Question 1

The yield to maturity on a bond with a price equal to its par value will

Accepted Answer

If the price of a bond is equal to its par value, then the yield to maturity (YTM) will be the same as the coupon rate. This is because the coupon rate is the fixed rate of interest that the bond pays annually and the par value is the face value of the bond at maturity. Therefore, the YTM will equal the coupon rate in order to make it worthwhile for investors to hold the bond until maturity.

Question 2

Whenever a bond's required return is different from its coupon interest rate, the passage of time will affect the bond's value, even if the required return remains constant until maturity.

Accepted Answer

If a bond's required return is different from its coupon interest rate, the passage of time will lead to changes in the bond's value. This is because the bond's price is determined by the present value of its future cash flows, which includes both the coupon interest payments and the return of the bond's principal at maturity. As time passes, the remaining cash flows become relatively closer in time, causing the bond's value to adjust to reflect the changing risk/reward trade-off perceived by investors.

Question 3

Yield to maturity (YTM) is the rate investors earn if they buy the bond at a specific price and hold it until maturity.

Accepted Answer

Yield to maturity (YTM) is the rate investors earn if they buy the bond at a specific price and hold it until maturity. This is a true statement.

Question 4

Gong Li has recently inherited $10,000 and is considering purchasing 10 bonds of the Lucky Corporation. The bond has a par value of $1,000 with 10 percent coupon rate and will mature in 10 years. Does Gong Li have enough money to buy 10 bonds if the required rate of return is 9 percent?

Accepted Answer

The answer of Gong Li has recently inherited $10,000 and...

Question 5

Tangshan Industries has issued a bond which has a $1,000 par value and a 15 percent annual coupon interest rate. The bond will mature in ten years and currently sells for $1,250. Using this information, the yield to maturity on the Tangshan Industries bond is

Accepted Answer

The yield to maturity (YTM) can be found using the formula for the present value of a bond, which equates the current bond price to the sum of the present value of its interest payments and the present value of its maturity value. Given the bond's current price ($1,250), its par value ($1,000), the annual coupon payment ($150, which is 15% of $1,000), and its time to maturity (10 years), the YTM that equates the bond's current price with its future cash flows is approximately 10.79%. This calculation involves solving for the discount rate that equates the bond's price with the present value of its cash flows, which is a trial-and-error process often facilitated by financial calculators or software.

Question 6

What is the approximate yield to maturity for a $1,000 par value bond selling for $1,120 that matures in 6 years and pays 12 percent interest annually?

Accepted Answer

To calculate yield to maturity, we need to use the following formula:

P = C/(1+i)^1 +C/(1+i)^2+...+ C/(1+i)^n + M/(1+i)^n

where:
P = market price of the bond
C = annual coupon payment
i = yield to maturity
n = number of years to maturity
M = par value of the bond

Plugging in the given values:
P = $1,120
C = $120 (12% of $1,000)
n = 6
M = $1,000

$1,120 = $120/(1+i)^1 + $120/(1+i)^2 + $120/(1+i)^3 + $120/(1+i)^4 + $120/(1+i)^5 + $120/(1+i)^6 + $1,000/(1+i)^6

Using a financial calculator or a spreadsheet, we can solve for i to get:

i = 9.4%

Therefore, the approximate yield to maturity for the bond is 9.4%, which corresponds to choice (B).

Question 7

Zhen Yi Computers has an outstanding issue of bond with a par value of $1,000, paying 12 percent coupon rate semi-annually. The bond was issued 25 years ago and has 5 years to maturity. What is the value of the bond assuming 14 percent rate of interest?

Accepted Answer

The answer of Zhen Yi Computers has an outstanding issue...

Question 8

A bond with short maturity has less "interest rate risk" than a bond with long maturity when all other features coupon interest rate, par value, and interest payment frequency are the same.

Accepted Answer

Bond price and interest rates have an inverse relationship. As interest rates rise, bond prices fall, and vice versa. Short-term bonds have less time for interest rates to fluctuate compared to long-term bonds, which means they are less exposed to interest rate risk. Hence, the statement is true.

Question 9

What is the current price of a $1,000 par value bond maturing in 9 years with a coupon rate of 8 percent, paid annually, that has a YTM of 9 percent?

