Question 1

Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

Accepted Answer

When market interest rates decline sharply, the company can refinance its debt at a lower cost by calling its existing higher-interest bonds and reissuing new bonds at the lower rate.

Question 2

Bond A has a 9% annual coupon while Bond B has a 6% annual coupon.Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant.Which of the following statements is CORRECT?

Accepted Answer

The answer of Bond A has a 9% annual coupon...

Question 3

Gilligan Co.'s bonds currently sell for $1,150.They have a 6.75% annual coupon rate and a 15-year maturity, and are callable in 6 years at $1,067.50.Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future.Under these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds, the YTC or the YTM?

Accepted Answer

The answer of Gilligan Co.'s bonds currently sell for $1,150.They...

Question 4

A 15-year bond has an annual coupon rate of 8%.The coupon rate will remain fixed until the bond matures.The bond has a yield to maturity of 6%.Which of the following statements is CORRECT?

Accepted Answer

The answer of A 15-year bond has an annual coupon...

Question 5

Perry Inc.'s bonds currently sell for $1,150.They have a 6-year maturity, an annual coupon of $85, and a par value of $1,000.What is their current yield?

Accepted Answer

The current yield is calculated by dividing the annual coupon payment by the bond's current market price.

Annual coupon payment = $85
Current market price = $1,150

Current yield = ($85/$1,150) x 100% = 7.39%

Therefore, the best choice is A.

Question 6

An 8-year Treasury bond has a 10% coupon, and a 10-year Treasury bond has an 8% coupon.Both bonds have the same yield to maturity.If the yield to maturity of both bonds increases by the same amount, which of the following statements would be CORRECT?

Accepted Answer

When the yield to maturity of both bonds increases by the same amount, their prices will decrease. However, the price of the 10-year bond will decrease more than the price of the 8-year bond, because it has a longer maturity and therefore greater interest rate risk.

Question 7

Assume that a 10-year Treasury bond has a 12% annual coupon, while a 15-year T-bond has an 8% annual coupon.Assume also that the yield curve is flat, and all Treasury securities have a 10% yield to maturity.Which of the following statements is CORRECT?

Accepted Answer

Given the yield to maturity is 10% for both bonds, and considering their coupon rates (12% for the 10-year and 8% for the 15-year), the 10-year bond will sell at a premium (because its coupon rate is higher than the yield) and the 15-year bond will sell at a discount (because its coupon rate is lower than the yield). When interest rates decline, bond prices increase. The bond with the longer duration (in this case, the 15-year bond) will have a larger percentage increase in price because it is more sensitive to changes in interest rates.

Question 8

If the required rate of return on a bond (r_d) is greater than its coupon interest rate and will remain above that rate, then the market value of the bond will always be below its par value until the bond matures, at which time its market value will equal its par value.(Accrued interest between interest payment dates should not be considered when answering this question.)

Accepted Answer

This is because the bond's coupon interest rate becomes less attractive compared to the required rate of return, leading investors to demand a discount on the bond's price. As the bond approaches maturity, the market value will gradually increase to its par value, where the bond will be redeemed.

Question 9

Rogoff Co.'s 15-year bonds have an annual coupon rate of 9.5%.Each bond has face value of $1,000 and makes semiannual interest payments.If you require an 11.0% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

Accepted Answer

The answer of Rogoff Co.'s 15-year bonds have an annual...

Question 10

Which of the following statements is CORRECT?

Accepted Answer

The duration of a bond, which measures its sensitivity to interest rate changes, is higher for zero coupon bonds than for similar maturity bonds that pay coupons. Therefore, a zero coupon bond will experience a larger percentage decline in value if interest rates rise.

Question 11

Currently, Bruner Inc.'s bonds sell for $1,250.They pay a $120 annual coupon, have a 15-year maturity, and a $1,000 par value, but they can be called in 5 years at $1,050.Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future.What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM.)

Accepted Answer

The answer of Currently, Bruner Inc.'s bonds sell for $1,250.They...

Question 12

Meacham Enterprises' bonds currently sell for $1,280 and have a par value of $1,000.They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050.What is their yield to call (YTC)?

Accepted Answer

The answer of Meacham Enterprises' bonds currently sell for $1,280...

Question 13

Field Industries' outstanding bonds have a 25-year maturity and $1,000 par value.Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $850.What is the bond's nominal (annual) coupon interest rate?

Accepted Answer

The answer of Field Industries' outstanding bonds have a 25-year...

Question 14

Haswell Enterprises' bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000.The going interest rate (r_d) is 4.75%, based on semiannual compounding.What is the bond's price?

