Deck 8: Debt Instruments and Markets

Question 1

Eurobonds differ from foreign bonds in all the following ways except

A) Eurobonds are traded in international capital markets but foreign bonds are traded in domestic capital markets.
B) Eurobonds are denominated in a currency other than the one used as a money unit in the countries in which it is traded but a foreign bond must be denominated in the money unit of the country in which it is issued.
C) Both eurobonds and foreign bonds are underwritten by international consortia of investment banks from the countries in which they are traded.
D) Eurobonds are international in many different ways but the only thing "foreign" about foreign bonds is the nationality of the borrower.
E) All of the statements above are correct.

Answer 1

Both eurobonds and foreign bonds are underwritten by international consortia of investment banks from the countries in which they are traded.

Question 2

Assume that a company issues a U.S. dollar floating-rate bond with a maturity of 10 years, an interest rate of LIBOR + 2 percent, and a six-month reset period. The bond is issued at par. Which of the following statements is incorrect?

A) The default risk premium on the bond is equal to 2 percent and is constant over the life of the bond.
B) The market value of the bond must be equal to the par value on the day the interest rate is reset because the new value of LIBOR is the market's required return.
C) One cannot calculate the yield to maturity before the bond matures because the future value of LIBOR is not known for sure.
D) This bond is financially equivalent to 20 bonds of six months maturity issued sequentially with a guaranteed rollover at a fixed risk premium.
E) All of the statements above are correct.

Answer 2

The market value of the bond must be equal to the par value on the day the interest rate is reset because the new value of LIBOR is the market's required return.

Question 3

Willis Ski Equipment has 10-year, $1,000 face value bonds outstanding that pay a 12 percent semiannual coupon. If your nominal annual required rate of return is 10 percent with semiannual compounding, how much should you be willing to pay for one of these bonds?

A) $835.83
B) $986.53
C) $1,091.55
D) $1,124.62
E) $1,425.99

Answer 3

$1,124.62

Question 4

A $1,000 par value bond pays interest of $35 each quarter and will mature in 10 years. If your nominal annual required rate of return is 12 percent with quarterly compounding, how much should you be willing to pay for this bond?

A) $838.19
B) $943.48
C) $1,076.69
D) $1,115.57
E) $1,394.49

Question 5

Holmia Tech's non-callable bonds have a face value of $1,000, and pay a 10 percent semiannual coupon. In other words, there is a coupon payment of $50 every six months. Each bond has 12 years until maturity, and sells at a price of $1,080. What is the bond's nominal yield to maturity?

A) 8.60%
B) 8.75%
C) 8.90%
D) 9.15%
E) 9.30%

Question 6

Converse Judson Industries has 9-year, $1,000 face value bonds outstanding that pay a 7 percent semiannual coupon. If your nominal annual required rate of return is 10 percent with semiannual compounding, what is the current yield on the bonds?

A) 8.49%
B) 8.59%
C) 8.71%
D) 8.84%
E) 8.90%

Question 7

Benik Properties' bonds mature in 14 years. The bonds have an 8 percent semiannual coupon and a par value of $1,000. The bonds are callable in five years at a call price of $1,050. The price of the bonds today is $1,075. Assuming that interest rates remain at the same level they are today, what yield can investors expect to earn on these bonds?

A) 6.86%
B) 7.05%
C) 7.14%
D) 7.39%
E) 7.45%

Question 8

Hadden Industries recently issued 10-year bonds at a price of $1,000. These bonds pay $60 in interest each six months. Their price has remained stable since they were issued, that is, they still sell for $1,000. Due to additional financing needs, the firm wishes to issue new bonds that would have a maturity of 10 years, a par value of $1,000, and pay $40 in interest every six months. If both bonds have the same yield, how many new bonds must Hadden issue to raise $2,000,000?

A) 2,481
B) 2,547
C) 2,596
D) 2,682
E) 2,742

Question 9

Assume that you are considering the purchase of a $1,000 par value bond that pays interest of $70 each six months and has 10 years before maturity. If you purchase this bond, you expect to hold it for 5 years and then to sell it in the market. You (and other investors) currently require a nominal annual rate of 16 percent, but you expect the market to require a nominal rate of only 12 percent when you sell the bond due to a general decline in interest rates. How much should you be willing to pay for this bond today?

