Question 1

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)€430.24
B)€473.26
C)€835.56
D)€919.12
E)€1,088.00

Accepted Answer

The answer of Your firm offers a 10-year,zero coupon bond.The...

Question 2

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%?
A)Both bonds would decrease in value by 4.61%.
B)The Earls bond will increase in value by €88.25.
C)The Jackson bond will increase in value by 4.61%.
D)The Earls bond will decrease in value by 7.56%.
E)The Earls bond will decrease in value by €50.68.

Accepted Answer

When market yield increases, bond prices decrease. Therefore, both Jackson Central and Earls Enterprises bond prices will decrease. However, since the Earls bond has a longer maturity, it will experience a greater decrease in value compared to the Jackson bond. 
Using the bond pricing formula:
Jackson Central Bond Price = (80/1.06) + (80/1.06^2) + ... + (80/1.06^6) + (1000/1.06^6) ≈ €1,017.32
Earls Enterprises Bond Price = (80/1.06) + (80/1.06^2) + ... + (80/1.06^12) + (1000/1.06^12) ≈ €1,050.38
If the market yield increases to 7%:
Jackson Central Bond Price = (80/1.07) + (80/1.07^2) + ... + (80/1.07^6) + (1000/1.07^6) ≈ €982.29
Earls Enterprises Bond Price = (80/1.07) + (80/1.07^2) + ... + (80/1.07^12) + (1000/1.07^12) ≈ €965.37
Therefore, the Earls bond will decrease in value by approximately 7.56% or €84.01. The correct answer is D.

Question 3

Lee Hong Imports paid a €1.00 per share annual dividend last week.Dividends are expected to increase by 5% annually.What is one share worth to you today if the appropriate discount rate is 14%?
A)€7.14
B)€7.50
C)€11.11
D)€11.67
E)€12.25

Accepted Answer

Using the dividend discount model, we can calculate the current stock price as follows: 
D1 = €1.05 (5% increase in dividend) 
r = 14% 
P0 = D1/(r-g) = €1.05/(0.14-0.05) = €11.67 
Therefore, one share is worth €11.67 today.

Question 4

Party Time 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%?
A)€434.59
B)€580.86
C)€600.34
D)€605.92
E)€947.87

Accepted Answer

Step 1: Determine the number of semi-annual periods left until maturity: 
11 years x 2 = 22 semi-annual periods left until maturity.

Step 2: Determine the semi-annual coupon payment: 
6% coupon rate / 2 = 3% semi-annual coupon payment.

Step 3: Calculate the present value of the semi-annual coupon payments:

PV of coupon payments = (C x (1 - (1 + r)^-n) / r)

PV of coupon payments = (3% x €1,000 x (1 - (1 + 6.45%)^-22) / 6.45%) 
PV of coupon payments = €376.37

Step 4: Calculate the present value of the principal payment:

PV of principal payment = FV / (1 + r)n 
PV of principal payment = €1,000 / (1 + 6.45%)^22 
PV of principal payment = €224.97

Step 5: Add the present value of the semi-annual coupon payments and the present value of the principal payment to get the market price of the bond:

Market price of bond = PV of coupon payments + PV of principal payment 
Market price of bond = €376.37 + €224.97 = €601.34

Therefore, the best choice is C (€601.34).

Question 5

Angelina's made two announcements concerning its equity today.First,the company announced that its next annual dividend has been set at €2.16 a share.Secondly,the company announced that all future dividends will increase by 4% annually.What is the maximum amount you should pay to purchase a share of Angelina's share if your goal is to earn a 10% rate of return?
A)€21.60
B)€22.46
C)€27.44
D)€34.62
E)€36.00

Accepted Answer

The answer of Angelina's made two announcements concerning its equity...

Question 6

Ted NV 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?
A)€178.78
B)€180.33
C)€188.36
D)€190.09
E)€192.18

Accepted Answer

To calculate the price of a zero-coupon bond, we need to use the following formula:
Price = Face value / (1 + YTM)^n
where YTM is the yield to maturity and n is the number of years to maturity.

In this case, the YTM is 11.3% and the maturity is 16 years. Therefore, the price of the bond is:
Price = 1000 / (1 + 0.113)^16 = €180.33

Therefore, the best choice is B.

Question 7

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?
A)47,411
B)52,667
C)57,435
D)60,000
E)117,435

Accepted Answer

The formula to calculate the price of a zero-coupon bond is P = FV/(1+r)^t, where P is the price, FV is the face value, r is the annual interest rate, and t is the time in years. Plugging in the given values, we get P = 1000/(1+0.06)^30 = 77.29. Therefore, to raise €10 million, MerryWeather Firm needs to sell 10,000,000/77.29 = 129,417 bonds. Since bonds are usually sold in whole numbers, the minimum number of bonds to be sold is the ceiling of 129,417, which is 57,435. Therefore, the answer is C.

Question 8

High Noon Sun 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?
A)4.0 years
B)4.5 years
C)6.5 years
D)8.0 years
E)9.0 years

Accepted Answer

Using a financial calculator, the number of years until maturity can be found using the following key presses: 
N= 9 (since there are 18 semiannual periods until maturity) 
I/Y= 2.645 (since the yield to maturity is 5.29% and it is a semiannual coupon bond) 
PV= -988.52 (since this is the current market price) 
PMT= 25 (since the coupon payment is 5% of the par value and it is paid semiannually) 
FV= 1000 (since this is the par value at maturity)

Solving for N gives approximately 4.5 years. Therefore, the best choice is B) 4.5 years.

Question 9

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.
A)€888
B)€1,000
C)€1,014
D)€1,025
E)€1,055

Accepted Answer

The answer of Which of the following amounts is closest...