Accepted Answer

To find the bond's price, we use the formula for the present value of a bond, which includes the present value of the annuity (coupon payments) and the present value of the lump sum (par value at maturity). Given a 6.25% semiannual coupon on a $1,000 par value, the semiannual coupon payment is $31.25 ($1,000 * 6.25% / 2). The bond has 20 periods (10 years * 2) because it's semiannual, and the discount rate per period is 2.375% (4.75% / 2). The bond price is calculated as follows:- Present value of the annuity (coupon payments): PV = PMT * [(1 - (1 + r)^-n) / r]- Present value of the lump sum (par value): PV = FV / (1 + r)^nWhere PMT is the semiannual coupon payment ($31.25), r is the semiannual interest rate (0.02375), n is the total number of periods (20), and FV is the face value of the bond ($1,000).Plugging in the numbers:- Present value of the annuity (coupon payments) = $31.25 * [(1 - (1 + 0.02375)^-20) / 0.02375]- Present value of the lump sum (par value) = $1,000 / (1 + 0.02375)^20Calculating these values and summing them gives the bond's price, which is approximately $1,118.31.

Question 15

Jerome Corporation's bonds have 15 years to maturity, an 8.75% coupon paid semiannually, and a $1,000 par value.The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,050.What is the bond's nominal yield to call?

Accepted Answer

To find the bond's nominal yield to call, we need to use the bond pricing formula:

PV = (C / (1 + r)^1) + (C / (1 + r)^2) + ... + (C + Par / (1 + r)^n)

where PV = present value or current price of the bond, C = coupon payment, r = nominal yield to call, Par = par value, and n = years to call.

If the bond is called in 6 years, then we can calculate the PV of the bond at that time:

PV = (C / (1 + r)^1) + (C / (1 + r)^2) + ... + (C + Par / (1 + r)^n)
PV = (43.75 / (1 + r)^1) + (43.75 / (1 + r)^2) + ... + (1,043.75 / (1 + r)^6)

Using a financial calculator or spreadsheet, we can solve for the nominal yield to call that makes the PV equal to the call price of $1,050:

PV = 1,050
r = 5.27%

Therefore, the bond's nominal yield to call is 5.27%.

Question 16

One year ago Lerner and Luckmann Co.issued 15-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000.Today, the market interest rate on these bonds is 5.5%.What is the current price of the bonds, given that they now have 14 years to maturity?

Accepted Answer

The answer of One year ago Lerner and Luckmann Co.issued...

Question 17

Curtis Corporation's noncallable bonds currently sell for $1,165.They have a 15-year maturity, an annual coupon of $95, and a par value of $1,000.What is their yield to maturity?

Accepted Answer

The answer of Curtis Corporation's noncallable bonds currently sell for...

Question 18

Sommers Co.'s bonds currently sell for $1,080 and have a par value of $1,000.They pay a $100 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,125.What is their yield to maturity (YTM)?

Accepted Answer

To calculate the YTM, we need to find the discount rate that makes the present value of the bond's cash flows equal to its current price. Using a financial calculator or spreadsheet software, we can solve for the YTM as follows:
N = 15
PV = -1080
PMT = 100
FV = 1000
CPT → I/Y = 9.01%
Note that the fact that the bond can be called in five years at a price of $1,125 is not directly relevant to the YTM calculation, since we are assuming that the bond will be held to maturity. However, it does represent a potential risk for the bondholder, since the bond's cash flows could end sooner than expected if the bond is called.

Question 19

A 25-year, $1,000 par value bond has an 8.5% annual coupon.The bond currently sells for $875.If the yield to maturity remains at its current rate, what will the price be 5 years from now?

Accepted Answer

Using a financial calculator, we can calculate that the current yield to maturity (YTM) of the bond is 10.5%. We can use this YTM to find the future value of the bond in 5 years as follows:

N = 5
I/Y = 10.5
PMT = 85 (annual coupon payment)
FV = 1000

Solving for PV, we get:
PV = $882.90

Therefore, the price of the bond 5 years from now will be $882.90.

The correct answer is (C).

Question 20

Sentry Corp.bonds have an annual coupon payment of 7.25%.The bonds have a par value of $1,000, a current price of $1,125, and they will mature in 13 years.What is the yield to maturity on these bonds?

Accepted Answer

The yield to maturity (YTM) on a bond is the internal rate of return (IRR) for an investor if the bond is held until maturity, assuming that all payments are made as scheduled. The YTM calculation takes into account the bond's current market price, its par value, the coupon interest payments, and the time to maturity. Given the information, the correct YTM cannot be calculated precisely without using a financial calculator or an appropriate financial function in a spreadsheet to solve for the rate that equates the present value of the bond's cash flows (coupon payments and the repayment of the par value at maturity) to its current price. However, since the bond's current price is above its par value, we know the bond is trading at a premium, which typically happens when the bond's coupon rate is higher than the prevailing market interest rates. This implies that the YTM will be lower than the coupon rate of 7.25%. Among the given options, 5.85% is a plausible estimate for the YTM, considering the bond's premium pricing and the time to maturity.

Quiz 5: Bonds, Bond Valuation, and Interest Rates

Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

Bond A has a 9% annual coupon while Bond B has a 6% annual coupon.Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant.Which of the following statements is CORRECT?

A 15-year bond has an annual coupon rate of 8%.The coupon rate will remain fixed until the bond matures.The bond has a yield to maturity of 6%.Which of the following statements is CORRECT?

