Question 1

Your firm offers a 10-year,zero coupon bond.The yield to maturity is 8.2%.What is the current market price of a $1,000 face value bond?

Accepted Answer

N=10 1/Y=8.2 FV=1000Solve for PV=-454.70

Question 2

Emmett Corporation has issued a $1,000 face value zero-coupon bond.Which of the following values is closest to the correct price for the bond if the appropriate discount rate is 4% and the bond matures in 8 years?

Accepted Answer

Current Price = Face Value/(1 + r)ⁿ = 1000/(1 + 0.05)⁹ = $644.61

Question 3

Emmett Corporation has issued a $1,000 face value zero-coupon bond.Which of the following values is closest to the correct price for the bond if the appropriate discount rate is 4% and the bond matures in 8 years?

Accepted Answer

Current Price = Face Value/(1 + r)ⁿ = 1000/(1 + 0.04)⁸ = $730.69

Question 4

The Lo Sun Corporation offers a 8% bond with a current market price of $875.05.The yield to maturity is 9.18%.The face value is $1,000.Interest is paid semiannually.How many years is it until this bond matures?

Accepted Answer

1/Y=9.18/2 PV=-875.05 PMT=80/2 FV=1,000 Solve for N=80The number of six-month periods is 80.The number of years is 40

Question 5

The zero coupon bonds of MarkCo,Inc.have a market price of $394.47,a face value of $1,000,and a yield to maturity of 6.87%.How many years is it until this bond matures?

Accepted Answer

Using the formula for calculating yield to maturity of a zero coupon bond, we can solve for the number of years until maturity:
P = F / (1 + r)^t 
where P = market price, F = face value, r = yield to maturity, and t = time until maturity.
Plugging in the given values:
394.47 = 1000 / (1 + 0.0687)^t
Using logarithms to solve for t:
t = ln(1000/394.47) / ln(1.0687)
t ≈ 14
Therefore, it will take approximately 14 years for the bond to mature.

Question 6

The nominal rate of return on the bonds of Steve's Boats is 8.75%.The real rate of return is 3.4%.What is the rate of inflation?

Accepted Answer

(1 + .0875)= (1 + .034)F1F1F1S1F1F1F10 (1 + h);h = 5.17%

Question 7

The bonds of Jerrod's Welding,Inc.pay an 8% coupon,have a 7.98% yield to maturity and have a face value of $1,000.The current rate of inflation is 2.5%.What is the real rate of return on these bonds?

Accepted Answer

(1 + .0798)= (1 + r)F1F1F1S1F1F1F10 (1 + .025);r = 5.35%

Question 8

The MerryWeather Firm wants to raise $10 million to expand its business.To accomplish this,it plans to sell 30-year,$1,000 face value zero-coupon bonds.The bonds will be priced to yield 6%.What is the minimum number of bonds it must sell to raise the $10 million it needs?

Accepted Answer

PV = = $174.11; (rounded)

Question 9

Calculate the YTM on a bond priced at $1,036 which has 2 years to maturity,a 10% annual coupon rate,and a return of $1,000 at maturity.

Accepted Answer

The answer of Calculate the YTM on a bond priced...

Question 10

A bond that pays interest annually yields a 7.25% rate of return.The inflation rate for the same period is 3.5%.What is the real rate of return on this bond?

Accepted Answer

(1 + .0725)= (1 + r)F1F1F1S1F1F1F10 (1 + .035);r = 3.62%

Question 11

A 12-year,5% coupon bond pays interest annually.The bond has a face value of $1,000.What is the change in the price of this bond if the market yield rises to 6% from the current yield of 4.5%?

Accepted Answer

To calculate the change in the price of the bond, we can use the formula:
Bond Price = (Coupon Payment / Market Yield) x [1 - 1/(1 + Market Yield)^n] + Face Value / (1 + Market Yield)^n

Where:
- Coupon Payment = $50 (5% of $1,000)
- Market Yield = 4.5%
- n = 12 (since the bond has a 12-year maturity)

Using this formula, we can calculate that the current price of the bond is $1,059.06.

To calculate the new price of the bond when the market yield rises to 6%, we can use the same formula, but with a new market yield of 6%:
Bond Price = ($50 / 6%) x [1 - 1/(1 + 6%)^12] + $1,000 / (1 + 6%)^12
Bond Price = $943.47

Therefore, the change in the price of the bond is:
($943.47 - $1,059.06) / $1,059.06 = -12.38%

So the best choice is B, which is a 12.38% decrease in the bond price.

Question 12

Ted's Co.offers a zero coupon bond with an 11.3% yield to maturity.The bond matures in 16 years.What is the current price of a $1,000 face value bond?

Accepted Answer

Using the formula for calculating the price of a zero coupon bond:

Price = Face value / (1 + YTM)^n

where YTM is the yield to maturity expressed as a decimal and n is the number of years to maturity.

In this case, the face value is $1,000, the YTM is 11.3% or 0.113, and n is 16.

Plugging in the values:

Price = 1000 / (1 + 0.113)^16
Price = $180.33

Therefore, the current price of the bond is $180.33.

Option B is the correct answer.

Question 13

A zero coupon bond with a face value of $1,000 is issued with an initial price of $463.34.The bond matures in 25 years.What is the implicit interest,in dollars,for the first year of the bond's life?

Accepted Answer

r = 3.125%;PV = = $477.82;Implicit interest = $477.82 - $463.34 = $14.48

Question 14

Which of the following amounts is closest to the value of a bond that pays $55 semiannually and has an effective semiannual interest rate of 5%? The face value is $1,000 and the bond matures in 3 years.There are exactly six months before the first interest payment.

