Question 1

Rolling Coast Inc. issued BBB bonds two years ago. These bonds provided a yield to maturity (YTM) of 11.5 percent. Long-term risk-free government bonds were yielding 8.7 percent at the time. The current risk premium on BBB bonds versus government bonds is half of what it was two years ago. If the risk-free long-term government bonds are currently yielding 7.8 percent, then at what interest rate should Rolling Coast expect to issue new bonds?

Accepted Answer

The current risk premium on BBB bonds versus government bonds is only half of what it was two years ago. This means that the yield on BBB bonds has decreased relative to risk-free government bonds.

To find the new YTM for Rolling Coast's new bonds, we need to add the current risk premium to the current risk-free rate:

New YTM = Risk-free rate + Risk premium
New YTM = 7.8% + (0.5 * (11.5% - 8.7%))
New YTM = 9.2%

Therefore, Rolling Coast should expect to issue new bonds with a YTM of 9.2%. The answer is choice (C).

Question 2

Which of the following statements about a bond that is selling at a discount is correct?

Accepted Answer

When a bond sells at a discount, it means that its market price is below its face value or par value. As the maturity date approaches, the market price of the bond will gradually increase and converge towards its face value. This is because the bond's yield to maturity, which takes into account the coupon rate, remaining term, and market price, will also increase until it equals the bond's coupon rate. Therefore, the investor who holds a discount bond will experience a capital gain as the market price increases, in addition to receiving interest payments at the fixed coupon rate.

Question 3

The computation for the yield to call (YTC) is the same as that for the yield to maturity (YTM), except that we substitute the _____ of the bond for the maturity (par) value and _____ for the years to maturity.

Accepted Answer

Yield to call is calculated by substituting the call price (which is often the face value plus a call premium) for the maturity (par) value and the number of years until the bond can be first called for the years to maturity. The call price is the price at which the bond will be redeemed if it is called.

Question 4

GP&L sold $1,000,000 of 12 percent, 30-year, semiannual payment bonds with a face value of $1,000, 15 years ago. The bonds are not callable, but they do have a sinking fund, which requires GP&L to redeem 5 percent of the original face value of the issue each year ($50,000), beginning in Year 11. To date, 25 percent of the issue has been retired. The company can either call bonds at par for sinking fund purposes or purchase bonds in the open market, spending sufficient money to redeem 5 percent of the original face value each year. If the current market yield of the bonds is 14 percent, what is the least amount of money GP&L must put in to satisfy the sinking fund provision for the next redemption?

Accepted Answer

The answer of GP&L sold $1,000,000 of 12 percent, 30-year,...

Question 5

Which of the following statements is true of a bond?

Accepted Answer

The maturity date of a bond is contractually fixed, meaning that it is determined when the bond is issued and does not change. A bond's maturity date is the date on which the issuer of the bond is obligated to pay back the principal (or face value) of the bond to the bondholder.

Question 6

If an investor buys a bond and holds it until it matures, the average rate of return the investor will earn per year is called the bond's:

Accepted Answer

Yield to maturity is the average rate of return an investor will earn per year if they hold a bond until it matures, taking into account factors such as the bond's coupon rate and current market price. This is the most accurate measure of the bond's return, as it considers both the interest payments and any capital gains or losses upon maturity.

Question 7

The current market price of Smith Corporation's 10-year bonds is $1,297.58. A 10 percent coupon interest rate is paid semiannually, and the par value is equal to $1,000. What is the yield to maturity (YTM), (stated on a simple, or annual, basis) if the bonds mature 10 years from today?

Accepted Answer

The yield to maturity (YTM) can be calculated using the bond price, coupon payments, and time to maturity. Given the bond price is above par, the YTM will be less than the coupon rate. The semiannual coupon is $50 ($1,000 * 10% / 2), and there are 20 periods (10 years * 2). Using a financial calculator or YTM formula, the YTM is approximately 6% annually.

Question 8

The percentage rate of return that investors earn on a bond consists of a(n):

Accepted Answer

The percentage rate of return that investors earn on a bond consists of both the interest yield and the capital gains yield. The interest yield is the interest payments received by the investor, and the capital gains yield is the increase in the bond's value over time. Therefore, option A is the correct answer as it takes both factors into account.

