Question 1

What is the market price of a bond with a $5,000 face value if the price quote is 101.1629?

Accepted Answer

Market price = 1.011629 × $5,000 = $5,058.15

Question 2

Delray bonds offer a coupon rate of 4.6 percent and currently sell at 99.2 percent of face value.What is the current yield on these bonds?

Accepted Answer

Assuming a $1,000 face value: (0.046 × $1,000)/ (0.992 × $1,000)= 0.0464,or 4.64%
You can also compute this as: 4.6% / 99.2% = 0.0464,or 4.64%

Question 3

A zero coupon bond with a face value of $1,000 is issued at an initial price of $474.20 and a 25-year maturity.What is the implicit interest,in dollars,for the first year of the bond's life? Assume semiannual interest.

Accepted Answer

$474.20 = $1,000 / (1 + r)²⁵^×2 r = 1.5034% 11ea5bb7_de33_5410_8724_d3bce6fc2227_TB1005_00 Bond value = $1,000 / (1 + 0.015034)^24×2 = $488.57 11ea5bb7_de33_5411_8724_7d779d0fa9eb_TB1005_00 Implicit interest = $488.57 - $474.20 = $14.37

Question 4

TJ Machine bonds have a coupon rate of 5.3 percent,a face value of $1,000,and pay interest semiannually.The bonds mature in 23 years and have a yield to maturity of 5.4 percent.What will be the percentage change in the bond's price if the market rate increases by 1 percent to 6.4 percent?

Accepted Answer

Bond value = [(0.053 × $1,000)/2] × ({1 - 1/[1 + (0.054/2)]^23×2}/(0.054/2))+ {$1,000/[1 + (0.054/2)]^23×2} = $986.92 11ea5bb7_de33_05ee_8724_df5c2e689ab4_TB1005_00 Bond value = [(0.053 × $1,000)/2] × ({1 - 1 / [1 + (0.064 / 2)]²³^×2} / (0.064 / 2))+ {$1,000 / [1 + (0.064 / 2)]^23×2} = $868.48 11ea5bb7_de33_05ef_8724_833c1214cf61_TB1005_00 Percentage change in price = ($868.48 - $986.92)/ $986.92 = -0.1200,or 12.00%

Question 5

Assume a taxable bond yields 6.38 percent and a comparable municipal bond yields 4.27 percent.At what tax rate would an investor be indifferent between the bonds?

Accepted Answer

0.0638 × (1 - t*)= 0.0427
t* = 0.3307,or 33.07%

Question 6

River Tours has 5.8 percent coupon bonds that pay interest semiannually.The face value of each bond is $1,000,and the current market price is $1,003.54.If the yield to maturity is 5.68 percent,how many years is it until these bonds mature?

Accepted Answer

11ea5bb7_de32_dedc_8724_2db0cc68c96f_TB1005_00 Number of years = 6.549 / 2 = 3.27 years

Question 7

The ABT Co.zero coupon bonds have a $1,000 face value,a required rate of return of 8 percent,and semiannual compounding.What is one of these bonds worth today if they mature in 12 years?

Accepted Answer

Bond value = $1,000 / [1 + (0.08 / 2)]¹²^×2 = $390.12 11ea5bb7_de33_c946_8724_f1e15e33f419_TB1005_00

Question 8

A $1,000 face value bond matures in 16 years,pays interest semiannually,and has a market quote of 102.0562.The coupon rate is 5.5 percent,the current yield is ________ percent,and the yield to maturity is ________ percent.

Accepted Answer

Current yield = (0.055 × $1,000)/ (1.020562 × $1,000)= 0.0539,or 5.39%
Or:
Current yield = 5.5% / 102.0562% = 0.0539,or 5.39%
 11ea5bb7_de33_f058_8724_310bb3d71d7a_TB1005_00 Yield to maturity = 2.654% × 2 = 5.31%

Question 9

A $1,000 face value bond is currently callable at a quoted price of 101.What is the amount of the call premium?

Accepted Answer

Call premium = (1.01 × $1,000)- $1,000 = $10

Question 10

A U.S.Treasury bond has a face value of $5,000,a coupon rate of 3 percent compounded semiannually,a yield to maturity of 2.97 percent,and 7 years until maturity.What is the clean price quote of this bond?

