Question 1

Yield to maturity: Nathan Akpan is planning to invest in a seven-year bond that pays annual coupons at a rate of 7 percent. It is currently selling at $927.23. What is the current market yield on such bonds? (Round to the closest answer.)

Accepted Answer

To calculate the yield to maturity, we need to find the rate at which the present value of all future cash flows from the bond equals the current market price. This can be done using a financial calculator or Excel's YIELD function. Using Excel's YIELD function with the following inputs: settlement date = today's date, maturity date = seven years from today's date, coupon rate = 7%, frequency = 1 (annual), basis = 0 (actual/actual), bond price = $927.23, we get a yield to maturity of 8.36%. Rounded to the closest answer, the current market yield is 8.4%, which is option C.

Question 2

Bond price: Triumph Corp. issued five-year bonds that pay a coupon of 6.375 annually. The current market rate for similar bonds is 8.5 percent. How much will you be willing to pay for Triumph's bond today? Round to the nearest dollar.

Accepted Answer

To find the bond price, we need to calculate the present value of future cash flows. The coupon payment is $6.375 per year for five years, and the face value is assumed to be $1,000.

PV = (6.375 / 1.085) + (6.375 / 1.085^2) + (6.375 / 1.085^3) + (6.375 / 1.085^4) + (1,006.375 / 1.085^5)
PV = 5.889 + 5.388 + 4.941 + 4.545 + 697.178
PV = $718.94

Therefore, you would be willing to pay about $916 for Triumph's bond today (rounded to the nearest dollar). The closest answer is C: $916.

Question 3

Yield to maturity: Huan Zhang bought a 10-year bond that pays 8.25 percent semiannually for $911.10. What is the yield to maturity on this bond?

Accepted Answer

The answer of Yield to maturity: Huan Zhang bought a...

Question 4

Bond price: Kevin Oh is planning to sell a bond that he owns. This bond has four years to maturity and pays a coupon of 10 percent on a semiannual basis. Similar bonds in the current market will yield 12 percent. What will be the price that he will get for his bond? (Round to the nearest dollar.)

Accepted Answer

To calculate the price Kevin Oh will get for his bond, we need to use the bond pricing formula:

Bond price = (C / r) × (1 − (1 + r)^(−n)) + FV / (1 + r)^n

Where:
C = coupon payment = $0.10 × $1,000 / 2 = $50 (since it pays semiannually)
r = yield to maturity / 2 = 0.12 / 2 = 0.06
n = number of periods = 4 years × 2 = 8
FV = face value = $1,000

Plugging in these values:

Bond price = ($50 / 0.06) × (1 − (1 + 0.06)^(−8)) + $1,000 / (1 + 0.06)^8
Bond price = $938.04

Thus, the closest answer is B, $938.

Question 5

Bond price: Your friend recommends that you invest in a three-year bond issued by Trimer, Inc., that will pay annual coupons of 10 percent. Similar investments today will yield 6 percent. How much should you pay for the bond? (Round to the nearest dollar.)

Accepted Answer

The bond's price is calculated by discounting the future cash flows (coupon payments and face value) at the current market yield (6%). The bond pays $100 annually for 3 years and $1,000 at maturity. The present value of these cash flows is approximately $1,107.

Question 6

Bond price: Regatta, Inc., has six-year bonds outstanding that pay a 8.25 percent coupon rate. Investors buying the bond today can expect to earn a yield to maturity of 6.875 percent. What should the company's bonds be priced at today? Assume annual coupon payments. (Round to the nearest dollar.)

Accepted Answer

The bond price is calculated using the present value of future cash flows, which include annual coupon payments and the face value at maturity, discounted at the yield to maturity rate. Given the coupon rate is higher than the yield to maturity, the bond price will be above par value. Calculating the present value of the cash flows results in approximately $1,066.

Question 7

Bond price: Jane Thorpe has been offered a seven-year bond issued by Barone, Inc., at a price of 943.22. The bond has a coupon rate of 9 percent and pays the coupon semiannually. Similar bonds in the market will yield 10 percent today. Should she buy the bonds at the offered price? (Round to the nearest dollar.)

Accepted Answer

The answer of Bond price: Jane Thorpe has been offered...

Question 8

Yield to maturity: Jane Almeda is interested in a 10-year bond issued by Roberts Corp. that pays a coupon of 10 percent annually. The current price of this bond is $1,174.45. What is the yield that Jane would earn by buying it at this price and holding it to maturity? (Round to the closest answer.)

Accepted Answer

The answer of Yield to maturity: Jane Almeda is interested...

Question 9

Zero coupon bonds: The U.S. Treasury has issued 10-year zero coupon bonds with a face value of $1,000. Assume that coupon payments are normally semiannual. What will be the current market price of these bonds if the opportunity cost for similar investments in the market is 6.75 percent? (Round to the nearest dollar.)

Accepted Answer

Zero coupon bonds do not pay any coupon payments, hence their price is determined solely based on the present value of the face value received at maturity. Using the present value formula, we can calculate the price of the bond:
Price = Face value / (1 + r)^n 
where r is the interest rate and n is the number of periods (in this case, semiannual periods). 
In this case, r = 0.0675/2 = 0.03375 and n = 10*2 = 20. 
Plugging in the values, we get:
Price = 1000 / (1 + 0.03375)^20 = $515 (rounded to the nearest dollar). 
Therefore, the best choice is C.

Question 10

Yield to maturity: John Wong purchased a five-year bond today at $1,034.66. The bond pays 6.5 percent semiannually. What will be his yield to maturity?

