.

Question 9

Bark Corporation's 10% coupon rate bond was issued for 30 years 25 years ago at a par value of $1000. Today's interest rate is 10%, what is it selling for today?

Accepted Answer

Since the bond's coupon rate matches the current interest rate (both are 10%), the bond will sell at its par value, which is $1000.00.

Question 10

Webley Corp. issued a $1,000 bond at a coupon rate of 12%. The bond has 30 years remaining, until maturity. Comparable bonds are yielding 8%. What should Webley's bond sell for today? (Round to nearest $)

Accepted Answer

The bond's price is calculated using the present value of its future cash flows, which include annual coupon payments and the face value at maturity. Given the bond's coupon rate is higher than the market yield, the bond will sell at a premium. Using the formula for bond pricing, the bond's price is approximately $1,452.

Question 11

J&J Manufacturing issued a bond with a $1,000 par value. The bond has a coupon rate of 7% and makes payments semiannually. If the bond has 30 years remaining and the annual market interest rate is 9.4%, what will the bond sell for today?

Accepted Answer

The bond will sell for less than its par value because the coupon rate is less than the market interest rate. To find the present value of the bond, we calculate the present value of the annuity (coupon payments) and the present value of the par value. The formula for the present value of an annuity is PVA = PMT * [(1 - (1 + r)^-n) / r], where PMT is the payment per period, r is the market interest rate per period, and n is the total number of periods. For the par value, the formula is PV = F / (1 + r)^n, where F is the future value or par value. Given that the bond makes semiannual payments, we adjust the annual market interest rate and the number of years accordingly: r = 9.4% / 2 = 4.7% per period, n = 30 * 2 = 60 periods, and PMT = 7% of $1,000 / 2 = $35 per period. Plugging these values into the formulas gives us the bond's present value, which is closest to $760.91.

Question 12

Aurand Inc. has outstanding bonds with an 8% coupon paid semiannually. The bonds have a par value of $1,000, a current price of $904, and will mature in 14 years. What is their yield?

Accepted Answer

The yield to maturity (YTM) can be calculated using the formula for bonds, which considers the coupon payments, the current price, the par value, and the time to maturity. Given the semiannual coupon payments, the YTM is approximately 9.24%.

Question 13

Hoffman Inc. has an $1,000 par value bond with 15 years to maturity and a coupon rate of 12%, paid semiannually. The market rate on similar debt has now risen to 16%. What is the current price of this bond?

Accepted Answer

The current 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 bond's par value at maturity). Given a 12% annual coupon rate on a $1,000 par value bond, the semiannual coupon payment is $60 ($1,000 * 12% / 2). With a market rate of 16% annually or 8% semiannually, and 15 years to maturity (or 30 semiannual periods), the bond's price is calculated as follows:$$ \text{Current Price} = \frac{C}{r} \left(1 - \frac{1}{(1 + r)^n}\right) + \frac{F}{(1 + r)^n} $$Where:- $C$ is the semiannual coupon payment ($60),- $r$ is the semiannual market rate (0.08),- $n$ is the total number of semiannual periods (30),- $F$ is the face value of the bond ($1,000).Plugging in the values:$$ \text{Current Price} = \frac{60}{0.08} \left(1 - \frac{1}{(1 + 0.08)^{30}}\right) + \frac{1000}{(1 + 0.08)^{30}} $$$$ \text{Current Price} \approx 774.84 $$Therefore, the current price of the bond is approximately $774.84.

Question 14

Hazeltine Corp has a callable bond outstanding. The call provision guarantees that the bond won't be called in the first ten years of its life, and if it is called thereafter the bondholder will be compensated with an extra two year's interest at the 14% coupon rate. The bond is now four years into its 25 year life. The market interest rate is now 7%, so it is likely that the bond will be called as soon as the contract allows. What should the bond sell for today?

Accepted Answer

The bond should sell for the present value of its future cash flows, which include the coupon payments and the call price. Given the market interest rate of 7%, the bond's price is calculated using the present value of the remaining coupon payments and the call price, which includes the extra two years' interest.

Question 15

A $1,000, 10% coupon rate bond with 10 years remaining until maturity is selling for $788.10. Its yield to maturity at this price is:

Accepted Answer

The yield to maturity is the rate at which the present value of the bond's future cash flows equals its current price. Here, the bond has a face value of $1,000, a coupon rate of 10%, and 10 years remaining until maturity. Using a financial calculator or Excel, we can solve for the yield to maturity as follows:
N = 10
I/Y = ?
PV = -788.10
PMT = 100
FV = 1000
Solving for I/Y, we get a yield to maturity of 14%. Therefore, the correct answer is choice C.

Question 16

Addleson Corp. has a $1,000 par value bond outstanding that was issued for 30 years 5 years ago at a coupon rate of 15%. What is it yielding if it is selling for $938.81?

Accepted Answer

To find the yield, we need to calculate the bond's current yield. The coupon payment is calculated as $1,000 x 15% = $150. The current yield is calculated as the annual coupon payment divided by the current market price, which is $150/$938.81 = 0.1595 or 15.95%. Rounded to the nearest whole percentage, the yield is 16%. Therefore, the correct answer is C.

Question 17

As per FASB 13, which of the following is a rule for a lease to qualify as an operating lease?

Accepted Answer

According to FASB 13, a lease qualifies as an operating lease if the present value of lease payments is less than 90% of the fair market value at the origination of the lease. This criterion is used to determine if the lease is a true rental arrangement and does not transfer the risks and rewards of ownership to the lessee. Therefore, options A, B, and C do not apply to the rule for a lease to qualify as an operating lease.

Question 18

You are considering the purchase of a 15-year $1,000 face value bond that pays interest of $90 annually . If you required a return of 10%, how much should you be willing to pay for this bond?

Accepted Answer

The bond is paying annual interest of $90 for 15 years, which means total interest payments of $1,350 ($90 x 15).

To calculate the fair price of the bond, we need to use the present value formula:

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

PV = 1,000/(1+0.1)^15 + (90 / 0.1) x [1 - 1/(1+0.1)^15]
PV = $626.05 + $297.89
PV = $923.94

Therefore, the fair price to pay for this bond, given a required return of 10%, is $923.94. Choice B is the correct answer.

Question 19

Addleson Corp. has a $1,000 par value bond outstanding that was issued for 30 years 5 years ago at a coupon rate of 15%. The yield on similar bonds is now 12%. What is its price?

Accepted Answer

The answer of Addleson Corp. has a $1,000 par value...

Question 20

If a 30-year bond with a quoted price of $810, pays $40 interest semiannually, its current yield would be about:

Accepted Answer

The current yield is calculated as the annual interest payment divided by the bond's current price. The bond pays $40 semiannually, so the annual interest is $80. The current yield is $80 / $810 = 0.0988, or approximately 9.9%.

Quiz 7: The Valuation and Characteristics of Bonds and Leasing