Question 1

Jeffrey Corp.Bonds have a current yield of 7% and mature in 10 years.Jones 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 Jeffrey Corp.Bonds have a current yield of...

Question 2

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 3

When using the PV (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 PV function represents the discount rate or yield to maturity, not the bond's coupon rate.

Question 4

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

If an investor buys the bond for less than its face value (in this case, $900), the yield to maturity will be greater than the coupon rate (9%). Therefore, choice C is correct. Choice A is incorrect because if the required return is less than the coupon rate, the bond will be valued at less than the face value. Choice B is incorrect because if the investor holds the bond until maturity, the capital loss or gain will depend on the market interest rate at that time. Choice D is incorrect because the annual interest payments on the bond will be $90 (9% of $1,000), not $81.

Question 5

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

Accepted Answer

PV stands for Present Value, which represents the current value of future cash flows, including bond payments.

Question 6

Zevo Corp.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 (YTM) of 10% represents the annual return an investor can expect if they hold the bond until maturity.

Question 7

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 8

In 1998 Fischer Corp issued bonds with an 8 percent coupon rate and a $1,000 face value.The bonds mature on March 1,2023.If an investor purchased one of these bonds on March 1,2010,determine the yield to maturity if the investor paid $1,100 for the bond.

Accepted Answer

The answer of In 1998 Fischer Corp issued bonds with...

Question 9

If the market price of a bond decreases,then

Accepted Answer

As the market price of a bond decreases, the yield to maturity increases. This is because the bond is now offering a higher return to investors (in the form of higher interest payments relative to the lower price paid for the bond), which drives up the yield. The coupon rate, however, does not change as it is a fixed rate determined at the issuance of the bond.

Question 10

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

Accepted Answer

The correct definition of yield to maturity is the discount rate that equates the present value of future cash flows with a bond's price. Option B is also a commonly accepted definition. Option C is a simplified explanation of the yield to maturity concept, and Option A is the generally accepted definition. Option D is incorrect as it equates the present value of future cash flows with a bond's face value rather than its price.

Question 11

Ajax 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

Option A is correct because the investor who purchased the bond in 2002 and plans to keep the bond until it matures will earn a fixed coupon rate of 6%, regardless of the current market interest rates. The coupon rate remains fixed over the life of the bond.

Option B is incorrect because bondholders receive interest payments based on the coupon rate and face value of the bond, not the current market interest rates. The interest payment would remain at $60 per year, which is 6% of the face value of $1,000.

Option C is incorrect because the investor who purchased the bond in 2002 expects to earn 6% per year over the life of the bond, not a 9% return.

Option D is incorrect because as interest rates increase, the price of existing bonds generally decreases. So, the price of an Ajax Corp bond should be lower than $1,000 due to the increase in rates.

Question 12

The yield to maturity on a bond

Accepted Answer

The yield to maturity on a bond is the required rate of return on the bond, which takes into account the current market price of the bond, coupon interest rate, and time to maturity. It is not fixed in the indenture and can vary depending on market conditions. The yield to maturity may be higher for higher risk bonds and may or may not be below the coupon interest rate.

Question 13

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

Accepted Answer

Leveraged buyouts (LBOs) involve the acquisition of a company using a large amount of borrowed money or debt. This debt is typically obtained from various sources such as banks, private equity firms, and other investors. The purpose of an LBO is to use the acquired company's assets and cash flows to repay the debt used to finance the acquisition. Existing corporate bondholders may be affected by an LBO, but they are not the ones using the LBO to increase their rate of return on their bonds.

Question 14

Which of the following statements is most correct?

Accepted Answer

When a bond's yield to maturity exceeds its coupon rate, it means that the bond is selling at a discount to its face value. Therefore, the bond's price must be less than its maturity value.

Answer: D 
 Both B and C are correct statements. If a bond's yield to maturity exceeds its coupon rate, the bond is selling at a discount and therefore, its price must be less than its maturity value. If two bonds have the same maturity, yield to maturity, and risk, they should sell for the same price regardless of their coupon rate.

Question 15

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 based on the current market value of the bond, not its face value, liquidation value, or book value. Therefore, the best choice is B) market value.

Question 16

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 is a fundamental principle of bond investing - as the creditworthiness of the issuer increases, the interest rate offered by the bond decreases.

Question 17

SWH Corporation issued bonds on January 1,2004.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 1,2019.What is the yield to maturity for an SWH Corporation bond on January 1,2010 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, its face value, the coupon interest payments, and the time remaining until 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 18

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 19

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.

Question 20

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.

Quiz 7: The Valuation and Characteristics of Bonds