Question 1

A bond selling at a discount will have a built-in capital gain if the bond is held to maturity.

Accepted Answer

When a bond is sold at a discount, it means its market value is below its par value. As the bond approaches maturity, its price will gradually increase to reach the par value. If the bond is held until maturity, the investor will receive the full par value, resulting in a capital gain equal to the difference between the purchase price and the par value.

Question 2

If you are willing to pay $1,077 for a 15-year $1,000 par value bond that pays 9 percent interest semiannually,what is your expected rate of return?

Accepted Answer

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Question 3

A bond's yield to maturity depends upon all of the following EXCEPT

Accepted Answer

The yield to maturity of a bond is determined by the bond's maturity, coupon rate, and risk as reflected by the bond rating. It is not based on the individual investor's required return, as this is a subjective factor decided by the investor and can vary from person to person.

Question 4

What is the yield to maturity of a corporate bond with 13 years to maturity,a coupon rate of 8% per year,a $1,000 par value,and a current market price of $1,250? Assume semiannual coupon payments.

Accepted Answer

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Question 5

Facade Securities has an issue of $1,000 par value bonds with 18 years remaining to maturity.The bonds pay 7.7% interest on a semiannual basis.The current market price of the bonds is $1,175.What is the yield-to-maturity of the bonds?

Accepted Answer

The yield-to-maturity (YTM) can be calculated using the bond price formula, considering the semiannual interest payments and the time to maturity. Given the bond's current price ($1,175), par value ($1,000), annual interest rate (7.7% or 0.077), and the number of years to maturity (18), the YTM reflects the interest rate that equates the present value of all future cash flows from the bond (interest payments and the repayment of the principal) to the bond's current price. The correct YTM in this case is 6.09%, which means option A is correct. This calculation typically requires financial calculators or spreadsheet software, as it involves solving for the interest rate in the present value formula, which cannot be easily done by hand due to its complexity.

Question 6

Two bonds are identical except for their maturity.The bonds have a coupon rate that is greater than their yield to maturity.Which of the following is true when comparing the two bonds?

Accepted Answer

If the coupon rate is greater than the yield to maturity, the bond is selling at a premium (above par). Since the bonds are identical except for maturity, the longer maturity bond will have a higher price (and therefore a greater premium) due to the fact that the coupon payments are received for a longer period of time.

Question 7

What is the yield to maturity of a bond that pays an 5% coupon rate with annual coupon payments,has a par value of $1,000,matures in 15 years,and is currently selling for $769?

Accepted Answer

Yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until it matures. Using a financial calculator or equation, we can calculate that the YTM of the given bond is approximately 7.6%. Since the bond is currently selling for less than its face value (at a discount), the YTM is greater than the coupon rate of 5%. Therefore, the best choice is C.

Question 8

A corporate bond has a coupon rate of 9%,a face value of $1,000,a market price of $850,and the bond matures in 15 years.Therefore,the bond's yield to maturity is

Accepted Answer

The yield to maturity (YTM) of a bond is the internal rate of return (IRR) if the bond is held until maturity, considering all its payments (coupons) and its final redemption value. It's not the same as the coupon rate when the bond's market price differs from its face value. In this case, since the bond is selling at a discount (market price of $850 less than the face value of $1,000), its YTM will be higher than its coupon rate of 9%. The correct calculation involves solving for the YTM in the bond pricing formula, which would give a result closer to 11.1% than to any of the other options provided.

Question 9

Long-term bonds have greater interest rate risk than shorter-term bonds.

Accepted Answer

Long-term bonds have a longer time horizon over which interest rates can fluctuate, increasing their interest rate risk compared to shorter-term bonds. If interest rates rise, the value of the long-term bonds may decrease more than shorter-term bonds, as investors may prefer to invest in newer bonds that offer higher interest rates.

Question 10

What is the expected rate of return on a bond that matures in 5 years,has a par value of $1,000,a coupon rate of 11.5%,and is currently selling for $982? Assume annual coupon payments.

Accepted Answer

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Question 11

ND Electric Company issued $1,000 bonds that have an annual coupon rate of 6.5%.The present market value of the bonds is $1,225.If the bonds have 17 years remaining until maturity,what is the current yield on ND Electric Company bonds?

Accepted Answer

The current yield is calculated by dividing the annual interest payment by the bond's current market price. Here, the annual interest payment is 6.5% of $1,000, which is $65. The bond's current market price is $1,225. So, the current yield = ($65 / $1,225) * 100% = 5.3%.

Question 12

A zero coupon bond is selling for $476.The bond has a face value of $1,000 and matures in 8 years.Your friend asks you if he should buy the bond.He tells you his required return is 9 percent.Would you recommend he buy the bond or not? Explain your answer.

Accepted Answer

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Question 13

The value of a bond is equal to the present value of the bond's interest payments plus the present value of the bond's maturity value,all discounted at the bond's coupon rate.

Accepted Answer

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Question 14

Two investors are considering the purchase of Corporation LMQ bonds.The bonds are selling at their par value of $1,000 with a coupon rate of 9%.Investor A decides to buy the bonds and Investor B does not buy the bonds.

Accepted Answer

Since the bonds are selling at par value and have a coupon rate of 9%, the yield to maturity is also 9%. Investor A, who decides to buy, must be satisfied with a return of 9% or less, indicating a required return less than or equal to the bond's yield to maturity.

Question 15

Messenger,Inc.bonds have a 4% coupon rate with semiannual coupon payments and a $1,000 par value.The bonds have 11 years until maturity,and sell for $925.What is the current yield for Messinger's bonds?

Accepted Answer

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Question 16

Visionary TV Corporation bonds are currently priced at $1,088.They have a par value of $1,000 and 12 years to maturity.They pay an annual coupon rate of 6%.What is the yield to maturity on this bond?

Accepted Answer

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Question 17

The yield to maturity on long-term bonds

Accepted Answer

The yield to maturity (YTM) on long-term bonds is equal to the current yield if the bond is selling for its face value because both the annual interest payments and the amount to be received at maturity are based on the face value. When a bond sells at face value, its coupon rate (interest rate) is the same as its yield to maturity.

Question 18

A bond that matures in 5 years has less interest rate risk than a bond that matures in 25 years because regardless of changes in interest rates,the bond can be redeemed for face value 20 years earlier.

Accepted Answer

The answer of A bond that matures in 5 years...

Question 19

Graystone bonds have a maturity value of $1,000.The bonds carry a coupon rate of 12 percent.Interest is paid semiannually.The bonds will mature in nine years.If the current market price is $976.50, a.what is the yield to maturity on the bond? b.what is the current yield on the bond?

Accepted Answer

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Question 20

Jackson Corp $1,000 par value bonds currently sell for $752.18.The coupon rate is 7 percent,paid semiannually.If the bonds have 6 years before maturity,what is the yield to maturity on the bonds?

Accepted Answer

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Quiz 7: The Valuation and Characteristics of Bonds