Question 1

A bond that pays interest annually yields a 7.25% rate of return. The inflation rate for the same period is 3.5%. What is the real rate of return on this bond?

Accepted Answer

The real rate of return is calculated using the formula: (1 + nominal rate) / (1 + inflation rate) - 1. Substituting the given values: (1 + 0.0725) / (1 + 0.035) - 1 = 0.0362 or 3.62%.

Question 2

The nominal rate of return on the bonds of Steve's Boats is 8.75%. The real rate of return is 3.4%. What is the rate of inflation?

Accepted Answer

The correct answer is A because the rate of inflation is calculated by subtracting the real rate of return from the nominal rate of return. In this case, the rate of inflation is 8.75% - 3.4% = 5.17%.

Question 3

The outstanding bonds of Boutelle,Inc. provide a real rate of return of 3.6%. The current rate of inflation is 2.5%. What is the nominal rate of return on these bonds?

Accepted Answer

The answer of The outstanding bonds of Boutelle,Inc. provide a...

Question 4

Guggenheim,Inc. offers a 9% coupon bond with annual payments. The yield to maturity is 8.13% and the maturity date is 9 years. What is the market price of a $1,000 face value bond?

Accepted Answer

The answer of Guggenheim,Inc. offers a 9% coupon bond with...

Question 5

Which of the following amounts is closest to the value of a bond that pays $55 semiannually and has an effective semiannual interest rate of 5%? The face value is $1,000 and the bond matures in 3 years. There are exactly six months before the first interest payment.

Accepted Answer

The bond's price is closest to $1,025. The bond's present value is the sum of the present values of its future cash flows. The future cash flows are the semiannual interest payments of $55 and the face value of $1,000 at maturity. The present value of the future cash flows is calculated using the effective semiannual interest rate of 5%.

Question 6

Ted's Co. offers a zero coupon bond with an 11.3% yield to maturity. The bond matures in 16 years. What is the current price of a $1,000 face value bond?

Accepted Answer

To calculate the price of a zero coupon bond, we need to use the formula:

P = F / (1 + y)^n

where P is the price, F is the face value, y is the yield to maturity, and n is the number of years to maturity.

We are given F = $1,000, y = 11.3%, and n = 16. Plugging these values into the formula, we get:

P = $1,000 / (1 + 0.113)^16 = $180.33

Therefore, the current price of the bond is $180.33.

The best choice is B.

Question 7

The bonds of Jerrod's Welding,Inc. pay an 8% coupon,have a 7.98% yield to maturity and have a face value of $1,000. The current rate of inflation is 2.5%. What is the real rate of return on these bonds?

Accepted Answer

The real rate of return is calculated as follows:

Real rate of return = (1 + nominal rate) / (1 + inflation rate) - 1

Plugging in the values:

Real rate of return = (1 + 0.08) / (1 + 0.025) - 1 
Real rate of return = 0.0535 or 5.35%

Therefore, the best choice is B.

Question 8

A corporate bond is quoted at a current price of 102.767. What is the market price of a bond with a $1,000 face value?

Accepted Answer

The market price of the bond is calculated by multiplying the quoted price (102.767) by the face value ($1,000) and dividing by 100, resulting in $1,027.67.

Question 9

The MerryWeather Firm wants to raise $10 million to expand its business. To accomplish this,it plans to sell 30-year,$1,000 face value zero-coupon bonds. The bonds will be priced to yield 6%. What is the minimum number of bonds it must sell to raise the $10 million it needs?

Accepted Answer

To find the minimum number of bonds needed to raise $10 million, we need to calculate the price of one bond first:

PV = FV/(1+r)^n
PV = 1000/(1+0.06)^30
PV = $174.32

Therefore, MerryWeather Firm needs to sell $10,000,000/$174.32 = 57,435 bonds to raise the $10 million it needs. Therefore, the correct answer is (C) 57,435.

Question 10

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 a yield of 8.8% over 10 years, the price is $1,000 / (1 + 0.088)^10 = $430.24.

Question 11

A zero coupon bond with a face value of $1,000 is issued with an initial price of $463.34. The bond matures in 25 years. What is the implicit interest,in dollars,for the first year of the bond's life?

