Question 1

The ABC company has two bonds outstanding that are the same except for the maturity date. Bond D matures in 4 years, while Bond E matures in 7 years. If the required return changes by 15 percent

Accepted Answer

Longer-term bonds (like Bond E) are more sensitive to changes in interest rates, leading to a greater change in price compared to shorter-term bonds (like Bond D).

Question 2

When valuing a bond, the characteristics of the bond that remain fixed are all of the following EXCEPT the

Accepted Answer

The price of a bond is not a fixed characteristic and can vary based on market conditions and investor demand. The other options (coupon rate, face value, and interest payment) remain fixed for the duration of the bond's life.

Question 3

Jia Hua Enterprises wants to issue sixty 20-year, $1,000 par value, zero-coupon bonds. If each bond is priced to yield 7 percent, how much will Jia Hua receive (ignoring issuance costs) when the bonds are first sold?

Accepted Answer

Each bond has a face value of $1,000 and will be priced to yield 7 percent, meaning investors will pay a discounted rate of 0.07/2 = 0.035 per half-year period. With a maturity of 20 years and semi-annual compounding, each bond will have 40 periods. Therefore, the present value of each bond can be calculated using the following formula:

PV = 1000 / (1 + 0.035)^40 = $214.37

The total amount Jia Hua will receive when the bonds are first sold is equal to the sum of the present values of all 60 bonds:

Total amount = 60 x $214.37 = $12,862.20

Therefore, the closest answer choice is C, $15,505.

Question 4

A firm has an issue of $1,000 par value bonds with a 9 percent stated interest rate outstanding. The issue pays interest annually and has 20 years remaining to its maturity date. If bonds of similar risk are currently earning 11 percent, the firm's bond will sell for ________ today.

Accepted Answer

The bond's price is calculated using the present value of its future cash flows, which include annual interest payments and the principal at maturity. Given the bond's coupon rate is lower than the current market rate, it will sell at a discount. Calculating the present value of the bond's cash flows using the market rate of 11% results in approximately $840.67.

Question 5

Calculate the value of a $1,000 bond which has 10 years until maturity and pays quarterly interest at an annual coupon rate of 12 percent. The required return on similar-risk bonds is 20 percent.

Accepted Answer

First, we need to find the quarterly coupon payment:
12% annual coupon rate / 4 = 3% quarterly coupon rate
$1,000 bond face value x 3% quarterly coupon rate = $30 quarterly coupon payment
Next, we need to find the number of quarterly periods until maturity:
10 years x 4 quarters per year = 40 quarters
Using this information, we can now calculate the value of the bond using the formula for the present value of a bond:
PV = [C / r] x [1 - (1 + r)^-n] + [F / (1 + r)^n]
Where:
C = coupon payment per period
r = required rate of return per period
n = total number of periods
F = face value of the bond
Using the given values, we have:
PV = [$30 / 0.20] x [1 - (1 + 0.20)^-40] + [$1,000 / (1 + 0.20)^40]
PV = $656.77 (rounded to the nearest cent)
Therefore, the best choice is A.

Question 6

On January 1, 2002, Zheng Corporation will issue new bonds to finance its expansion plans. In its efforts to price the issue, Zheng Corporation has identified a company of similar risk with an outstanding bond issue that has an 8 percent coupon rate that is due January 1, 2017. This firm's bonds currently are selling for $1,091.96. If interest is paid semiannually for both bonds, what must the coupon rate of the new bonds be in order for the issue to sell at par?

Accepted Answer

To sell at par, the coupon rate must equal the yield to maturity (YTM) of the comparable bond. The comparable bond's YTM can be calculated using its current price, coupon rate, and time to maturity. Given the bond's price of $1,091.96, a coupon rate of 8%, and 15 years to maturity, the YTM is approximately 7%. Therefore, the new bonds must have a coupon rate of 7% to sell at par.

Question 7

If a corporate bond is issued with a coupon rate that varies directly with the required return, the price of the bond will

Accepted Answer

When a corporate bond's coupon rate varies directly with the required return, it means that the bond's interest payments adjust to match the current market rates. As a result, the bond's price remains stable at its face value, because the payments it offers to investors always align with what the market requires.

