Question 1

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 2

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

The answer of When the required return is different from...

Question 3

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 4

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.

Question 5

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 the bond can be calculated using the formula: 
PV = (C / r) x [1 - (1 / (1+r)^n)] + (FV / (1+r)^n)
Where PV is the present value, C is the annual coupon payment, r is the YTM, n is the number of years to maturity, and FV is the face value or par value of the bond. 
Substituting the values given in the problem, we get: 
PV = (80 / 0.09) x [1 - (1 / (1.09)^9)] + (1000 / (1.09)^9)
PV = 627.77 + 312.94
PV = $940.71
Therefore, the best choice is C, which is the closest to our calculated value.

Question 6

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

Interest rate risk refers to the risk that the bond's value will decline due to changes in interest rates. Short-term bonds are less sensitive to interest rate changes than long-term bonds, so they have less interest rate risk.

Question 7

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) + (F/(1+i)^n)
where P = market price, C = annual coupon payment, i = yield to maturity, F = face value, and n = number of years to maturity.

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

$1,120 = ($120/(1+i)^1) + ($120/(1+i)^2) + ... + ($120/(1+i)^6) + ($1,000/(1+i)^6)

Using a financial calculator or trial and error method, we find that the approximate yield to maturity is 9.4 percent.

Question 8

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

When the bond's current price is equal to its par value, the yield to maturity will be equal to the coupon interest rate. This is because there are no capital gains or losses associated with the bond's price, and the coupon payments provide the only source of return.

Question 9

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 10

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 11

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

Accepted Answer

When the price of a bond is equal to its par value, the yield to maturity (YTM) will always be equal to the coupon rate. This is because the YTM is the rate of return that investors will receive if they hold the bond until maturity and receive all the interest payments and the principal payment. When the bond is priced at par, the coupon rate is the same as the YTM that would make the price of the bond equal to its par value.

Question 12

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

When a bond's required return is equal to its coupon interest rate, the bond's value will remain at par (its face value) until it matures. This is because the bond's coupon payments provide the required return to investors, and there is no need for the bond's price to adjust in the market.

Question 13

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 14

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

Bondholders are typically more concerned with rising interest rates because it results in a decrease in bond value. When interest rates drop, bondholders may be tempted to sell their existing bonds at a higher price and purchase new bonds with a lower interest rate, resulting in a decrease in demand for existing bonds and a decrease in their value.

Question 15

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

The passage of time will affect the bond's value as it gets closer to maturity, regardless of whether the required return remains constant or not. This is because the remaining time until maturity is a key factor in determining the bond's value.

Question 16

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

This is a correct definition of yield to maturity.

Question 17

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

Accepted Answer

This is because the yield to maturity takes into account the price paid for the bond, which may be higher or lower than par value depending on market conditions. If the bond is trading at a premium (higher than par), the yield to maturity will be lower than the coupon interest rate, and if the bond is trading at a discount (lower than par), the yield to maturity will be higher than the coupon interest rate.

Question 18

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 19

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

Accepted Answer

For an investor who plans to purchase a bond maturing in one year, the primary consideration should be the yield to maturity. This is because the investor would want to earn the highest possible return on their investment within their one-year time horizon. Interest rate risk, changes in the risk of the issue, and the coupon rate may also be important considerations, but the yield to maturity is the most crucial factor.

Question 20

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...

Quiz 6: Interest Rates and Bond Valuation