Question 1

Addleson Corp. has a $1,000 par value bond outstanding that was issued for 30 years 5 years ago at a coupon rate of 15%. The yield on similar bonds is now 12%. What is its price?

Accepted Answer

The answer of Addleson Corp. has a $1,000 par value...

Question 2

J&J Manufacturing issued a bond with a $1,000 par value. The bond has a coupon rate of 7% and makes payments semiannually. If the bond has 30 years remaining and the annual market interest rate is 9.4%, what will the bond sell for today?

Accepted Answer

Step 1: Calculate the semiannual coupon payment
Coupon Payment = (Par Value x Coupon Rate) / 2
Coupon Payment = (1000 x 0.07) / 2
Coupon Payment = $35

Step 2: Calculate the number of semiannual periods remaining
Number of periods = Remaining years x 2
Number of periods = 30 x 2
Number of periods = 60

Step 3: Calculate the present value of the coupon payments
PV of Coupon Payments = Coupon Payment x [1 - (1 + r)^(-n)] / r
r = Market interest rate / 2
r = 0.094 / 2
r = 0.047
n = Number of periods remaining = 60
PV of Coupon Payments = 35 x [1 - (1 + 0.047)^(-60)] / 0.047
PV of Coupon Payments = $760.91

Step 4: Calculate the present value of the par value
PV of Par Value = Par Value / (1 + r)^n
PV of Par Value = 1000 / (1 + 0.047)^60
PV of Par Value = $151.88

Step 5: Calculate the bond price
Bond Price = PV of Coupon Payments + PV of Par Value
Bond Price = $760.91 + $151.88
Bond Price = $912.79

Therefore, the bond will sell for $760.91 today.

Question 3

Which of the following statements about leasing is correct?

Accepted Answer

All the statements are correct regarding leasing. Approximately 30% of all equipment is leased, indicating the prevalence of leasing in acquiring equipment. Financial leases must indeed be capitalized on the balance sheet, reflecting the lessee's obligation to pay lease payments as well as the right to use the asset. Leased assets are depreciated over their useful life, similar to purchased assets, to account for their wear and tear. Lastly, lease obligations are amortized as loans, meaning the lease payments are spread out over the lease term, typically including interest and principal repayment components.

Question 4

The amount the issuer intends to borrow at the coupon rate of interest is generally the:

Accepted Answer

The par value and face value are typically the same and represent the amount the issuer intends to borrow, while the coupon rate of interest is the stated interest rate on the bond. Therefore, D is the correct choice as both A and B represent the intended borrowing amount.

Question 5

The owners of registered bonds are recorded with the(a):

Accepted Answer

The transfer agent is responsible for maintaining records of registered bondholders and transferring ownership of the bonds. The SEC is a regulatory agency and does not handle individual bondholder records. The registration agent is responsible for filing registration statements with the SEC, but does not handle bondholder records. The company may have records of bondholders, but it is typically the transfer agent who maintains these records on behalf of the company. Therefore, option B is the best choice.

Question 6

Bark Corporation's 10% coupon rate bond was issued for 30 years 25 years ago at a par value of $1000. Today's interest rate is 10%, what is it selling for today?

Accepted Answer

Since the bond's coupon rate matches the current interest rate (both are 10%), the bond will sell at its par value, which is $1000.00.

Question 7

A $1,000, 10% coupon rate bond with 10 years remaining until maturity is selling for $788.10. Its yield to maturity at this price is:

Accepted Answer

Using the bond pricing formula:

PV = C × (1 - (1 + r)^-n) / r + FV / (1 + r)^n

where:
PV = present value of the bond
C = annual coupon payment
r = yield to maturity
n = number of periods (years to maturity)
FV = face value of the bond

Plugging in the values:
PV = $788.10
C = $100 (10% of $1,000)
n = 10
FV = $1,000

$788.10 = $100 × (1 - (1 + r)^-10) / r + $1,000 / (1 + r)^10

Using trial and error or iterative methods, the yield to maturity (r) that satisfies this equation is approximately 14%. Therefore, the answer is C.

Question 8

Which of the following is true of bonds?

Accepted Answer

A junk bond, also known as a high-yield bond, typically pays a higher interest rate than rates paid by strong companies with high credit ratings.

Question 9

You are considering the purchase of an AT&P bond with a 13% coupon rate. Interest is paid and compounded semiannually. The bond will mature in 8 years, and has a $1,000 face value. The bond currently sells for $867. Calculate the ANNUAL yield to maturity for this bond. (Round to nearest percentage)

Accepted Answer

The first step is to find the semiannual coupon payment:

Coupon payment = Face value x Coupon rate / 2
Coupon payment = $1,000 x 0.13 / 2
Coupon payment = $65

Next, we need to calculate the total number of semiannual periods over the life of the bond:

Total periods = 8 years x 2 semiannual periods per year
Total periods = 16

Using this information, we can now calculate the present value of the bond:

PV = Coupon payment x [1 - (1 + Yield/2)^(-total periods)] / (Yield/2) + Face value / (1 + Yield/2)^total periods
$867 = $65 x [1 - (1 + Yield/2)^(-16)] / (Yield/2) + $1,000 / (1 + Yield/2)^16

We then need to solve for the annual yield to maturity using trial and error, or by using a financial calculator or spreadsheet software. The annual yield to maturity for this bond is approximately 16%. Therefore, the correct answer is C.

Question 10

Willamson Inc.'s bonds have a coupon rate of 12% and a par value of $1,000. The bonds have 15 years left to maturity. If Williamson's bonds are currently selling for $1,430, calculate their yield to maturity. Assume semiannual coupon payments.