A) $952.73
B) $955.51
C) $958.49
D) $961.39
E) $966.99

Question 10

A bond with 12 years to maturity has a 7 percent semiannual coupon and a face value of $1,000. (That is, the bond pays a $35 coupon every six months.) The bond currently sells for $1,000. What should be the price of a bond that pays a 7 percent annual coupon and has a face value of $1,000 with the same risk and maturity as the semiannual bond?

A) $970.16
B) $975.82
C) $981.34
D) $985.23
E) $990.33

Question 11

Boyd Advertising has bonds outstanding that have a 9 percent annual coupon and a face value of $1,000. The bonds will mature in 10 years, although they can be called before maturity at a call price of $1,050. The bonds have a yield to call of 6.5 percent and a yield to maturity of 7.4 percent. If interest rates remain at their current level, how long until these bonds may first be called?

A) 3.16 years
B) 3.45 years
C) 3.62 years
D) 3.79 years
E) 4.02 years

Question 12

Identify and describe some key characteristics of bonds.

Question 13

From the bondholder's perspective, which is riskier, a callable bond or a non-callable bond? Explain.

Question 14

Who issues bonds?

Question 15

If a bond has a sinking fund provision, how can an issuer handle the sinking fund payments, and when will the issuer use the different methods?

Question 16

Will a non-callable bond's price change over time or will it stay the same? Explain.

Question 17

What is the difference between the yield to maturity and the yield to call, and which should investors expect to earn?

Question 18

What is interest rate and reinvestment rate risk, and which bonds are most exposed to these risks?

Question 19

Where do most long-term corporate bonds trade, and who owns most of them?

Question 20

Describe the three major international credit markets.

Question 21

Harrison Hotels has 8-year, $1,000 face value bonds outstanding that pay an 11 percent semiannual coupon. If your nominal annual required rate of return is 9 percent with semiannual compounding, how much should you be willing to pay for one of these bonds?

Question 22

A $1,000 par value bond pays interest of $30 each quarter and will mature in 12 years. If your nominal annual required rate of return is 16 percent with quarterly compounding, how much should you be willing to pay for this bond?

Question 23

Atlanta Power's non-callable bonds have a face value of $1,000, and pay a 9 percent semiannual coupon. In other words, there is a coupon payment of $45 every six months. Each bond has 11 years until maturity, and sells at a price of $1,070. What is the bond's nominal yield to maturity?

Question 24

Abilene Electric has 13-year, $1,000 face value bonds outstanding that pay an 8 percent semiannual coupon. If your nominal annual required rate of return is 11 percent with semiannual compounding, what is the current yield on the bonds?

Question 25

Piven Construction's bonds mature in 13 years. The bonds have a 7 percent semiannual coupon and a par value of $1,000. The bonds are callable in five years at a call price of $1,035. The price of the bonds today is $1,080. Assuming that interest rates remain at the same level they are today, what yield can investors expect to earn on these bonds?

Question 26

Freeman Cobblers recently issued 10-year bonds at a price of $1,000. These bonds pay $50 in interest each six months. Their price has remained stable since they were issued, that is, they still sell for $1,000. Due to additional financing needs, the firm wishes to issue new bonds that would have a maturity of 10 years, a par value of $1,000, and pay $45 in interest every six months. If both bonds have the same yield, how many new bonds must Freeman issue to raise $3,000,000?

Question 27

Assume that you are considering the purchase of a $1,000 par value bond that pays interest of $60 each six months and has 10 years before maturity. If you purchase this bond, you expect to hold it for 5 years and then to sell it in the market. You (and other investors) currently require a nominal annual rate of 14 percent, but you expect the market to require a nominal rate of only 10 percent when you sell the bond due to a general decline in interest rates. How much should you be willing to pay for this bond today?

Question 28

A bond with 12 years to maturity has a 7 percent semiannual coupon and a face value of $1,000. (That is, the bond pays a $35 coupon every six months.) The bond currently sells for $1,010. What should be the price of a bond that pays a 7 percent annual coupon and has a face value of $1,000 with the same risk and maturity as the semiannual bond?

Question 29

Stern Design has bonds outstanding that have an 8 percent annual coupon and a face value of $1,000. The bonds will mature in 15 years, although they can be called before maturity at a call price of $1,050. The bonds have a yield to call of 6.8 percent and a yield to maturity of 7.1 percent. If interest rates remain at their current level, how long until these bonds may first be called?