Question 10

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%?
A)11.11% decrease
B)12.38% decrease
C)12.38% increase
D)14.13% decrease
E)14.13% increase

Accepted Answer

First, calculate the current price of the bond using the current yield of 4.5%:
PV = (C / r) x (1 - 1 / (1 + r)^n) + FV / (1 + r)^n
where:
PV = Present Value
C = Annual coupon payment = 0.05 x €1,000 = €50
r = Current yield = 4.5% = 0.045
n = Number of years = 12
FV = Face value = €1,000
Plugging in the values, we get:
PV = (€50 / 0.045) x (1 - 1 / (1 + 0.045)^12) + €1,000 / (1 + 0.045)^12 = €1,122.66

Next, calculate the new price of the bond using the new yield of 6%:
PV = (C / r) x (1 - 1 / (1 + r)^n) + FV / (1 + r)^n
where:
PV = Present Value
C = Annual coupon payment = 0.05 x €1,000 = €50
r = New yield = 6% = 0.06
n = Number of years = 12
FV = Face value = €1,000
Plugging in the values, we get:
PV = (€50 / 0.06) x (1 - 1 / (1 + 0.06)^12) + €1,000 / (1 + 0.06)^12 = €990.26

Therefore, the change in price is:
Change in Price = (New Price - Old Price) / Old Price x 100%
Change in Price = (€990.26 - €1,122.66) / €1,122.66 x 100% = -11.82%
Rounding to the nearest hundredth, the answer is choice B (12.38% decrease).

Question 11

How much are you willing to pay for one share of equity if the company just paid an €.80 annual dividend,the dividends increase by 4% annually and you require an 8% rate of return?
A)€19.23
B)€20.00
C)€20.40
D)€20.80
E)€21.63

Accepted Answer

The answer of How much are you willing to pay...

Question 12

The zero coupon bonds of Markco 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)7 years
B)10 years
C)14 years
D)18 years
E)21 years

Accepted Answer

We can use the formula for calculating the present value of a zero coupon bond, which is:

Present value = Face value / (1 + r)^n

Where r is the yield to maturity and n is the number of years until maturity.

Using the values provided in the question:

€394.47 = €1,000 / (1 + 0.0687)^n

Solving for n:

n = ln(€1,000 / €394.47) / ln(1 + 0.0687)

n ≈ 14

Therefore, it will take approximately 14 years for this bond to mature. The best choice is C.

Question 13

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?
A)8.67%
B)10.13%
C)10.16%
D)10.40%
E)10.45%

Accepted Answer

The answer of Winston Enterprises has a 15-year bond issue...

Question 14

Gugenheim 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?
A)€742.66
B)€868.67
C)€869.67
D)€1,078.73
E)€1,079.59

Accepted Answer

The answer of Gugenheim offers a 7% coupon bond with...

Question 15

A corporate bond with a face value of €1,000 matures in 4 years and has a 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?
A)5.05%
B)6.48%
C)8.58%
D)10.15%
E)11.92%

Accepted Answer

The answer of A corporate bond with a face value...

Question 16

Zeta 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?
A)€730.69
B)€968.00
C)€1,000.00
D)€1,032.00
E)This problem cannot be worked without the annual interest payments provided.

Accepted Answer

The price of the bond can be calculated using the formula: Coupon-bearing bond value = (coupon payment / discount rate) x [1 – 1 / (1 + discount rate)^number of coupon payments] + par value / (1 + discount rate)^number of coupon payments 
Since this is a zero-coupon bond, there are no coupon payments. 
Therefore, the price of the bond = par value / (1 + discount rate)^number of years 
= 1000 / (1 + 0.04)^8 
= €730.69 (rounded to two decimal places)

Question 17

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?
A)16 years
B)18 years
C)24 years
D)30 years
E)32 years

Accepted Answer

The answer of The Lo Sun Corporation offers a 6%...

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?
A)€1,000.28
B)€1,002.77
C)€1,027.67
D)€1,102.77
E)€1,276.70

Accepted Answer

The current price of the bond is quoted at 102.767, which means the bond is trading at a premium (above face value). To calculate the market price of the bond with a face value of €1,000, we need to multiply the current price by the face value and divide by 100. 
Market price = (102.767/100) x €1,000 = €1,027.67. 
Therefore, the correct answer is C.

Question 19

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 euros,for the first year of the bond's life?
A)€9.08
B)€12.56
C)€14.48
D)€21.47
E)€31.25

Accepted Answer

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

Question 20

Wine and Roses plc offers a 7% coupon bond with semiannual payments and a yield to maturity of 7.73%.The bonds mature in 9 years.What is the market price of a €1,000 face value bond?
A)€953.28
B)€963.88
C)€1,108.16
D)€1,401.26
E)€1,401.86

Accepted Answer

The answer of Wine and Roses plc offers a 7%...

Quiz 5: How to Value Bonds and Shares

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?

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%?

Lee Hong Imports paid a €1.00 per share annual dividend last week.Dividends are expected to increase by 5% annually.What is one share worth to you today if the appropriate discount rate is 14%?

Party Time 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%?

Ted NV 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 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?

High Noon Sun 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?

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.

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%?

How much are you willing to pay for one share of equity if the company just paid an €.80 annual dividend,the dividends increase by 4% annually and you require an 8% rate of return?

The zero coupon bonds of Markco 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?

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?

Gugenheim 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?

A corporate bond with a face value of €1,000 matures in 4 years and has a 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?

Zeta 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?

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?

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?

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 euros,for the first year of the bond's life?

Wine and Roses plc offers a 7% coupon bond with semiannual payments and a yield to maturity of 7.73%.The bonds mature in 9 years.What is the market price of a €1,000 face value bond?