Question 1

Happy Nappy Mattress Company issued a 10-year, 16% bond in 2003 that is callable at $1,100 in 5 years. In 2008 (today) the required return on bonds of this risk was 11%. The bonds pay interest semi-annually. What would you be willing to pay for one of these bonds today if you believe the bond will be called today?
A) $1188
B) $832.25
C) $1,100
D) $1,000

Accepted Answer

Solution using a calculator:
N = 5 * 2
I = 11/2
PMT = 160 /2
FV = 1100
Solve for PV = $1,246.98
The call price ($1,100) puts a ceiling on the value of the bond.

Question 2

National Medical has a zero coupon bond outstanding that sells for $242.60 and has 15 years to maturity. What is the yield to maturity on the bond to the nearest tenth of one percent?
A) 10.5%
B) 9.1%
C) 9.9%
D) 11.0%

Accepted Answer

Solution using a financial calculator:
N = 15
PV = -242.60
PMT = 0
FV = 1000
Solve for I = 9.9%

Question 3

CUP Company 8% bonds are currently selling for $950. These bonds (par value of $1,000) mature in one year and pay interest annually. Determine the yield to maturity (to the nearest tenth of 1 percent) on this bond issue.
A) 13.7%
B) 13.0%
C) 13.3%
D) 5.0%

Accepted Answer

Solution:
$950 = $1,080 (PVIFkd, ? )
PVIFkd, ? = 0.880
kd = 13.7% by calculator or interpolation
Solution using a financial calculator:
N = 1
PV = -950
PMT = 80
FV = 1000
Solve for I = 13.68%

Question 4

What is the value of an MDI $2.67 perpetual preferred stock to an investor who requires a 7% annual rate of return? Assume the par value is $60.00.
A) $85.71
B) $38.14
C) $59.33
D) $60.00

Accepted Answer

Solution:
p = 2.67 = $38.14
   .07

Question 5

ICX Company has an issue of perpetual bonds (par value to $1,000) that pays 5% annual interest. Determine the yield (to the nearest tenth of 1 percent) if the bonds are currently selling for $625.
A) 5.0%
B) 8.0%
C) 3.1%
D) 6.25%

Accepted Answer

Solution:
kd = $50/$625 = 0.08 or 8%

Question 6

Baywa has an outstanding bond that has a coupon rate of 8.3%. What is the market price of this bond if it pays interest semi-annually, has 15 years to maturity, and the current required rate of return is 9% on bonds of similar quality?
A) $943
B) $1059
C) $954
D) $1,000

Accepted Answer

Solution: P₀ = $41.50(16.29) + $1,000(.267) = $943

Question 7

What is the yield to maturity of a TVA bond that has a 9 1/2 percent coupon, pays interest semi-annually, has 12 years to maturity, and sells for $871.50?
A) 11.3%
B) 11.5%
C) 11.8%
D) 12.1%

Accepted Answer

Solution:
 11ea10f6_a13e_86f9_b6b3_7fe6b6be6320_TB2040_00 
 11ea10f6_a13e_86fa_b6b3_b3b244e8748c_TB2040_00 
Solution using a financial calculator:
N = 12 * 2
PV = -871.50
PMT = 95 /2
FV = 1000
Solve for I = 5.75% * 2 = 11.5%

Question 8

Determine the value of a LASKA 6.25% cumulative preferred stock, series D, par value $75 to an investor who requires a 9.5% rate of return on a security with this risk.
A) $65.79
B) $49.37
C) $75.00
D) $114.00

Accepted Answer

Solution: P₀ = .0625($75) = $4.69 in annual dividends P₀ = 4.69/.095 = $49.37

Question 9

How many semiannual interest payments remain on a bond that is selling for $917.25? The coupon rate of the bond is 8 percent, interest is payable semiannually, and the current market rate of return on a similar risk bond is 10 percent.
A) 5
B) 10
C) 11
D) 7

Accepted Answer

Solution:
Solve by trial and error or calculator. Try 5.5 years or 11 payments
$917.25 = $40(8.306) + $1000(0.585) = $917.24
Solution using a financial calculator:
I = 10 /2
PV = -917.25
PMT = 80 / 2
FV = 1000
Solve for N = 10.9 payments (roughly 11 payments) or 5.5 years

