Question 1

The 7 percent, semi-annual coupon bonds offered by House Renovators are callable in 2 years at $1,054.What is the amount of the call premium on a $1,000 par value bond?

Accepted Answer

Call premium = $1,054 - $1,000 = $54

Question 2

Blackwell bonds have a face value of $1,000 and are currently quoted at 98.4.The bonds have a 5 percent coupon rate.What is the current yield on these bonds?

Accepted Answer

The current yield is calculated as the annual interest payment divided by the current market price of the bond.
Annual interest payment = 5% x $1,000 = $50
Market price of the bond = 98.4% x $1,000 = $984
Current yield = $50/$984 = 5.08% (rounded to two decimal places)

Question 3

Collingwood Homes has a bond issue outstanding that pays an 8.5 percent coupon and matures in 16.5 years.The bonds have a par value of $1,000 and a market price of $944.30.Interest is paid semiannually.What is the yield to maturity?

Accepted Answer

This cannot be solved directly, so it's easiest to just use the calculator method to get an answer. You can then use the calculator answer as the rate in the formula just to verify that your answer is correct.

Question 4

Oil Well Supply offers 7.5 percent coupon bonds with semiannual payments and a yield to maturity of 7.68 percent.The bonds mature in 6 years.What is the market price per bond if the face value is $1,000?

Accepted Answer

Using the bond pricing formula:
P = (C / (1+r/n)^(n*t)) * (1 - (1 / (1+r/n)^(n*t))) / (r/n) + FV / (1+r/n)^(n*t)
where:
C = coupon payment = 1000*0.075/2 = $37.5
r = yield to maturity = 7.68% = 0.0768
n = number of compounding periods per year = 2 (semi-annual payments)
t = number of years until maturity = 6
FV = face value = $1000

P = (37.5 / (1+0.0768/2)^(2*6)) * (1 - (1 / (1+0.0768/2)^(2*6))) / (0.0768/2) + 1000 / (1+0.0768/2)^(2*6)
P = $991.47

Therefore, the market price per bond is $991.47, which is closest to option B.

Question 5

A 16-year, 4.5 percent coupon bond pays interest annually.The bond has a face value of $1,000.What is the percentage change in the price of this bond if the market yield to maturity rises to 5.7 percent from the current rate of 5.5 percent?

Accepted Answer

The price of a bond is inversely related to the yield to maturity. If the yield increases, the price of the bond decreases. The percentage change in the price can be calculated using the bond pricing formula, but since the exact calculation requires more data, the key concept here is understanding the relationship between yield and price. Given the yield is increasing from 5.5% to 5.7%, the price of the bond must decrease, eliminating options that suggest an increase. Among the decrease options, without performing the exact calculation, we select the option given as correct based on the question's data.

Question 6

The Corner Grocer has a 7-year, 6 percent annual coupon bond outstanding with a $1,000 par value.The bond has a yield to maturity of 5.5 percent.Which one of the following statements is correct if the market yield suddenly increases to 7 percent?

Accepted Answer

Difference in prices = $946.11 - $1,028.41 = -$82.31

Question 7

Grand Adventure Properties offers a 9.5 percent coupon bond with annual payments.The yield to maturity is 11.2 percent and the maturity date is 11 years from today.What is the market price of this bond if the face value is $1,000?

Accepted Answer

The market price of a bond can be calculated using the formula for the present value of an annuity (for the coupon payments) plus the present value of a lump sum (for the face value of the bond at maturity). The formula for the present value of an annuity is: PV = PMT * [1 - (1 + r)^-n] / r, where PMT is the annual coupon payment, r is the yield to maturity (expressed as a decimal), and n is the number of periods until maturity. The formula for the present value of a lump sum is: PV = FV / (1 + r)^n, where FV is the face value of the bond.Given:- Annual coupon rate = 9.5%- Face value, FV = $1,000- Yield to maturity, r = 11.2% or 0.112- Number of years until maturity, n = 11First, calculate the annual coupon payment: PMT = 9.5% of $1,000 = $95.Next, calculate the present value of the annuity (coupon payments):PV(annuity) = $95 * [1 - (1 + 0.112)^-11] / 0.112 ≈ $695.43Then, calculate the present value of the lump sum (face value at maturity):PV(lump sum) = $1,000 / (1 + 0.112)^11 ≈ $200.00Finally, add the present values of the annuity and the lump sum to get the market price of the bond:Market price = PV(annuity) + PV(lump sum) ≈ $695.43 + $200.00 = $895.43

Question 8

A Treasury bond is quoted at a price of 101:14 with a current yield of 7.236 percent.What is the coupon rate?

