Question 1

Two of the primary differences between a corporate bond and a Treasury bond with identical maturity dates are related to:

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Question 2

The bonds issued by Jensen & Son bear a 5 % coupon,payable semiannually.The bond matures in 8 years and has a $1,000 face value.Currently,the bond sells 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, which is 5%. This is the only choice that matches the given information.

Question 3

The value of a 20 year zero-coupon bond with a $1,000 face value when the market required rate of return of 8% (semiannual)is ___.

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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 semiannually.What is the yield to maturity?

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Question 5

Ted's Co.offers a zero coupon bond with an 11.3% (annual)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 current price of a zero coupon bond, we need to use the formula:

PV = FV / (1 + r)^n

Where PV is the present value or current price, FV is the face value of the bond, r is the yield to maturity divided by the number of compounding periods per year, and n is the total number of compounding periods.

In this case, the yield to maturity is 11.3% annually, so the semi-annual yield is 5.65% (11.3% divided by 2). The bond matures in 16 years, which means there are 32 semi-annual periods (16 years x 2). Plugging these values into the formula, we get:

PV = 1000 / (1 + 0.0565)^32
PV = 1000 / 4.9167
PV = $203.43

Therefore, the current price of the bond is $203.43, which is closest to answer choice B.

Question 6

Mitzi's,II.bonds offer a 5% coupon at a current market price of $989.The bonds have a face value of $1,000 and a call price of $1,025.What is the current yield on these bonds?

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Question 7

D'Angelo's bonds have a face value of $1,000 and a current market price of $1065.The bonds have a 7% coupon rate.What is the current yield on these bonds?

Accepted Answer

The formula to calculate current yield is annual interest payment divided by current market price, expressed as a percentage.

Annual interest payment = face value x coupon rate 
= $1,000 x 7% 
= $70

Current yield = ($70 ÷ $1,065) x 100% 
= 6.57%

Therefore, the answer is B) 6.57%.

Question 8

Party Time,Inc.has a 6% coupon bond that matures in 11 years.The bond pays interest semiannually.What is the market price of a $1,000 face value bond if the yield to maturity is 12.9%?

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Question 9

Gugenheim,Inc.offers a 7% coupon bond with annual payments.The yield to maturity is 5.85% and the maturity date is 9 years.What is the market price of a $1,000 face value bond?

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Question 10

Consider a bond which pays 7% semiannually and has 8 years to maturity.The market requires an interest rate of 8% on bonds of this risk.What is this bond's price?

Accepted Answer

First, we need to calculate the number of periods, which is 8 years multiplied by 2 since the bond pays semiannually. So we have 16 periods. 
Next, we need to calculate the present value of the bond using the formula:
PV = C x [1 - (1 + r)^(-n)]/r + FV/(1+r)^n
Where:
C = semiannual coupon payment = 0.07 x 1000/2 = $35
r = semiannual interest rate = 0.08/2 = 0.04
n = number of periods = 16
FV = face value = $1000
Plugging these values into the formula, we get:
PV = 35 x [1 - (1 + 0.04)^(-16)]/0.04 + 1000/(1+0.04)^16
PV = $941.74
Therefore, the bond's price is $941.74, which is closest to option C ($941.74).

Question 11

Your firm offers a 10-year,zero coupon bond.The yield to maturity is 8.8% (annual).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 8.8% yield over 10 years, the price is $1,000 / (1 + 0.088)^10 = $430.24.

Question 12

Wine and Roses,Inc.offers a 7% coupon bond with semiannual payments and a yield to maturity of 7.73%.The bonds mature in 10 years.What is the market price of a $1,000 face value bond?

Accepted Answer

To calculate the market price of the bond, we need to use the following formula:
PV = (C/2)*(1 - (1/(1+y/2)^n))/(y/2) + 1000/(1+y/2)^n
where:
PV = present value or market price of the bond
C = coupon payment = 0.07*1000/2 = $35 (semi-annual coupon payment)
y = yield to maturity = 7.73%/2 = 0.03865
n = number of semi-annual periods = 10*2 = 20
Plugging in these values, we get:
PV = (35/(1.03865)^1 + 35/(1.03865)^2 + ... + 35/(1.03865)^20) + 1000/(1.03865)^20
PV = $949.80
Therefore, the market price of the bond is $949.80, which corresponds to choice B.

