Question 1

William Corp.Bonds have a current yield of 7% and mature in 10 years.Smith Corp.Bonds have a current yield of 5% and mature in 10 years.Given this information,which of the following statements is MOST correct?

Accepted Answer

The answer of William Corp.Bonds have a current yield of...

Question 2

In 2000 Jenson Inc.issued bonds with an 8 percent coupon rate and a $1,000 face value.The bonds mature on March 1,2025.If an investor purchased one of these bonds on March 1,2012,determine the yield to maturity if the investor paid $1,100 for the bond.

Accepted Answer

The answer of In 2000 Jenson Inc.issued bonds with an...

Question 3

a Heights Inc.bonds have a coupon rate of 7%,a yield to maturity of 10%,a face value of $1,000,and mature in 10 years.Which of the following statements is MOST correct?

Accepted Answer

The yield to maturity represents the total return an investor will earn if they hold the bond until maturity. In this case, the yield to maturity is 10%, which means an investor who purchases the bond today and holds it until maturity will earn a return of 10% per year. The coupon rate of 7% is only the annual interest payment the investor will receive. Therefore, choices A and B are incorrect. Choice C may be misleading, as it implies a return of 17% per year, which is not accurate. The return will be 10% per year if the investor holds the bond until maturity.

Question 4

The yield to maturity on a bond is the rate of return that equates the present value of the bond's future cash flows with the bond's

Accepted Answer

The yield to maturity is calculated by equating the present value of the bond's future cash flows to its current market value. Therefore, the correct choice is B. The face value, liquidation value, and book value are not used in the calculation of yield to maturity.

Question 5

Which of the following statements is MOST correct?

Accepted Answer

If the bond's yield to maturity exceeds its coupon rate, it indicates that the bond is selling at a discount to its face value, i.e., its price is less than its maturity value. So, statement B is correct.

Statement A is incorrect as the current yield is the annual interest income divided by the market price of the bond, and it can be different from the coupon rate depending on the bond's price in the market.

Statement C is incorrect as the coupon rate affects the interest payments and the total return of the bond. Therefore, two bonds with the same maturity, yield to maturity, and risk can sell for different prices if they have different coupon rates.

Thus, option D is incorrect.

Question 6

Bond A has a current yield of 6% and Bond B has a current yield of 8%.If the market price of both bonds is the same,then the yield to maturity on Bond B must be higher than the yield to maturity on Bond A.

Accepted Answer

The current yield only accounts for the annual interest payment relative to the bond's price; it does not account for differences in the bonds' maturity dates, coupon rates, or how these factors affect the yield to maturity. Bond B could have a higher current yield but a similar or lower yield to maturity than Bond A depending on these other factors.

Question 7

The yield to maturity on a bond

Accepted Answer

The yield to maturity on a bond is the rate of return that an investor can expect to earn if they purchase the bond at its current market price and hold it until the bond’s maturity date, and this rate is set by the market based on current interest rates and the creditworthiness of the issuer. Therefore, it represents the required rate of return on the bond. It is not fixed in the indenture (A), it can be higher or lower for higher risk bonds (B), and it can be either above or below the coupon interest rate (D).

Question 8

When using the pvs (present value)function in Excel to calculate bond values,the bond's coupon rate is entered as the Rate variable.

Accepted Answer

The Rate variable in the pvs function refers to the discount rate or yield to maturity, not the bond's coupon rate.

Question 9

Which of the following is NOT a definition of yield to maturity?

Accepted Answer

Yield to maturity is defined as the discount rate that equates the present value of a bond's future cash flows with its market price. Option D refers to the discount rate that equates the present value of future cash flows with a bond's face value, which is not the same as the yield to maturity.

Question 10

PBJ Corporation issued bonds on January 1,2006.The bonds had a coupon rate of 5.5%,with interest paid semiannually.The face value of the bonds is $1,000 and the bonds mature on January 1,2021.What is the yield to maturity for an PBJ Corporation bond on January 1,2012 if the market price of the bond on that date is $950?

Accepted Answer

The yield to maturity (YTM) is calculated based on the bond's current market price, coupon payments, face value, and time to maturity. Given the bond's market price of $950, a coupon rate of 5.5%, and 9 years remaining until maturity, the YTM is approximately 6.23%.

Question 11

The less risky the bond (or the higher the bond rating)the lower will be the yield to maturity on the bond.