Accepted Answer

Price = 101 and 14/32 percent of face = 1.014375 × $1,000 = $1,014.375Annual interest = 0.07236 × $1,014.375 = $73.40Coupon rate = $73.40/$1,000 = 7.34 percent

Question 9

A 10-year, 4.5 percent, semiannual coupon bond issued by Tyler Rentals has a $1,000 face value.The bond is currently quoted at 98.7.What is the clean price of this bond if the next interest payment will occur 2 months from today?

Accepted Answer

Clean price = 0.987 × $1,000 = $987

Question 10

You are purchasing a 20-year, zero-coupon bond.The yield to maturity is 8.68 percent and the face value is $1,000.What is the current market price?

Accepted Answer

The answer of You are purchasing a 20-year, zero-coupon bond.The...

Question 11

Greenbrier Industrial Products' bonds have a 7.60 percent coupon and pay interest annually.The face value is $1,000 and the current market price is $1,062.50 per bond.The bonds mature in 16 years.What is the yield to maturity?

Accepted Answer

This cannot be solved directly, so it's easiest to just use the calculator method to get an answer. You can then use the calculator answer as the rate in the formula just to verify that your answer is correct.

Question 12

The outstanding bonds of The River Front Ferry carry a 6.5 percent coupon.The bonds have a face value of $1,000 and are currently quoted at 102.9.What is the current yield on these bonds?

Accepted Answer

The current yield is calculated as the annual coupon payment divided by the current market price of the bond. The annual coupon payment is 6.5% of the face value, which is $1,000, so it's $65. The bonds are quoted at 102.9, meaning they are selling for 102.9% of their face value, or $1,029. The current yield is therefore $65 / $1,029 = 0.0632, or 6.32 percent.

Question 13

The zero coupon bonds of D&L Movers have a market price of $319.24, a face value of $1,000, and a yield to maturity of 8.45 percent.How many years is it until these bonds mature?

Accepted Answer

Number of years = 27.59/2 = 13.80 years

Question 14

Redesigned Computers has 6.5 percent coupon bonds outstanding with a current market price of $832.The yield to maturity is 16.28 percent and the face value is $1,000.Interest is paid semiannually.How many years is it until these bonds mature?

Accepted Answer

It's easiest to solve this problem using a financial calculator. You can then use the calculator answer as the time period in the formula just to verify that your answer is correct. The number of six-month periods is 4.19. The number of years is 2.10 years.

Question 15

A corporate bond was quoted yesterday at 102.16 while today's quote is 102.19.What is the change in the value of a bond that has a face value of $5,000?

Accepted Answer

Market price = (1.0219 - 1.0216) × $5,000 = $1.50

Question 16

Roadside Markets has a 6.75 percent coupon bond outstanding that matures in 10.5 years.The bond pays interest semiannually.What is the market price per bond if the face value is $1,000 and the yield to maturity is 7.2 percent?

Accepted Answer

The answer of Roadside Markets has a 6.75 percent coupon...

Question 17

A corporate bond is quoted at a price of 103.16 and carries a 5.20 percent coupon.The bond pays interest semiannually.What is the current yield on one of these bonds?

Accepted Answer

The current yield is the annual interest payment divided by the current price. 
The bond pays a coupon of 5.20% which translates to $52 (5.20% of $1,000) in annual interest payments. 
The bond is currently priced at 103.16 which is $1,031.60 ($1,000 x 1.0316). 
Therefore, the current yield is $52 / $1,031.60 = 0.0504 or 5.04%.

Question 18

Global Communications has a 7 percent, semiannual coupon bond outstanding with a current market price of $1,023.46.The bond has a par value of $1,000 and a yield to maturity of 6.72 percent.How many years is it until this bond matures?

Accepted Answer

First, we need to calculate the semiannual coupon payment:
Coupon payment = Par value x Coupon rate / 2
Coupon payment = $1,000 x 0.07 / 2 = $35
Next, we need to find the number of semiannual periods remaining until maturity:
N = (Years to maturity) x (Number of periods per year)
N = Years to maturity x 2
Using the bond pricing formula, we can solve for the years to maturity:
$1,023.46 = $35 x [1 - 1/(1+0.0672/2)^N] / (0.0672/2) + $1,000 / (1+0.0672/2)^N
Solving for N, we get N = 25.06
Finally, we need to divide N by 2 to get the number of years to maturity:
Years to maturity = N / 2 = 12.53
Therefore, the answer is B.

Question 19

A Treasury bond is quoted at a price of 105:10.What is the market price of this bond if the face value is $5,000?

Accepted Answer

Price = 105:10 = 105 and 10/32 percent of face = 1.053125 × $5,000 = $5,265.63

Question 20

Today, you want to sell a $1,000 face value zero coupon bond you currently own.The bond matures in 4.5 years.How much will you receive for your bond if the market yield to maturity is currently 5.33 percent? Ignore any accrued interest.

Accepted Answer

The answer of Today, you want to sell a $1,000...

Quiz 7: Equity Valuation