Question 9

Bonds issued by BB&C Communications that have a coupon rate of interest equal to 10.65 percent currently have a yield to maturity (YTM) equal to 15.25 percent. Based on this information, it is understood that BB&C's bonds must currently be selling at _____ in the financial markets.

Accepted Answer

The bonds are selling at a discount because the yield to maturity (15.25 percent) is higher than the coupon rate (10.65 percent). This indicates that the bonds are being sold for less than their face value to compensate for the lower interest payments compared to the current market rate.

Question 10

A change in market conditions causes the market price of a bond to change because of changes in the bond's:

Accepted Answer

The yield to maturity is the total return anticipated on a bond if the bond is held until it matures. A change in market conditions can affect the yield to maturity, causing the bond's price to change. When the yield to maturity increases, the bond's price decreases, and when the yield to maturity decreases, the bond's price increases. Therefore, changes in market conditions affect the yield to maturity, which in turn affects the bond's price.

Question 11

The _____ of a bond fluctuates continuously during its life.

Accepted Answer

The market value of a bond is the price at which it can be bought or sold in the market, and this value fluctuates continuously during the life of the bond based on various factors such as changes in interest rates, credit rating of the issuer, supply and demand in the market, etc. The principal value or face value of a bond remains the same throughout its life, and the maturity value is the amount that the issuer has to repay at the end of the bond term, which is also fixed. The coupon rate is the fixed interest rate that the issuer pays on the bond, which also remains constant throughout the life of the bond. Hence, the correct answer is E) market value.

Question 12

Which of the following statements about a bond that sells for its par value is correct?

Accepted Answer

A bond that sells for its par value has a coupon rate equal to the prevailing market rate, so its yield to maturity will also be equal to the coupon rate. As long as market rates remain constant, the bond's price will not change, so there will be no capital gains yield. Therefore, choice B is correct. Choice A, C, D, and E are all incorrect.

Question 13

Which of the following statements is correct?

Accepted Answer

When the coupon rate is higher than the market yield, the bond will sell at a premium, which means the price will be higher than the par value. Therefore, the correct statement is that the bond will sell at a premium.

Question 14

Omega Inc. holds a 12-year bond that has a 12 percent coupon rate and a marginal tax rate of 40 percent. It is currently selling for $1,000, which is the bond's face value. If interest is paid semiannually, the bond's yield to maturity is:

Accepted Answer

The bond's yield to maturity (YTM) is equal to its coupon rate when the bond is selling at its face value. Since the bond has a 12 percent coupon rate and is selling for its face value of $1,000, its YTM is also 12 percent. The semiannual payments and tax considerations do not affect the calculation of YTM in this context.

Question 15

_____ bonds are often called by the firm prior to maturity.

Accepted Answer

Callable bonds give the issuer the option to repay the bond before its maturity date, usually when interest rates have decreased, allowing the issuer to refinance at a lower rate. As a result, callable bonds are often called by the firm prior to maturity.

Question 16

A $1,000 par value bond sells for $1,216. It matures in 20 years, has a 14 percent coupon, pays interest semiannually, and can be called in 5 years at a price of $1,100. Calculate the bond's yield to maturity.

Accepted Answer

The answer of A $1,000 par value bond sells for...

Question 17

If the yield to maturity (the market rate of return) of a bond is less than its coupon rate, the bond should be:

Accepted Answer

When the yield to maturity of a bond is less than its coupon rate, investors are willing to pay more for the bond than its face value because it offers interest payments that are higher than the current market rate. This causes the bond to sell at a premium.

Question 18

The average rate of return earned on a callable bond if it is held until the first call date is the:

Accepted Answer

The yield to call is the average rate of return earned on a callable bond if it is held until the first call date. It takes into account the call price and call date, which can affect the total return on the investment. The other options—yield to market, yield to principal price, yield to issue price, and yield to maturity—refer to different yield calculations for bonds that do not have an optionality feature like a call provision.

Question 19

Two years ago, Synergy Inc. issued a 15-year callable bond with a $1,000 face value and a 12 percent coupon rate of interest (paid semiannually). The bond cannot be called until five years after issue, at which time the call price will equal $1,120. Currently, the bond is selling for $989.What is the bond's yield to call (YTC).

Accepted Answer

The answer of Two years ago, Synergy Inc. issued a...