Accepted Answer

The current price of a bond can be calculated using the formula: 
P = (C / r) x [1 – 1 / (1 + r)^n] + M / (1 + r)^n 
Where 
P = current price of the bond 
C = coupon payment 
r = YTM 
n = number of periods 
M = par value 
Plugging in the values, 
P = (80 / 0.09) x [1 – 1 / (1 + 0.09)^9] + 1000 / (1 + 0.09)^9 = $940.62 
Rounding off to the nearest dollar, the answer is $940 (Option C).

Question 10

When a bond's value differs from par, its yield to maturity will differ from its coupon interest rate.

Accepted Answer

The yield to maturity takes into account the bond's current market value, while the coupon interest rate is fixed at the time of issuance. As a result, if the bond's value differs from its par value, its yield to maturity will differ from its coupon interest rate.

Question 11

To finance a new line of product, the Tangshan Toys has issued $1,000,000 bond with a par value of $1,000, coupon rate of 8 percent, and maturity of 30 years. Compute the price of the bond if the opportunity cost is 11 percent.

Accepted Answer

The answer of To finance a new line of product,...

Question 12

Yantai Food, Inc. has issued a bond with par value of $1,000, a coupon rate of 9 percent that is paid semi-annually, and that matures in 10 years. What is the value of the bond if the required rate of return is 12 percent?

Accepted Answer

The answer of Yantai Food, Inc. has issued a bond...

Question 13

For an investor who plans to purchase a bond maturing in one year, the primary consideration should be

Accepted Answer

For an investor purchasing a bond maturing in one year, the primary consideration should be the yield to maturity. This is because the yield to maturity reflects the total return the investor will earn on the investment, including both the interest income and any potential capital gains or losses. Interest rate risk, changes in the risk of the issue, and the coupon rate are also important factors to consider, but they are secondary to the yield to maturity for a one-year bond.

Question 14

When the required return is different from the coupon interest rate and is assumed to be constant until maturity, the value of the bond will approach its par value as the passage of time moves the bond's value closer to maturity.

Accepted Answer

As a bond approaches maturity, its price converges to its par value regardless of the required return, because the remaining cash flows become more predictable and the time value of money effect diminishes.

Question 15

Interest rate risk and the time to maturity have a relationship that is best characterized as

Accepted Answer

Interest rate risk and the time to maturity have a direct relationship, meaning as the time to maturity increases, the interest rate risk also increases.

Question 16

The yield to maturity on a bond with a current price equal to its par, or face, value will always be equal to the coupon interest rate.

Accepted Answer

If the bond's price is equal to its face value, then the yield to maturity will be the same as the coupon interest rate. This is because the bondholder will earn interest payments equal to the coupon rate, and will receive the full face value of the bond at maturity, resulting in no capital gain or loss.

Question 17

The shorter the amount of time until a bond's maturity, the more responsive is its market value to a given change in the required return.

Accepted Answer

The longer the time until a bond's maturity, the more its market value will respond to changes in the required return. Shorter-term bonds are less sensitive to interest rate changes.

Question 18

If a bond's required return always equals its coupon interest rate, its bond's value will remain at par until it matures.

Accepted Answer

This is true. When a bond's required return (yield) is equal to its coupon rate, there will be no difference between the bond's stated interest payments and the yield that investors demand from the bond. Therefore, the bond's price will equal its face value (par value). As long as there are no changes in the interest rate environment or the creditworthiness of the bond issuer, the bond's value will remain at par until maturity.

Question 19

Because a rise in interest rates, and therefore the required return, results in an increase in bond value, bondholders are typically more concerned with dropping interest rates.

Accepted Answer

A rise in interest rates typically leads to a decrease in bond value, as the fixed interest payments become less attractive compared to new bonds issued at higher rates. Bondholders are more concerned with rising interest rates, not dropping ones.

Question 20

What is the yield to maturity, to the nearest percent, for the following bond: current price is $908, coupon rate is 11 percent, $1,000 par value, interest paid annually, eight years to maturity?

Accepted Answer

To calculate the yield to maturity, we need to find the interest rate that equates the current price of the bond with the present value of all future cash flows (interest payments and principal repayment) discounted at that interest rate. Using a financial calculator, we find that the yield to maturity for this bond is approximately 13 percent. Therefore, the best choice is C.

Quiz 6: Interest Rates and Bond Valuation