Question 8

Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent annual coupon interest rate. The issue has ten years remaining to the maturity date. Bonds of similar risk are currently selling to yield a 12 percent rate of return. The current value of each Hewitt bond is ________.

Accepted Answer

The answer of Hewitt Packing Company has an issue of...

Question 9

A bond will sell ________ when the stated rate of interest exceeds the required rate of return, ________ when the stated rate of interest is less than the required return, and ________ when the stated rate of interest is equal to the required return.

Accepted Answer

A bond sells at a premium when its stated interest rate is higher than the market's required rate of return, indicating the bond offers more attractive returns than currently available alternatives. It sells at a discount when its stated interest rate is lower than the market's required rate, making it less attractive. When the stated rate equals the required rate, the bond sells at its par value, as it is considered fairly priced.

Question 10

If the required return is greater than the coupon rate, a bond will sell at

Accepted Answer

If the required return is greater than the coupon rate, it means investors demand a higher yield from the bond than what it currently offers. This results in bond prices dropping, which impacts the bond's market value. Therefore, the bond will sell at a discount to its par value.

Question 11

Table 6.2 
-(a) Calculate the current value of Bond N. (See Table 6.2)
(b) What will happen to value/price as the bond approaches maturity?

Accepted Answer

The answer of Table 6.2 
-(a) Calculate the current value...

Question 12

Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent coupon interest rate outstanding. The issue pays interest semiannually and has 10 years remaining to its maturity date. Bonds of similar risk are currently selling to yield a 12 percent rate of return. What is the value of these Hewitt Packing Company bonds?

Accepted Answer

The answer of Hewitt Packing Company has an issue of...

Question 13

When the required return is constant but different from the coupon rate, the price of a bond as it approaches its maturity date will

Accepted Answer

When the required return is constant but different from the coupon rate, the price of a bond will approach its par value as it nears its maturity date. This is because the bond's value will increasingly reflect its redemption value rather than its coupon payments.

Question 14

Table 6.2 
-Calculate the current value of Bond M. (See Table 6.2)

Accepted Answer

The answer of Table 6.2 
-Calculate the current value of...

Question 15

The price of a bond with a fixed coupon rate and the market required return have a relationship that is best described as

Accepted Answer

The price of a bond with a fixed coupon rate and the market required return have an inverse relationship. As the market required return increases, the price of the bond decreases, and vice versa. This is because investors demand a higher rate of return for the same level of risk when interest rates are higher, so they are willing to pay less for the bond. Conversely, when interest rates are lower, investors are willing to pay more for the bond, driving up its price.

Question 16

If the required return is less than the coupon rate, a bond will sell at

Accepted Answer

When the required return (or yield to maturity) on a bond is less than the coupon rate, the bond will sell at a premium because its cash flows (interest payments) are more attractive compared to the current market rates. Investors are willing to pay more for this bond, hence its price exceeds its par value.

Question 17

Table 6.2 
-(a) Calculate the current value of Bond L. (See Table 6.2)
(b) What will happen to the value/price as the bond approaches maturity?

Accepted Answer

The answer of Table 6.2 
-(a) Calculate the current value...

Question 18

Table 6.2 
-Calculate the current value of Bond M if the time of maturity is six years. (See Table 6.2)

Accepted Answer

The answer of Table 6.2 
-Calculate the current value of...

Question 19

To expand its business, the Kingston Outlet factory would like to issue a bond with par value of $1,000, coupon rate of 10 percent, and maturity of 10 years from now. What is the value of the bond if the required rate of return is 1) 8 percent, 2) 10 percent, and 3) 12 percent?

Accepted Answer

The answer of To expand its business, the Kingston Outlet...

Question 20

A firm has an issue of $1,000 par value bonds with a 12 percent stated interest rate outstanding. The issue pays interest annually and has 10 years remaining to its maturity date. If bonds of similar risk are currently earning 8 percent, the firm's bond will sell for ________ today.

Accepted Answer

The bond's price is calculated using the present value of its future cash flows, which include annual interest payments and the principal at maturity. With a coupon rate of 12% and a market rate of 8%, the bond's price will be higher than its par value, resulting in a price of $1,268.20.

Quiz 6: Interest Rates and Bond Valuation