Accepted Answer

To calculate the yield to maturity, we need to find the interest rate that will make the present value of the bond's future cash flows equal to its current price. We can use a financial calculator or spreadsheet program to solve for the yield to maturity, or we can use trial and error with the following formula:

PV = C / (1+i)^1 + C / (1+i)^2 + ... + C / (1+i)^n + F / (1+i)^n

Where PV = present value of the bond, C = semiannual coupon payment, i = yield to maturity, n = number of semiannual periods until maturity, and F = par value of the bond.

Using the values given, we can plug them into the formula and solve for i:

1430 = 60 / (1+i)^1 + 60 / (1+i)^2 + ... + 60 / (1+i)^30 + 1000 / (1+i)^30

By using trial and error, we can find that the yield to maturity is approximately 7.2%. Therefore, the correct answer is choice C.

Question 11

Addleson Corp. has a $1,000 par value bond outstanding that was issued for 30 years 5 years ago at a coupon rate of 15%. What is it yielding if it is selling for $938.81?

Accepted Answer

To find the yield, we need to calculate the bond's current yield. The coupon payment is calculated as $1,000 x 15% = $150. The current yield is calculated as the annual coupon payment divided by the current market price, which is $150/$938.81 = 0.1595 or 15.95%. Rounded to the nearest whole percentage, the yield is 16%. Therefore, the correct answer is C.

Question 12

Alpha Inc. has a $1,000 par value bond that was issued ten years ago for a thirty year term. Interest rates were very high at that time and the bond's coupon rate is 22%. The relevant bond market interest rate is now 10%. All of Alpha's bonds have a call feature. It allows the company to pay off the bond any time after the first fifteen years, but requires that bondholders be compensated with an extra year's interest at the coupon rate if such a payoff is exercised. What is the bond's market price assuming investors expect it will be called as soon as possible?

Accepted Answer

First, we need to calculate the current value of the bond using the current market interest rate of 10%.

PV = 220 / (1.1)^1 + 220 / (1.1)^2 + ... + 220 / (1.1)^30 + 1000 / (1.1)^30
PV = $1598.35

Next, we need to adjust for the possibility of the bond being called. If it is called, the investor would receive an extra year's interest at the coupon rate of 22%, or $220.

Adjusted PV = $1598.35 - $220
Adjusted PV = $1378.35

Therefore, the market price of the bond assuming investors expect it will be called as soon as possible is $1378.35, or choice B.

Question 13

Webley Corp. issued a $1,000 bond at a coupon rate of 12%. The bond has 30 years remaining, until maturity. Comparable bonds are yielding 8%. What should Webley's bond sell for today? (Round to nearest $)

Accepted Answer

The answer of Webley Corp. issued a $1,000 bond at...

Question 14

As per FASB 13, which of the following is a rule for a lease to qualify as an operating lease?

Accepted Answer

As per FASB 13, a lease can be classified as an operating lease if the present value of lease payments is less than 90% of the fair market value of the asset at the beginning of the lease term. Choices A, B, and C are all characteristics of a finance lease, not an operating lease.

Question 15

Which of the following statements about convertible bonds is true?

Accepted Answer

A convertible bond can be exchanged for a fixed number of shares of the issuing company's stock at the investor's discretion. Choice B is incorrect because conversion is at the investor's discretion, not the company's. Choice C is incorrect as convertibles can be either secured or unsecured bonds. Choice D is incorrect because the conversion price is usually set above the bond's par value to provide an incentive for investors to convert.

Question 16

Which of the following is true of senior debt?

Accepted Answer

Senior debt is considered less risky as compared to subordinated debt, therefore, it usually requires a lower yield. Option A is incorrect as it is the highest ranked debt and less risky than subordinated debt. Option B is incorrect as in case of failure, senior debt is paid before subordinated debt. Option C is incorrect as senior debt is the highest in priority for interest payments.

Question 17

Riordan Inc. has a bond outstanding that has a $1,000 par value, semiannual coupon rate of 4% and a current yield of 7.9%. What is the price of the bond? (Round to nearest $)

Accepted Answer

1. Calculate the semiannual coupon payment: $1,000 par value x 4% semiannual coupon rate = $40 semiannual coupon payment
2. Calculate the semiannual yield: 7.9% annual yield / 2 = 3.95% semiannual yield
3. Use the bond pricing formula: 
Price = (Coupon Payment / Semiannual Yield) x (1 - 1 / (1 + Semiannual Yield) ^(Number of Semiannual Periods)) + Par Value / (1 + Semiannual Yield) ^(Number of Semiannual Periods)

Price = ($40 / 3.95%) x (1 - 1 / (1 + 3.95%) ^(2)) + $1,000 / (1 + 3.95%) ^(2)
Price = $1,013 (rounded to nearest $)

Question 18

If a 30-year bond with a quoted price of $810, pays $40 interest semiannually, its current yield would be about:

Accepted Answer

The answer of If a 30-year bond with a quoted...

Question 19

Marshall Industries has a bond outstanding that has a $1,000 par value and a market price of $1,322. The bond has 25 years remaining to maturity. Assuming an annual market interest rate of 8% and that the bond pays interest semiannually, calculate the ANNUAL coupon rate on the bond. (Round to nearest whole percentage)

Accepted Answer

The answer of Marshall Industries has a bond outstanding that...

Question 20

Which of the following are advantages of convertible debt to issuing companies?

Accepted Answer

Convertible features can be used as bargaining chips in negotiations with investors to accept lower interest rates. This allows the issuing company to save money on interest expenses.

Quiz 7: The Valuation and Characteristics of Bonds