Accepted Answer

The answer of A zero coupon bond with a face...

Question 12

Your firm offers a 10-year,zero coupon bond. The yield to maturity is 8.2%. 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 8.2% yield over 10 years, the price is $1,000 / (1 + 0.082)^10 = $454.70.

Question 13

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 number of years until maturity can be calculated using the formula for the present value of a zero-coupon bond: $ PV = \frac{FV}{(1 + r)^n} $. Solving for $ n $ gives $ n = \frac{\log(FV/PV)}{\log(1 + r)} $. Substituting the given values: $ n = \frac{\log(1000/394.47)}{\log(1.0687)} \approx 14 $ years.

Question 14

A corporate bond with a face value of $1,000 matures in 4 years and has an 8% coupon paid at the end of each year. The current price of the bond is $932. What is the yield to maturity for this bond?

Accepted Answer

The yield to maturity (YTM) is calculated by solving the equation for the bond price, which equates the present value of future cash flows (coupon payments and face value) to the current price. Using a financial calculator or iterative method, the YTM is approximately 10.15%.

Question 15

Emmett Corporation has issued a $1,000 face value zero-coupon bond. Which of the following values is closest to the correct price for the bond if the appropriate discount rate is 4% and the bond matures in 8 years?

Accepted Answer

The price of a zero-coupon bond can be calculated using the formula:
Price = Face Value / (1 + r)n
where r is the discount rate and n is the number of years until maturity.
Using this formula, we get:
Price = 1000 / (1 + 0.04)8
Price = 644.61
Therefore, the closest value to the correct price is A) $644.61.

Question 16

Emmett Corporation has issued a $1,000 face value zero-coupon bond. Which of the following values is closest to the correct price for the bond if the appropriate discount rate is 4% and the bond matures in 8 years?

Accepted Answer

The present value formula for a zero-coupon bond is: 
PV = Face Value / (1 + r)^n 
Where: 
PV = Present Value 
r = Discount Rate 
n = Number of Years until Maturity

Using the formula, we can calculate the present value of the bond as: 
PV = $1,000 / (1 + 0.04)^8 
PV = $730.69

Therefore, the closest value to the correct price for the bond is $730.69, which is answer choice A.

Question 17

Jackson Central has a 6-year,8% annual coupon bond with a $1,000 par value. Earls Enterprises has a 12-year,8% annual coupon bond with a $1,000 par value. Both bonds currently have a yield to maturity of 6%. Which of the following statements are correct if the market yield increases to 7%?

Accepted Answer

When market yield increases, bond prices decrease. The duration of the bonds increases with time to maturity and coupon rate. The Earls bond has a longer duration than the Jackson bond, so it will be more sensitive to changes in market yields. At a yield to maturity of 7%, the Earls bond will decrease in value by 7.56% (calculated using the bond price formula). None of the other statements are correct.

Question 18

Moonhigh,Inc. has a 6%,semiannual coupon bond with a current market price of $988.52. The bond has a par value of $1,000 and a yield to maturity of 6.31%. How many years is it until this bond matures?

Accepted Answer

The bond has a par value of $1,000, a semiannual coupon rate of 6%, and a yield to maturity of 6.31%. Since the coupon payments are semiannual, the coupon payment would be $30 ($1,000 x 6% x 1/2) per half year. Using the bond pricing formula, we can solve for the number of periods until maturity:

$988.52 = ($30 / (1 + 0.03155)^1) + ($30 / (1 + 0.03155)^2) + ... + ($1,030 / (1 + 0.03155)^20)

Solving for the number of periods (in half years), we get:

n = 8.56 half years

Therefore, the number of years until maturity is:

n / 2 = 4.28 years

Thus, the best choice is B.

Question 19

The Lo Sun Corporation offers a 8% bond with a current market price of $875.05. The yield to maturity is 9.18%. The face value is $1,000. Interest is paid semiannually. How many years is it until this bond matures?

Accepted Answer

The bond pays interest semiannually, so the yield to maturity of 9.18% is divided by 2, and the coupon rate of 8% is also divided by 2. Using the bond price formula and solving for the number of periods, we find that the bond matures in 40 years.

Question 20

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

First, we need to calculate the current price of the bond using the current yield of 4.5%.