Accepted Answer

Value = $55(PVIFA_5%,6)+ $1,000(PVIF_5%,6)= $279.16 + $746.22 = $1,025.38

Question 15

A corporate bond is quoted at a current price of 102.767.What is the market price of a bond with a $1,000 face value?

Accepted Answer

Market price = 102.767 F1F1F1S1F1F1F10 10 = $1,027.67

Question 16

The outstanding bonds of Boutelle,Inc.provide a real rate of return of 3.6%.The current rate of inflation is 2.5%.What is the nominal rate of return on these bonds?

Accepted Answer

(1 + .036)F1F1F1S1F1F1F10 (1 + .025)- 1 = .0619 = 6.19%

Question 17

Moonhigh,Inc.has a 6%,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 6.31%.How many years is it until this bond matures?

Accepted Answer

1/Y=6.31/2 PV=-988.52 PMT=60/2 FV=1,000Solve for N=8.56The number of six-month periods is 8.56.The number of years is 4.28.

Question 18

A corporate bond with a face value of $1,000 matures in 4 years and has an 8% coupon paid at the end of each year.The current price of the bond is $932.What is the yield to maturity for this bond?

Accepted Answer

Current Price = Int(PVIFA_r,4)+ Face value(PVIF_r,4)$932 = $80[1 - 1/(1 + r)⁴]/r + $1000/(1 + r)⁴ r = 10.152

Question 19

Jackson Central has a 6-year,8% annual coupon bond with a $1,000 par value.Earls Enterprises has a 12-year,8% annual coupon bond with a $1,000 par value.Both bonds currently have a yield to maturity of 6%.Which of the following statements are correct if the market yield increases to 7%?

Accepted Answer

Difference in Jackson's prices = $1,047.67 - $1,098.35 = -$50.68 (decrease)percentage difference in Jackson's prices = Difference in Earls' prices = $1,079.43 - $1,167.68 = -$88.25 (decrease)percentage difference in Earls' prices = (decrease)The correct answer states that the Earls' bond will decrease in value by 7.56%.

Question 20

Given the opportunity to invest in one of the three bonds listed below,which would you purchase? Assume an interest rate of 7%.
B.If funds remain,one may purchase Bond B also since both Bonds B and C are underpriced.

Accepted Answer

The answer of Given the opportunity to invest in one...

Quiz 8: Interest Rates and Bond Valuation

Your firm offers a 10-year,zero coupon bond.The yield to maturity is 8.2%.What is the current market price of a $1,000 face value bond?

Emmett Corporation has issued a $1,000 face value zero-coupon bond.Which of the following values is closest to the correct price for the bond if the appropriate discount rate is 4% and the bond matures in 8 years?

Emmett Corporation has issued a $1,000 face value zero-coupon bond.Which of the following values is closest to the correct price for the bond if the appropriate discount rate is 4% and the bond matures in 8 years?

The Lo Sun Corporation offers a 8% bond with a current market price of $875.05.The yield to maturity is 9.18%.The face value is $1,000.Interest is paid semiannually.How many years is it until this bond matures?

The zero coupon bonds of MarkCo,Inc.have a market price of $394.47,a face value of $1,000,and a yield to maturity of 6.87%.How many years is it until this bond matures?

The nominal rate of return on the bonds of Steve's Boats is 8.75%.The real rate of return is 3.4%.What is the rate of inflation?

The bonds of Jerrod's Welding,Inc.pay an 8% coupon,have a 7.98% yield to maturity and have a face value of $1,000.The current rate of inflation is 2.5%.What is the real rate of return on these bonds?

The MerryWeather Firm wants to raise $10 million to expand its business.To accomplish this,it plans to sell 30-year,$1,000 face value zero-coupon bonds.The bonds will be priced to yield 6%.What is the minimum number of bonds it must sell to raise the $10 million it needs?

Calculate the YTM on a bond priced at $1,036 which has 2 years to maturity,a 10% annual coupon rate,and a return of $1,000 at maturity.

A bond that pays interest annually yields a 7.25% rate of return.The inflation rate for the same period is 3.5%.What is the real rate of return on this bond?

A 12-year,5% coupon bond pays interest annually.The bond has a face value of $1,000.What is the change in the price of this bond if the market yield rises to 6% from the current yield of 4.5%?

Ted's Co.offers a zero coupon bond with an 11.3% yield to maturity.The bond matures in 16 years.What is the current price of a $1,000 face value bond?

A zero coupon bond with a face value of $1,000 is issued with an initial price of $463.34.The bond matures in 25 years.What is the implicit interest,in dollars,for the first year of the bond's life?

Which of the following amounts is closest to the value of a bond that pays $55 semiannually and has an effective semiannual interest rate of 5%? The face value is $1,000 and the bond matures in 3 years.There are exactly six months before the first interest payment.

A corporate bond is quoted at a current price of 102.767.What is the market price of a bond with a $1,000 face value?

The outstanding bonds of Boutelle,Inc.provide a real rate of return of 3.6%.The current rate of inflation is 2.5%.What is the nominal rate of return on these bonds?

Moonhigh,Inc.has a 6%,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 6.31%.How many years is it until this bond matures?

A corporate bond with a face value of $1,000 matures in 4 years and has an 8% coupon paid at the end of each year.The current price of the bond is $932.What is the yield to maturity for this bond?

Jackson Central has a 6-year,8% annual coupon bond with a $1,000 par value.Earls Enterprises has a 12-year,8% annual coupon bond with a $1,000 par value.Both bonds currently have a yield to maturity of 6%.Which of the following statements are correct if the market yield increases to 7%?

Given the opportunity to invest in one of the three bonds listed below,which would you purchase? Assume an interest rate of 7%. B.If funds remain,one may purchase Bond B also since both Bonds B and C are underpriced.