Question 1

Consider a bond which pays 7% semiannually and has 8 years to maturity.The market requires an interest rate of 8% on bonds of this risk.What is this bond's price?

Accepted Answer

First, we need to calculate the present value of each coupon payment. Each coupon payment is $35 (half of 7% of the face value of $1,000). We can use the formula PV=C/r(1-(1+r)^-n) where C is the coupon payment, r is the semiannual interest rate (8%/2 = 4%), and n is the number of periods (16 since there are 8 years and 2 semiannual periods per year).

PV = 35/0.04 (1-1/1.04^16) = $614.46

Next, we need to calculate the present value of the face value payment (the payment at maturity). The face value is $1,000 and we can simply use the present value formula to find its present value:

PV = 1000/(1.04)^16 = $467.28

Finally, we can calculate the total present value of the bond by adding the present value of the coupon payments and the present value of the face value payment:

Total PV = 614.46 x 16 + 467.28 = $9,941.74

Therefore, the bond's price is $941.74 (not one of the choices listed, but the closest is C).

Question 2

Gugenheim, Inc.offers a 7% coupon bond with annual payments.The yield to maturity is 5.85% and the maturity date is 9 years.What is the market price of a $1,000 face value bond?

Accepted Answer

The answer of Gugenheim, Inc.offers a 7% coupon bond with...

Question 3

Wine and Roses, Inc.offers a 7% coupon bond with semiannual payments and a yield to maturity of 7.73%.The bonds mature in 9 years.What is the market price of a $1,000 face value bond?

Accepted Answer

The market price of the bond is calculated using the present value of its cash flows, which include semiannual coupon payments and the face value at maturity. Given the coupon rate, yield to maturity, and time to maturity, the bond's price is $953.28.

Question 4

High Noon Sun, Inc.has a 5%, semiannual coupon bond with a current market price of $988.52.The bond has a par value of $1,000 and a yield to maturity of 5.29%.How many years is it until this bond matures?

Accepted Answer

The answer of High Noon Sun, Inc.has a 5%, semiannual...

Question 5

Winston Enterprises has a 15-year bond issue outstanding that pays a 9% coupon.The bond is currently priced at $894.60 and has a par value of $1,000.Interest is paid semiannually.What is the yield to maturity?

Accepted Answer

The answer of Winston Enterprises has a 15-year bond issue...

Question 6

The total interest paid on a zero-coupon bond is equal to:

Accepted Answer

A zero-coupon bond does not pay periodic interest. Instead, it is issued at a discount to its face value, and the total interest paid is the difference between the face value and the issue price.

Question 7

The yield to maturity is:

Accepted Answer

The yield to maturity takes into account the price of the bond and its discounted cash flows, so A is correct. It is also the expected rate to be earned if held to maturity, making B correct. Additionally, it is used in determining the market price of the bond, so C is also correct. Finally, for bonds priced at par, the current yield would be the same as the yield to maturity, so D is also true. Therefore, all of the options are correct.

Question 8

The Lo Sun Corporation offers a 6% bond with a current market price of $875.05.The yield to maturity is 7.34%.The face value is $1,000.Interest is paid semiannually.How many years is it until this bond matures?

Accepted Answer

The answer of The Lo Sun Corporation offers a 6%...

Question 9

The Fisher formula is expressed as _____ where R is the nominal rate, r is the real rate, and h is the inflation rate.

Accepted Answer

The Fisher formula is expressed as 1 + R = (1 + r) * (1 + h), which relates the nominal interest rate (R), the real interest rate (r), and the inflation rate (h).

Question 10

A bond is listed in The Wall Street Journal as a 12 3/4s of July 2009.This bond pays:

Accepted Answer

The bond's coupon rate is 12.75% (12 3/4), which means it pays 12.75% of its face value annually. Assuming a face value of $1,000, the annual payment is $127.50. Since bond interest is typically paid semi-annually, the payment in July and January would be half of that, or $63.75.

Question 11

One basis point is equal to:

Accepted Answer

One basis point is defined as one-hundredth of a percentage point or 0.01%.

Question 12

The value of a 20 year zero-coupon bond when the market required rate of return is 9% (semiannual) is ____.

Accepted Answer

A zero-coupon bond pays no interest and is sold at a discount to its face value. The value of the bond is calculated using the formula: Present Value = Face Value / (1 + r/n)^(nt), where r is the annual interest rate, n is the number of compounding periods per year, and t is the number of years. Assuming a face value of $1000, the calculation is: $1000 / (1 + 0.09/2)^(2*20) = $171.93.

Question 13

Party Time, Inc.has a 6% coupon bond that matures in 11 years.The bond pays interest semiannually.What is the market price of a $1,000 face value bond if the yield to maturity is 12.9%?

Accepted Answer

The answer of Party Time, Inc.has a 6% coupon bond...

Question 14

Face value is:

Accepted Answer

Face value is the nominal value of a bond or stock, not necessarily related to its current market price or coupon amount.

Question 15

The Fisher Effect primarily emphasizes the effects of _____ risk on an investor's rate of return.

Accepted Answer

The Fisher Effect relates to the impact of inflation on the nominal rate of return that an investor receives on a security. According to the theory, real interest rates (i.e., the return an investor receives after accounting for inflation) are relatively stable over time, and the nominal interest rate (i.e., the stated interest rate without any adjustment for inflation) adjusts to changes in the inflation rate. Therefore, if inflation expectations rise, investors demand a higher nominal interest rate to compensate for the decrease in the purchasing power of future cash flows. As a result, the Fisher Effect states that the nominal interest rate equals the real interest rate plus expected inflation.

Question 16

If its yield to maturity is less than its coupon rate, a bond will sell at a _____, and increases in market interest rates will _____.

Accepted Answer

A bond sells at a premium when its yield to maturity is less than its coupon rate. Increases in market interest rates will decrease the premium as the bond's price will fall to align with the higher yields available in the market.

Question 17

The bonds issued by Jensen & Son bear a 6% coupon, payable semiannually.The bond matures in 8 years and has a $1,000 face value.Currently, the bond sells at par.What is the yield to maturity?

Accepted Answer

Since the bond is selling at par, the yield to maturity is equal to the coupon rate, which is 6%.

Question 18

A General Co.bond has an 8% coupon and pays interest annually.The face value is $1,000 and the current market price is $1,020.50.The bond matures in 20 years.What is the yield to maturity?

Accepted Answer

Using the financial calculator, input the following values: n = 20, PV = -1020.50, PMT = 80, FV = 1000, and solve for I/Y, which gives us 7.79%. Therefore, the yield to maturity is 7.79%.

Question 19

A zero coupon bond:

Accepted Answer

The answer of A zero coupon bond:
...

Question 20

The "EST SPREAD" shown in The Wall Street Journal listing of corporate bonds represents the estimated:

Accepted Answer

The "EST SPREAD" is the estimated difference between the bond's yield and the yield of a particular Treasury issue. This is typically the yield on the corresponding maturity of a U.S. Treasury security. This spread represents the additional interest rate that investors demand for investing in a less creditworthy corporate bond compared to a risk-free Treasury bond of the same maturity.

Quiz 8: Interest Rates and Bond Valuation