Question 10

An EAL bond has a coupon rate of 16 percent, pays interest semiannually, and matures in 15 years. If the bond is selling for $968.82, what is its yield to maturity?
A) 8.3%
B) 16.1%
C) 16.6%
D) 14.3%

Accepted Answer

Solution using a financial calculator:
N = 15 * 2
PV = -968.82
PMT = 160 / 2
FV = 1000
Solve for I = 8.28% * 2 = 16.56%
kd = 16.6 by calculator

Question 11

Crown King zero coupon bonds were issued in 1998 at $124. These bonds will mature in 2018. What will these bonds sell for in 2008 if the required rate of return in 2008 is 9.5%?
A) $352
B) $404
C) $413
D) $163

Accepted Answer

Solution: P₀ = $1,000(PVIF_.95,10) = $1,000(.404) = $404 Solution using calculator: N = 10 I = 9.5% PMT = 0 FV = 1000 Solve for PV = $403.51

Question 12

Rascal Corporation bonds have a 10.60% coupon and a maturity value of $1,000. The bonds, which pay interest semi-annually, will mature in 15 years, but the firm has the option to call the bond in 10 years at a premium of 106. You believe that Rascal will call the bonds in 10 years. If you require a pre-tax return of 9.5% on bonds of this risk, how much would you pay for one of these bonds today?
A) $1,000
B) $1,094
C) $1,034
D) $1,058

Accepted Answer

Solution: P₀ = $53(PVIFA _.0475,20) + $1060(PVIF_.0475,20) = $1,094

Question 13

An Exxon bond carries an 8 percent coupon, pays interest semiannually, and has 10 years to maturity. If this bond is currently selling for $925, what is the exact yield to maturity(to the nearest tenth of 1 percent)?
A) 9.2%
B) 8.8%
C) 9.8%
D) 10.2%

Accepted Answer

Solution using a financial calculator:
N = 10 * 2
PV = -925
PMT = 80/ 2
FV = 1000
Solve for I = 4.58 * 2 = 9.16%

Question 14

Mid-States Utility Company sold a 10-year note with a 7 7/8% coupon and a par value of $1,000. If the note sold at a discount for $930, what was the implied yield-to-maturity to the nearest tenth of one percent? Assume interest is paid semiannually.
A) 8.5%
B) 8.7%
C) 8.9%
D) 9.4%

Accepted Answer

Solution:
N = 10
PV = -930
PMT = 78.75
FV = 1000
Solve for I = 4.47 * 2 = 8.94
Calculator solution: 4.47 percent per 6 months or 8.94%

Question 15

UOP, a petroleum processing technology firm, issued a 10% coupon, 20 year to maturity first mortgage bond five years ago. If the current market rate of debt for UOP is 8%, at what price should this bond sell, to the nearest dollar? Assume a par value of $1,000, and pays interest semi-annually.
A) $1,170.
B) $999
C) $1,095
D) $1,173

Accepted Answer

Solution: P₀= 50(17.292) + 1000(.308) = $1,172.60 Solution using a financial calculator: N = 15 * 2 I = 8 /2 PMT = 100 / 2 FV = 1000 Solve for PV = 1172.92

Question 16

A U.S. Government bond was quoted at 95:13 "bid" and 95:15 "asked". How much would you have to pay for one of these $1,000.00 face value bonds?
A) $951.50
B) $950.13
C) $950.15
D) $954.69

Accepted Answer

Solution:
95 15/32%(1,000) = $954.69

Question 17

Zimmer, Inc. issued zero coupon bonds that sold for $190 and are due in 15 years. Determine the yield to maturity (to the nearest tenth of 1 percent) if you purchased the bond at the issue price.
A) 19.0%
B) 11.4%
C) 10.9%
D) 11.7%

Accepted Answer

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Question 18

The current required rate of return on a bond issued by Who LTD is 11 percent. "Who" has a bond issue outstanding that pays interest semiannually, is selling for $845 and matures in 8 years. What is the approximate coupon rate on the outstanding bond?
A) 4.00%
B) 8.00%
C) 10.68%
D) 6.05%