Question 13

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, calculate the current price of the bond using the current yield:

Coupon payment = $1,000 x 5% = $50
Current price = $50 / 0.045 = $1,111.11

Then, calculate the new price of the bond using the new yield:

Coupon payment = $1,000 x 5% = $50
New price = $50 / 0.06 = $833.33

Finally, calculate the change in price as a percentage:

Change in price = ($833.33 - $1,111.11) / $1,111.11 x 100% = - 24.96%
The answer closest to this is B: 12.38% decrease.

Question 14

The bonds offered by Leo's Pumps are callable in 3 years at a quoted price of 101.What is the amount of the call premium on a $1,000 par value bond?

Accepted Answer

The call premium is the amount above the par value that the issuer must pay to call the bond. Since the bond is callable at 101, this means it can be called at 101% of its par value. For a $1,000 par value bond, 101% is $1,010. The call premium is therefore $1,010 - $1,000 = $10.

Question 15

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

The bond with a longer maturity (Earls Enterprises) will have a larger decrease in value when the market yield increases. Using the bond pricing formula:

For Jackson Central: 
n = 6 (years left until maturity)
r = 7% (new yield to maturity)
C = 80 (annual coupon payment = 8% x $1,000)
F = $1,000 (par value)

Price = $1,000 / (1 + 0.07)^6 + $80 / (1 + 0.07)^1 + $80 / (1 + 0.07)^2 + ... + $80 / (1 + 0.07)^6
Price = $1,000 / 1.4071 + $69.87 + $65.34 + ... + $43.38
Price = $1,000 / 1.4071 + $457.58
Price = $1,714.72

Using the same formula for Earls Enterprises:

n = 12
r = 7%
C = 80
F = $1,000

Price = $1,000 / (1 + 0.07)^12 + $80 / (1 + 0.07)^1 + $80 / (1 + 0.07)^2 + ... + $80 / (1 + 0.07)^12
Price = $1,000 / 2.1240 + $69.87 + $65.34 + ... + $25.07
Price = $1,000 / 2.1240 + $600.18
Price = $1,471.09

The percentage change in price can be calculated using:

Percentage change = (new price - old price) / old price * 100

For Jackson Central:

Percentage change = ($1,714.72 - $1,809.94) / $1,809.94 * 100
Percentage change = -5.25%

For Earls Enterprises:

Percentage change = ($1,471.09 - $1,588.34) / $1,588.34 * 100
Percentage change = -7.37%

Therefore, the correct answer is D: The Earls bond will decrease in value by 7.56%.

Question 16

The zero coupon bonds of Markco,Inc.have a market price of $370.67,a face value of $1,000,and a yield to maturity of 6.84% (annual).How many years is it until this bond matures?

Accepted Answer

The formula for the price of a zero-coupon bond is: Price = Face Value / (1 + Yield)^Years. Plugging in the values: $370.67 = $1,000 / (1 + 0.0684)^Years. Solving for Years gives approximately 15 years.

Question 17

High Noon Sun,Inc.has a 5%,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 5.29%.How many years is it until this bond matures?

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Question 18

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 the quoted price multiplied by the face value. Therefore, market price = 102.767 x 1,000 = $1,027.67.

Question 19

The Lo Sun Corporation offers a 6% bond with a current market price of $875.05.The yield to maturity is 7.34%.The face value is $1,000.Interest is paid semiannually.How many years is it until this bond matures?

Accepted Answer

The correct answer is A because the bond has a maturity of 16 years. This can be calculated using the following formula:Maturity = (Face Value / Current Market Price) * (1 + Yield to Maturity / 2)^(-2 * Number of Years)Plugging in the given values, we get:16 = (1000 / 875.05) * (1 + 0.0734 / 2)^(-2 * Number of Years)Solving for Number of Years, we get:Number of Years = 16

Question 20

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?

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Quiz 5: Interest Rate and Bond Valuation