Accepted Answer

This statement is true. Bond ratings are determined by credit rating agencies, and bonds with higher ratings (i.e. less risky) are perceived to have a lower risk of default, resulting in lower yields to attract investors.

Question 12

A $1,000 par value 14-year bond with a 10 percent coupon rate recently sold for $965.The yield to maturity is

Accepted Answer

The yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until it matures. YTM is considered a long-term bond yield expressed as an annual rate. The calculation of YTM takes into account the current market price, par value, coupon interest rate, and time to maturity. It is a complex calculation but essentially, it solves for the interest rate that equates the present value of all future cash flows from the bond (coupons and principal) to the current price of the bond. In this case, since the bond sold for less than its par value ($965 < $1,000) and has a coupon rate of 10%, the yield to maturity must be higher than the coupon rate to compensate for the discount. Therefore, the correct answer is 10.49%, which indicates that the YTM is slightly higher than the coupon rate, reflecting the bond's discount to par value.

Question 13

In Excel,the variable pvs stands for a bond's par value.

Accepted Answer

In Excel, the variable "pvs" stands for the present value of a series of future payments, not a bond's par value.

Question 14

The current yield for a bond is constant over time because the coupon rate is fixed.

Accepted Answer

The current yield for a bond may change over time, depending on the market price of the bond. The coupon rate is fixed, but as the market price of the bond changes, the yield will also change. For example, if the market price of a bond decreases, the current yield will increase, and vice versa.

Question 15

If the market price of a bond decreases,then

Accepted Answer

When the market price of a bond decreases, the yield to maturity increases. This is because investors can buy the bond at a lower price but still receive the same coupon payments and eventual face value at maturity. As a result, the yield to maturity must increase in order to compensate investors for the lower price they paid for the bond. The coupon rate, however, remains fixed and does not change in response to changes in the market price of the bond.

Question 16

A corporate bond has a coupon rate of 9%,a face value of $1,000,and matures in 15 years.Which of the following statements is MOST correct?

Accepted Answer

When an investor buys the bond at $900, they are purchasing the bond below its face value. This creates a capital gain opportunity upon maturity, as the investor will receive the full $1,000 face value. Additionally, because the coupon rate of 9% is greater than the investor's purchase price of $900, the bond's yield to maturity will be greater than 9%. Therefore, choice C is the most correct statement. Choices A and B are not accurate, as an investor with a required return of 10% would only be willing to pay a price lower than $1,000 for the bond, and holding the bond until maturity at a purchase price of $900 would result in a capital gain. Choice D is also not accurate, as the annual interest payments on the bond would be $90 ($1,000 x 0.09).

Question 17

Pentrax Corp issued 25 year bonds in 2002 with a coupon rate of 6% and a face value of $1,000.The bonds sold for face value when issued.Since 2002,interest rates have increased,so the going rate on similar bonds is now 9%.Which of the following statements is most accurate?

Accepted Answer

The investor who purchased the bond in 2002 will continue to earn the same coupon rate of 6% for the life of the bond, regardless of changes in interest rates. This is because the coupon rate is fixed at the time of issuance. Therefore, choice A is the most accurate statement. Choice B is incorrect because Pentrax Corp will continue to pay the same interest payment of $60 per year based on the coupon rate of 6%. Choice C is incorrect because the investor will not experience an increase in return since the coupon rate remains fixed at 6%. Choice D is also incorrect because the bond price may actually decrease due to the increase in interest rates.

Question 18

Leveraged b (los)are used by existing corporate bondholders to increase the rate of return earned on their bonds.

Accepted Answer

Leveraged buyouts (LBOs) are used by investors to acquire a company using borrowed funds, not by bondholders to increase returns on bonds.

Question 19

A bond's yield to maturity varies from investor to investor because each investor has his or her own required return.

Accepted Answer

Yield to maturity (YTM) is a fixed calculation based on the bond's current price, its face value, the coupon rate, and the time to maturity, and does not vary from investor to investor.

Question 20

While checking the Wall Street Journal bond listings you notice that the price of an AT&T bond is the same as the price of a K-Mart bond.Based on this information you know that

Accepted Answer

The bond with the lower coupon rate will have a lower current yield because current yield is calculated as the annual interest payment divided by the current bond price. If two bonds are priced the same, the one with the lower coupon pays less interest annually, resulting in a lower current yield.

Quiz 7: The Valuation and Characteristics of Bonds