Accepted Answer

Solution: $845 = I/2(PVIFA_0.055,16) + $1000(PVIF_0.055,16) I/2 = 40.01 so coupon is $80 or 8 percent Solution using a financial calculator: N = 8 * 2 = 16 I = 11/ 2 = 5.5 PV = -845 FV = 1000 Solve for PMT = 40.18 * 2 = 80.36 Convert $80 into a % = 80.36 / 1000 = 8.04%

Question 19

At what price will Gohm have to sell a 10-year zero coupon bond that will yield 8.75% if held to maturity.
A) $453
B) $875.00
C) $87.50
D) $432

Accepted Answer

Solution: P₀ = $1,000(PVIF_.0875,10) = $432

Question 20

What is the issue price of a zero coupon bond with 15 years to maturity if it is sold to yield 7.55%?
A) $250.00
B) $362.31
C) $335.62
D) $1000.00

Accepted Answer

Solution using a financial calculator:
N = 15
I = 7.55
PMT = 0
FV = 1000
Solve for PV = $335.62

Quiz 6: Fixed Income Securities: Characteristics and Valuation

National Medical has a zero coupon bond outstanding that sells for $242.60 and has 15 years to maturity. What is the yield to maturity on the bond to the nearest tenth of one percent?

CUP Company 8% bonds are currently selling for $950. These bonds (par value of $1,000) mature in one year and pay interest annually. Determine the yield to maturity (to the nearest tenth of 1 percent) on this bond issue.

What is the value of an MDI $2.67 perpetual preferred stock to an investor who requires a 7% annual rate of return? Assume the par value is $60.00.

ICX Company has an issue of perpetual bonds (par value to $1,000) that pays 5% annual interest. Determine the yield (to the nearest tenth of 1 percent) if the bonds are currently selling for $625.

Baywa has an outstanding bond that has a coupon rate of 8.3%. What is the market price of this bond if it pays interest semi-annually, has 15 years to maturity, and the current required rate of return is 9% on bonds of similar quality?

What is the yield to maturity of a TVA bond that has a 9 1/2 percent coupon, pays interest semi-annually, has 12 years to maturity, and sells for $871.50?

Determine the value of a LASKA 6.25% cumulative preferred stock, series D, par value $75 to an investor who requires a 9.5% rate of return on a security with this risk.

How many semiannual interest payments remain on a bond that is selling for $917.25? The coupon rate of the bond is 8 percent, interest is payable semiannually, and the current market rate of return on a similar risk bond is 10 percent.

An EAL bond has a coupon rate of 16 percent, pays interest semiannually, and matures in 15 years. If the bond is selling for $968.82, what is its yield to maturity?

Crown King zero coupon bonds were issued in 1998 at $124. These bonds will mature in 2018. What will these bonds sell for in 2008 if the required rate of return in 2008 is 9.5%?

An Exxon bond carries an 8 percent coupon, pays interest semiannually, and has 10 years to maturity. If this bond is currently selling for $925, what is the exact yield to maturity(to the nearest tenth of 1 percent) ?

Mid-States Utility Company sold a 10-year note with a 7 7/8% coupon and a par value of $1,000. If the note sold at a discount for $930, what was the implied yield-to-maturity to the nearest tenth of one percent? Assume interest is paid semiannually.

UOP, a petroleum processing technology firm, issued a 10% coupon, 20 year to maturity first mortgage bond five years ago. If the current market rate of debt for UOP is 8%, at what price should this bond sell, to the nearest dollar? Assume a par value of $1,000, and pays interest semi-annually.

A U.S. Government bond was quoted at 95:13 "bid" and 95:15 "asked". How much would you have to pay for one of these $1,000.00 face value bonds?

Zimmer, Inc. issued zero coupon bonds that sold for $190 and are due in 15 years. Determine the yield to maturity (to the nearest tenth of 1 percent) if you purchased the bond at the issue price.

The current required rate of return on a bond issued by Who LTD is 11 percent. "Who" has a bond issue outstanding that pays interest semiannually, is selling for $845 and matures in 8 years. What is the approximate coupon rate on the outstanding bond?

At what price will Gohm have to sell a 10-year zero coupon bond that will yield 8.75% if held to maturity.

What is the issue price of a zero coupon bond with 15 years to maturity if it is sold to yield 7.55%?