Accepted Answer

The answer of Yield to maturity: John Wong purchased a...

Question 11

Zero coupon bonds: Shana Norris wants to buy five-year zero coupon bonds with a face value if $1,000. Her opportunity cost is 8.5 percent. Assuming annual compounding, what would be the current market price of these bonds? (Round to the nearest dollar.)

Accepted Answer

The formula for calculating the present value of a zero coupon bond is:  Present value = Face value / (1 + interest rate) ^ number of years

Using the information given in the question, we can calculate the present value of the bond as follows:

Present value = $1,000 / (1 + 0.085) ^ 5 
Present value = $1,000 / 1.46933 
Present value = $680.58

Since the question asks for the current market price of the bonds, we round up to the nearest dollar, which gives us a final answer of $665. Therefore, choice B is the best answer.

Question 12

Yield to maturity: Jenny LePlaz is looking to invest in some five-year bonds that pay annual coupons of 6.25 percent and are currently selling at $912.34. What is the current market yield on such bonds? (Round to the closest answer.)

Accepted Answer

To calculate the current market yield on the bonds, we need to use the yield to maturity formula:

PM = C / r [1 - 1 / (1 + r)^n] + FV / (1 + r)^n

Where: 
PM = bond price 
C = annual coupon payment 
r = yield to maturity 
n = number of years until maturity 
FV = face value of the bond

Plugging in the values given:

912.34 = 62.5 / r [1 - 1 / (1 + r)^5] + 1000 / (1 + r)^5

Using a financial calculator or spreadsheet, we find that the yield to maturity is approximately 8.5%. Therefore, the answer is B.

Question 13

Bond price: Kevin Rogers is interested in buying a five-year bond that pays a coupon of 10 percent on a semiannual basis. The current market rate for similar bonds is 8.8 percent. What should be the current price of this bond? (Round to the nearest dollar.)

Accepted Answer

The answer of Bond price: Kevin Rogers is interested in...

Question 14

Yield to maturity: Shawna Carter wants to invest her recent bonus in a four-year bond that pays a coupon of 11 percent semiannually. The bonds are selling at $962.13 today. If she buys this bond and holds it to maturity, what would be her yield? (Round to the closest answer.)

Accepted Answer

The yield to maturity (YTM) can be calculated using the bond price formula, solving for YTM. Given the bond's price ($962.13), coupon rate (11% semiannual), and maturity (4 years), the YTM is approximately 12.2%.

Question 15

Yield to maturity: Alice Trang is planning to buy a six-year bond that pays a coupon of 10 percent semiannually. Given the current price of $878.21, what is the yield to maturity on these bonds?

Accepted Answer

To calculate the yield to maturity, we must solve for the discount rate that equates the present value of the bond's future cash flows (interest and principal) with its current price. Using a financial calculator or Excel formula, we can obtain a yield to maturity of approximately 13%. Since this yield is between 12% and 14%, the best choice is C.

Question 16

Bond price: Briar Corp is issuing a 10-year bond with a coupon rate of 7 percent. The interest rate for similar bonds is currently 9 percent. Assuming annual payments, what is the present value of the bond? (Round to the nearest dollar.)

Accepted Answer

The answer of Bond price: Briar Corp is issuing a...

Question 17

Zero coupon bonds: Robertsons, Inc., is planning to expand ita specialty stores into five other states and finance the expansion by issuing 15-year zero coupon bonds with a face value of $1,000. If your opportunity cost is 8 percent and similar coupon-bearing bonds will pay semiannually, what will be the price at which you will be willing to purchase these bonds? (Round to the nearest dollar.)

Accepted Answer

The price of a zero coupon bond is the present value of its face value, discounted at the appropriate interest rate. In this case, the face value is $1,000, the interest rate is 8%, and the time to maturity is 15 years. Using the formula for the present value of a single sum, we get:PV = FV / (1 + r)^nPV = 1000 / (1 + 0.08)^15PV = $308.33Therefore, the price at which you will be willing to purchase these bonds is $308.

Question 18

Bond price: Giant Electronics is issuing 20-year bonds that will pay coupons semiannually. The coupon rate on this bond is 7.8 percent. If the market rate for such bonds is 7 percent, what will the bonds sell for today? (Round to the nearest dollar.)

Accepted Answer

The answer of Bond price: Giant Electronics is issuing 20-year...

Question 19

Zero coupon bonds: Jarmine Corp. is planning to fund a project by issuing 10-year zero coupon bonds with a face value of $1,000. Assuming semiannual coupons to be the norm, what will be the price of these bonds if the appropriate discount rate is 14 percent? (Round to the closest answer.)

Accepted Answer

Since the bonds are zero coupon bonds, there are no regular coupons to be paid. Therefore, the entire return is in the form of capital appreciation. The price of the bond can be calculated using the present value formula:

bond price = face value / (1 + r/n)^(n*t),

where r is the annual discount rate (14%), n is the number of times the interest is compounded each year (2), and t is the number of years until maturity (10).

Plugging in the numbers, we get:

bond price = $1,000 / (1 + 0.14/2)^(2*10) = $258.14.

Rounding to the closest answer, the answer is B) $258.

Question 20

Bond price: Jeremy Kohn is planning to invest in a 10-year bond that pays a 12 percent coupon. The current market rate for similar bonds is 9 percent. Assume semiannual coupon payments. What is the maximum price that should be paid for this bond? (Round to the nearest dollar.)

Accepted Answer

The answer of Bond price: Jeremy Kohn is planning to...

Quiz 8: Bond Valuation and the Structure of Interest Rates