Question 1

Collateralized bonds

Accepted Answer

Collateralized bonds are considered the safest variety of bonds because they are backed by specific assets of the firm, rather than relying on the firm's general earning power.

Question 2

Swingin'Soiree, Inc. is a firm that has its main office on the Right Bank in Paris. The firm just issued bonds with a final payment amount that depends on whether the Seine River floods. This type of bond is known as

Accepted Answer

Catastrophe bonds are used to transfer risk from the firm to the capital markets.

Question 3

A zero-coupon bond is one that

Accepted Answer

Zero-coupon bonds pay no interest. Investors receive the face value at maturity.

Question 4

You purchased an annual interest coupon bond one year ago that now has 18 years remaining until maturity. The coupon rate of interest was 11%, and par value was $1,000. At the time you purchased the bond, the yield to maturity was 10%. The amount you paid for this bond one year ago was

Accepted Answer

FV = 1,000, PMT = 110, n = 19, i = 10, PV = 1,083.65.

Question 5

A zero-coupon bond has a yield to maturity of 11% and a par value of $1,000. If the bond matures in 27 years, the bond should sell for a price of _______ today.

Accepted Answer

The price of a zero-coupon bond is calculated using the formula: Price = Par Value / (1 + Yield)^Years. Plugging in the values: $1,000 / (1 + 0.11)^27 = $59.74.

Question 6

Subordination clauses in bond indentures

Accepted Answer

Subordination clauses in bond indentures may restrict the amount of additional borrowing the firm can undertake and provide higher priority to senior creditors in the event of bankruptcy.

Question 7

A coupon bond that pays interest of $90 annually has a par value of $1,000, matures in nine years, and is selling today at a $66 discount from par value. The yield to maturity on this bond is

Accepted Answer

FV = 1,000, PMT = 90, n = 9, PV = 934, i = 10.15%.

Question 8

A coupon bond that pays interest annually has a par value of $1,000, matures in eight years, and has a yield to maturity of 9%. The intrinsic value of the bond today will be ______ if the coupon rate is 6%.

Accepted Answer

FV = 1,000, PMT = 60, n = 8, i = 9, PV = 833.96.

Question 9

Three years ago, you purchased a bond for $974.69. The bond had three years to maturity, a coupon rate of 8%, paid annually, and a face value of $1,000. Each year, you reinvested all coupon interest at the prevailing reinvestment rate shown in the table below. Today is the bond's maturity date. What is your realized compound yield on the bond? $\begin{array}{lc}
&\text { Prevailing } \
&\text { Reinvestment }\
 \text { Time } & \text { Rate } \
\hline0 \text { (purchase date) } & 6.0 \% \
1 & 7.2 \% \
2 & 9.4 \% \
3 \text { (maturity date) } & 8.2 \%
\end{array}$

Accepted Answer

The answer of Three years ago, you purchased a bond...

Question 10

Which of the following is not a type of international bond?

Accepted Answer

Samurai bonds, Yankee bonds, and bulldog bonds are mentioned in the textbook.

Question 11

A coupon bond that pays interest of $40 semi-annually has a par value of $1,000, matures in four years, and is selling today at a $36 discount from par value. The yield to maturity on this bond is

Accepted Answer

FV = 1,000, PMT = 40, n = 8, PV = 964, i = 9.09%.

Question 12

Debt securities are often called fixed-income securities because

Accepted Answer

This definition is given in the chapter's introduction. It helps the student understand the nature of bonds.

Question 13

Bond analysts might be more interested in a bond's yield to call if

Accepted Answer

If interest rates fall the firm is more likely to call the issue and refinance at lower rates. This is similar to an individual refinancing a home. The student has to think through each of the reasons given and make the connection between falling rates and the motivation to refinance.

Question 14

One year ago, you purchased a newly-issued TIPS bond that has a 6% coupon rate, five years to maturity, and a par value of $1,000. The average inflation rate over the year was 4.2%. What is the amount of the coupon payment you will receive, and what is the current face value of the bond?

Accepted Answer

The bond price, which is indexed to the inflation rate, becomes $1,000 × 1.042 = $1,042. The interest payment is based on the coupon rate and the new face value. The interest amount equals $1,042 × .06 = $62.52.

Question 15

A coupon bond that pays interest semi-annually has a par value of $1,000, matures in six years, and has a yield to maturity of 9%. The intrinsic value of the bond today will be __________ if the coupon rate is 9%.

Accepted Answer

FV = 1,000, PMT = 45, n = 12, i = 4.5, PV = 1,000.00.

Question 16

A coupon bond that pays interest semi-annually has a par value of $1,000, matures in seven years, and has a yield to maturity of 11%. The intrinsic value of the bond today will be __________ if the coupon rate is 8.8%.

Accepted Answer

FV = 1,000, PMT = 44, n = 14, i = 5.5, PV = 894.51.

Question 17

A coupon bond that pays interest annually has a par value of $1,000, matures in six years, and has a yield to maturity of 11%. The intrinsic value of the bond today will be ______ if the coupon rate is 7.5%.

Accepted Answer

FV = 1,000, PMT = 75, n = 6, i = 11, PV = 851.93.

Question 18

What is the relationship between the price of a straight bond and the price of a callable bond?

Accepted Answer

For low interest rates, the price difference is due to the value of the firm's option to call the bond at the call price. The firm is more likely to call the issue at low interest rates, so the option is valuable. At higher interest rates the firm is less likely to call and this option loses value. The prices converge for high interest rates. A graphical representation is shown in Figure 14.4.

Question 19

You purchased an annual interest coupon bond one year ago that had nine years remaining to maturity at that time. The coupon interest rate was 10%, and the par value was $1,000. At the time you purchased the bond, the yield to maturity was 8%. If you sold the bond after receiving the first interest payment and the yield to maturity continued to be 8%, your annual total rate of return on holding the bond for that year would have been

Accepted Answer

FV = 1,000, PMT = 100, n = 9, i = 8, PV = 1,124.94; FV = 1000, PMT = 100, n = 8, i = 8, PV = 1,114.93; HPR = (1,114.93 1,124.94 + 100)/1,124.94 = 8%.

Question 20

A zero-coupon bond has a yield to maturity of 12% and a par value of $1,000. If the bond matures in 18 years, the bond should sell for a price of _______ today.

Accepted Answer

The answer of A zero-coupon bond has a yield to...

Quiz 14: Bond Prices and Yields