Perry Inc.'s bonds currently sell for $1,150.They have a 6-year maturity, an annual coupon of $85, and a par value of $1,000.What is their current yield?

An 8-year Treasury bond has a 10% coupon, and a 10-year Treasury bond has an 8% coupon.Both bonds have the same yield to maturity.If the yield to maturity of both bonds increases by the same amount, which of the following statements would be CORRECT?

Assume that a 10-year Treasury bond has a 12% annual coupon, while a 15-year T-bond has an 8% annual coupon.Assume also that the yield curve is flat, and all Treasury securities have a 10% yield to maturity.Which of the following statements is CORRECT?

Rogoff Co.'s 15-year bonds have an annual coupon rate of 9.5%.Each bond has face value of $1,000 and makes semiannual interest payments.If you require an 11.0% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

Which of the following statements is CORRECT?

Meacham Enterprises' bonds currently sell for $1,280 and have a par value of $1,000.They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050.What is their yield to call (YTC) ?

Field Industries' outstanding bonds have a 25-year maturity and $1,000 par value.Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $850.What is the bond's nominal (annual) coupon interest rate?

Haswell Enterprises' bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000.The going interest rate (r_d) is 4.75%, based on semiannual compounding.What is the bond's price?

Jerome Corporation's bonds have 15 years to maturity, an 8.75% coupon paid semiannually, and a $1,000 par value.The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,050.What is the bond's nominal yield to call?

One year ago Lerner and Luckmann Co.issued 15-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000.Today, the market interest rate on these bonds is 5.5%.What is the current price of the bonds, given that they now have 14 years to maturity?

Curtis Corporation's noncallable bonds currently sell for $1,165.They have a 15-year maturity, an annual coupon of $95, and a par value of $1,000.What is their yield to maturity?

Sommers Co.'s bonds currently sell for $1,080 and have a par value of $1,000.They pay a $100 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,125.What is their yield to maturity (YTM) ?

A 25-year, $1,000 par value bond has an 8.5% annual coupon.The bond currently sells for $875.If the yield to maturity remains at its current rate, what will the price be 5 years from now?

Sentry Corp.bonds have an annual coupon payment of 7.25%.The bonds have a par value of $1,000, a current price of $1,125, and they will mature in 13 years.What is the yield to maturity on these bonds?

Quiz 5: Bonds, Bond Valuation, and Interest Rates

Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

Bond A has a 9% annual coupon while Bond B has a 6% annual coupon.Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant.Which of the following statements is CORRECT?

A 15-year bond has an annual coupon rate of 8%.The coupon rate will remain fixed until the bond matures.The bond has a yield to maturity of 6%.Which of the following statements is CORRECT?

Perry Inc.'s bonds currently sell for $1,150.They have a 6-year maturity, an annual coupon of $85, and a par value of $1,000.What is their current yield?

An 8-year Treasury bond has a 10% coupon, and a 10-year Treasury bond has an 8% coupon.Both bonds have the same yield to maturity.If the yield to maturity of both bonds increases by the same amount, which of the following statements would be CORRECT?

Assume that a 10-year Treasury bond has a 12% annual coupon, while a 15-year T-bond has an 8% annual coupon.Assume also that the yield curve is flat, and all Treasury securities have a 10% yield to maturity.Which of the following statements is CORRECT?

Rogoff Co.'s 15-year bonds have an annual coupon rate of 9.5%.Each bond has face value of $1,000 and makes semiannual interest payments.If you require an 11.0% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

Which of the following statements is CORRECT?

Meacham Enterprises' bonds currently sell for $1,280 and have a par value of $1,000.They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050.What is their yield to call (YTC) ?

Field Industries' outstanding bonds have a 25-year maturity and $1,000 par value.Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $850.What is the bond's nominal (annual) coupon interest rate?

Haswell Enterprises' bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000.The going interest rate (rd) is 4.75%, based on semiannual compounding.What is the bond's price?

Jerome Corporation's bonds have 15 years to maturity, an 8.75% coupon paid semiannually, and a $1,000 par value.The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,050.What is the bond's nominal yield to call?

One year ago Lerner and Luckmann Co.issued 15-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000.Today, the market interest rate on these bonds is 5.5%.What is the current price of the bonds, given that they now have 14 years to maturity?

Curtis Corporation's noncallable bonds currently sell for $1,165.They have a 15-year maturity, an annual coupon of $95, and a par value of $1,000.What is their yield to maturity?

Sommers Co.'s bonds currently sell for $1,080 and have a par value of $1,000.They pay a $100 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,125.What is their yield to maturity (YTM) ?

A 25-year, $1,000 par value bond has an 8.5% annual coupon.The bond currently sells for $875.If the yield to maturity remains at its current rate, what will the price be 5 years from now?

Sentry Corp.bonds have an annual coupon payment of 7.25%.The bonds have a par value of $1,000, a current price of $1,125, and they will mature in 13 years.What is the yield to maturity on these bonds?

Haswell Enterprises' bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000.The going interest rate (r_d) is 4.75%, based on semiannual compounding.What is the bond's price?