Accepted Answer

Bond value = [(0.03 × $5,000)/2] × ({1 - 1/[1 + (0.0297/2)]^7×2}/(0.0297/2))+ {$5,000/[1 + (0.0297/2)]^7×2} = $5,009.42 11ea5bb7_de33_f057_8724_cd264618f212_TB1005_00

Question 11

Taylor Bros.bonds have a face value of $5,000,a current market price of $5,248.50,and a coupon rate of 5.3 percent,compounded semiannually.What is the current yield on these bonds?

Accepted Answer

Current yield = (0.053 × $5,000)/ $5,248.50 = 0.0505,or 5.05%

Question 12

Assume an investor has a tax rate of 33 percent.What municipal bond rate is equivalent to a corporate rate of 7.8 percent for this investor?

Accepted Answer

Muni rate = 0.078 × (1 - 0.33)= 0.0523,or 5.23%

Question 13

A zero coupon bond has a yield to maturity of 7.48 percent,semiannual compounding,a $1,000 face value,and a market quote of 41.0932.How many years is it until this bond matures?

Accepted Answer

$1,000 = (0.410932 × $1,000)[1 + (0.0748 / 2)^T] T = 24.22 semiannual periods 11ea5bb7_de33_a234_8724_b1bc0141b676_TB1005_00 Number of years = 24.22 / 2 = 12.11 years

Question 14

A $1,000 Treasury bond matures in 13.5 years,pays interest semiannually,and carries a coupon rate of 3.53 percent.What is the price of this bond if the discount rate is 4 percent?

Accepted Answer

Bond value = [(0.0353 × $1,000)/2] × ({1 - 1 / [1 + (0.04 / 2)]^13.5^×2} / (0.04 / 2))+ {$1,000 / [1 + (0.04 / 2)]^13.5×2} = $951.34 11ea5bb7_de33_c945_8724_3b8f6c8ff415_TB1005_00

Question 15

Westover Company needs $1.8 million to expand its business.To accomplish this,the firm plans to sell 25-year,$1,000 face value zero-coupon bonds.The bonds will be priced to yield 7.15 percent with interest compounded semiannually.What is the minimum number of bonds the company must sell? Ignore all issue costs.

Accepted Answer

Bond value = $1,000 / [1 + 0.0715 / 2)]²⁵^×2 = $172.68 11ea5bb7_de33_7b23_8724_1b958380da63_TB1005_00 Number of bonds = $1,800,000 / $172.68 = 10,424

Question 16

A $1,000 face value bond has a bid quote of 100.6794 and a bid-ask spread of 0.0155.If you were to purchase this bond,what clean price would you pay?

Accepted Answer

Asked price = (1.006794 + 0.000155)× $1,000 = $1,006.95

Question 17

A Treasury bond is quoted at a price of 99.4062 with a current yield of 3.17 percent.What is the coupon rate?

Accepted Answer

0.0317 = C / (0.994062 × $1,000)
C = $31.51
Coupon rate = $31.51 / $1,000 = 0.03151,or 3.151%

Question 18

The 12-year bonds issued by Golf Companies have a quoted yield to maturity of 7.9 percent,a coupon rate of 8 percent,and semiannual payments.What is the effective annual yield on these bonds?

Accepted Answer

Effective annual yield = [1 + (0.079 / 2)]² - 1 = 0.0806,or 8.06%

Question 19

The Beta Co.bonds have a maturity of 13 years,a face value of $1,000,a coupon rate of 6.5 percent,and pay interest annually.What is the percentage change in the price of these bonds if the market yield rises to 6.9 percent from its current level of 6.5 percent?

Accepted Answer

At 6.5%,the bond sells at par.At 6.9%,the bond sells at a discount. Bond value = (0.065 × $1,000)× {[1 - 1 / (1 + 0.069)¹³] / 0.069} + [$1,000 / (1 + 0.069)¹³] = $966.38 11ea5bb7_de33_05ed_8724_c7b67fc244fa_TB1005_00 Percentage change in price = ($966.38 - $1,000)/ $1,000 = -0.0336 or - 3.36%

Question 20

Autos and More offers a zero coupon bond with a yield to maturity of 9.3 percent.The bond matures in 11 years and has a face value of $1,000.What is this bond worth today? Assume semiannual compounding.

Accepted Answer

Bond value = $1,000 / [1 + (0.093 / 2)]¹¹^×2 = $367.91 11ea5bb7_de33_7b22_8724_3f2ea05a2d77_TB1005_00

Quiz 5: Interest Rates AMCQ Bomcq Valuation