Question 20

At the time a bond is issued, the coupon rate on the bond is set at a level that will cause:

Accepted Answer

When a bond is issued, the coupon rate is typically set to match the prevailing market interest rates, which causes the bond to be issued at its face (par) value.

Quiz 6: Bonds Debt Characteristics and Valuation

Which of the following statements about a bond that is selling at a discount is correct?

The computation for the yield to call (YTC) is the same as that for the yield to maturity (YTM) , except that we substitute the _ of the bond for the maturity (par) value and _ for the years to maturity.

Which of the following statements is true of a bond?

If an investor buys a bond and holds it until it matures, the average rate of return the investor will earn per year is called the bond's:

The current market price of Smith Corporation's 10-year bonds is $1,297.58. A 10 percent coupon interest rate is paid semiannually, and the par value is equal to $1,000. What is the yield to maturity (YTM) , (stated on a simple, or annual, basis) if the bonds mature 10 years from today?

The percentage rate of return that investors earn on a bond consists of a(n) :

Bonds issued by BB&C Communications that have a coupon rate of interest equal to 10.65 percent currently have a yield to maturity (YTM) equal to 15.25 percent. Based on this information, it is understood that BB&C's bonds must currently be selling at _____ in the financial markets.

A change in market conditions causes the market price of a bond to change because of changes in the bond's:

The _____ of a bond fluctuates continuously during its life.

Which of the following statements about a bond that sells for its par value is correct?

Which of the following statements is correct?

Omega Inc. holds a 12-year bond that has a 12 percent coupon rate and a marginal tax rate of 40 percent. It is currently selling for $1,000, which is the bond's face value. If interest is paid semiannually, the bond's yield to maturity is:

_____ bonds are often called by the firm prior to maturity.

A $1,000 par value bond sells for $1,216. It matures in 20 years, has a 14 percent coupon, pays interest semiannually, and can be called in 5 years at a price of $1,100. Calculate the bond's yield to maturity.

If the yield to maturity (the market rate of return) of a bond is less than its coupon rate, the bond should be:

The average rate of return earned on a callable bond if it is held until the first call date is the:

At the time a bond is issued, the coupon rate on the bond is set at a level that will cause:

Quiz 6: Bonds Debt Characteristics and Valuation

Which of the following statements about a bond that is selling at a discount is correct?

The computation for the yield to call (YTC) is the same as that for the yield to maturity (YTM) , except that we substitute the _____ of the bond for the maturity (par) value and _____ for the years to maturity.

Which of the following statements is true of a bond?

If an investor buys a bond and holds it until it matures, the average rate of return the investor will earn per year is called the bond's:

The current market price of Smith Corporation's 10-year bonds is $1,297.58. A 10 percent coupon interest rate is paid semiannually, and the par value is equal to $1,000. What is the yield to maturity (YTM) , (stated on a simple, or annual, basis) if the bonds mature 10 years from today?

The percentage rate of return that investors earn on a bond consists of a(n) :

Bonds issued by BB&C Communications that have a coupon rate of interest equal to 10.65 percent currently have a yield to maturity (YTM) equal to 15.25 percent. Based on this information, it is understood that BB&C's bonds must currently be selling at _____ in the financial markets.

A change in market conditions causes the market price of a bond to change because of changes in the bond's:

The _____ of a bond fluctuates continuously during its life.

Which of the following statements about a bond that sells for its par value is correct?

Which of the following statements is correct?

Omega Inc. holds a 12-year bond that has a 12 percent coupon rate and a marginal tax rate of 40 percent. It is currently selling for $1,000, which is the bond's face value. If interest is paid semiannually, the bond's yield to maturity is:

_____ bonds are often called by the firm prior to maturity.

A $1,000 par value bond sells for $1,216. It matures in 20 years, has a 14 percent coupon, pays interest semiannually, and can be called in 5 years at a price of $1,100. Calculate the bond's yield to maturity.

If the yield to maturity (the market rate of return) of a bond is less than its coupon rate, the bond should be:

The average rate of return earned on a callable bond if it is held until the first call date is the:

At the time a bond is issued, the coupon rate on the bond is set at a level that will cause:

The computation for the yield to call (YTC) is the same as that for the yield to maturity (YTM) , except that we substitute the _ of the bond for the maturity (par) value and _ for the years to maturity.