PV = (coupon payment / interest rate) x [1 - 1 / (1 + interest rate) ^ n] + face value / (1 + interest rate) ^ n
where PV is the present value or current price, coupon payment is the annual interest payment ($50), interest rate is the current yield (0.045), n is the number of years until maturity (12).

PV = (50 / 0.045) x [1 - 1 / (1 + 0.045) ^ 12] + 1000 / (1 + 0.045) ^ 12
PV = $1,126.85

Next, we need to calculate the new price of the bond using the new market yield of 6%.

PV = (50 / 0.06) x [1 - 1 / (1 + 0.06) ^ 12] + 1000 / (1 + 0.06) ^ 12
PV = $1,002.47

The change in price is then calculated as:
Change in price = (New price - Current price) / Current price x 100%
Change in price = ($1,002.47 - $1,126.85) / $1,126.85 x 100%
Change in price = -0.1119 or -11.19%

Therefore, the bond price has decreased by 12.38% (rounded to the nearest hundredth) which is closest to option B.

Quiz 8: Interest Rates and Bond Valuation

A bond that pays interest annually yields a 7.25% rate of return. The inflation rate for the same period is 3.5%. What is the real rate of return on this bond?

The nominal rate of return on the bonds of Steve's Boats is 8.75%. The real rate of return is 3.4%. What is the rate of inflation?

The outstanding bonds of Boutelle,Inc. provide a real rate of return of 3.6%. The current rate of inflation is 2.5%. What is the nominal rate of return on these bonds?

Guggenheim,Inc. offers a 9% coupon bond with annual payments. The yield to maturity is 8.13% and the maturity date is 9 years. What is the market price of a $1,000 face value bond?

Which of the following amounts is closest to the value of a bond that pays $55 semiannually and has an effective semiannual interest rate of 5%? The face value is $1,000 and the bond matures in 3 years. There are exactly six months before the first interest payment.

Ted's Co. offers a zero coupon bond with an 11.3% yield to maturity. The bond matures in 16 years. What is the current price of a $1,000 face value bond?

The bonds of Jerrod's Welding,Inc. pay an 8% coupon,have a 7.98% yield to maturity and have a face value of $1,000. The current rate of inflation is 2.5%. What is the real rate of return on these bonds?

A corporate bond is quoted at a current price of 102.767. What is the market price of a bond with a $1,000 face value?

The MerryWeather Firm wants to raise $10 million to expand its business. To accomplish this,it plans to sell 30-year,$1,000 face value zero-coupon bonds. The bonds will be priced to yield 6%. What is the minimum number of bonds it must sell to raise the $10 million it needs?

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?

A zero coupon bond with a face value of $1,000 is issued with an initial price of $463.34. The bond matures in 25 years. What is the implicit interest,in dollars,for the first year of the bond's life?

Your firm offers a 10-year,zero coupon bond. The yield to maturity is 8.2%. What is the current market price of a $1,000 face value bond?

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?

A corporate bond with a face value of $1,000 matures in 4 years and has an 8% coupon paid at the end of each year. The current price of the bond is $932. What is the yield to maturity for this bond?

Emmett Corporation has issued a $1,000 face value zero-coupon bond. Which of the following values is closest to the correct price for the bond if the appropriate discount rate is 4% and the bond matures in 8 years?

Emmett Corporation has issued a $1,000 face value zero-coupon bond. Which of the following values is closest to the correct price for the bond if the appropriate discount rate is 4% and the bond matures in 8 years?

Jackson Central has a 6-year,8% annual coupon bond with a $1,000 par value. Earls Enterprises has a 12-year,8% annual coupon bond with a $1,000 par value. Both bonds currently have a yield to maturity of 6%. Which of the following statements are correct if the market yield increases to 7%?

Moonhigh,Inc. has a 6%,semiannual coupon bond with a current market price of $988.52. The bond has a par value of $1,000 and a yield to maturity of 6.31%. How many years is it until this bond matures?

The Lo Sun Corporation offers a 8% bond with a current market price of $875.05. The yield to maturity is 9.18%. The face value is $1,000. Interest is paid semiannually. How many years is it until this bond matures?

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%?