Question 1

You are buying a bond at a clean price of $1,140.The bond has a face value of $1,000,an 8 percent coupon,and pays interest semiannually.The next coupon payment is one month from now.What is the dirty price of this bond?

Accepted Answer

The answer of You are buying a bond at a...

Question 2

Smiley Industrial Goods has bonds on the market making annual payments,with 13 years to maturity,and selling for $1,095.At this price,the bonds yield 6.4 percent.What must the coupon rate be on these bonds?

Accepted Answer

The answer of Smiley Industrial Goods has bonds on the...

Question 3

Keyser Materials has 8 percent coupon bonds on the market with 19 years to maturity.The bonds make semiannual payments and currently sell for 102 percent of par.What is the current yield on Keyser Materials bonds? The YTM?
The effective annual yield?

Accepted Answer

Current yield = (0.08 × $1,000)/(1.02 × $1,000) = 7.84 percent Effective yield = [1 + (0.0779648/2)]² - 1 = 7.95 percent

Question 4

Last year,you earned a rate of return of 12.37 percent on your bond investments.During that time,the inflation rate was 3.6 percent.What was your real rate of return?

Accepted Answer

(1 + 0.1237) = (1 + r)(1 + 0.036); r = 8.47 percent

Question 5

Jeffries,Inc.has 6 percent coupon bonds on the market that have 11 years left to maturity.The bonds make annual payments.If the YTM on these bonds is 7.4 percent,what is the current bond price?

Accepted Answer

The answer of Jeffries,Inc.has 6 percent coupon bonds on the...

Question 6

Arts and Crafts Warehouse wants to issue 15-year,zero coupon bonds that yield 7.5 percent.What price should it charge for these bonds if the face value is $1,000? (Assume semiannual compounding.)

Accepted Answer

We can use the formula for calculating the present value of a bond:

PV = FV / (1 + r)^n

where PV is the present value, FV is the face value, r is the semi-annual yield, and n is the number of semi-annual periods (i.e. years x 2).

In this case, the semi-annual yield is 7.5%/2 = 3.75% and the number of periods is 15 x 2 = 30.

Plugging these values into the formula, we get:

PV = 1000 / (1 + 0.0375)^30
PV = $331.40

Therefore, the price that Arts and Crafts Warehouse should charge for these bonds is $331.40. Option B is the correct answer.

Question 7

MLK,Inc.wants to issue new 15-year bonds for some much-needed expansion projects.The company currently has 6.5 percent coupon bonds on the market that sell for $975.00,make semiannual payments,and mature in 15 years.What coupon rate should the company set on its new bonds if it wants them to sell at par?

Accepted Answer

The coupon rate must equal the current market rate of 6.77 percent if the bonds are to be sold at par.

Question 8

Over the next three years,you expect the rate of inflation to decrease,but yet remain positive.After that,you expect inflation to increase steadily for the next several years.Draw a term structure of interest rates graph based on this assumption and identify all the components of that structure.

Accepted Answer

The answer of Over the next three years,you expect the...

Question 9

If your nominal rate of return is 14.38 percent and your real rate of return is 4.97 percent,what is the inflation rate?

Accepted Answer

(1 + 0.1438) = (1 + 0.0497)(1 + h); h = 8.96 percent

Question 10

If Treasury bills are currently paying 3.2 percent and the inflation rate is 2.8 percent,what is the approximate real rate of interest? The exact real rate?

Accepted Answer

Approximate rate = 3.2 percent - 2.8 percent = 0.40 percent; Exact rate = [(1 + 0.032)/(1 + 0.028)] - 1 = 3.89 percent

Question 11

Deltona Motors just issued 225,000 zero coupon bonds.These bonds mature in 20 years,have a par value of $1,000,and have a yield to maturity of 7.45 percent.What is the approximate total amount of money the company raised from issuing these bonds? (Assume semiannual compounding.)

Accepted Answer

Total amount raised = $231.56 × 225,000 = $52.10 million

Question 12

You purchase a bond with an invoice price of $1,120.The bond has a coupon rate of 8.5 percent,semiannual coupons,and there are three months to the next coupon date.What is the clean price of the bond?

Accepted Answer

Clean price = $1,120 - [(0.085 × $1,000)/2][(6 - 3)/6] = $1,098.75

Question 13

The App Store needs to raise $2.2 million for an expansion project.The firm wants to raise this money by selling zero coupon bonds with a par value of $1,000 that mature in 20 years.The market yield on similar bonds is 8.8 percent.How many bonds must The App Store sell to raise the money it needs? (Assume semiannual compounding.)

Accepted Answer

Number of bonds = $2,200,000/$178.64 = 12,315 bonds

Question 14

Suppose your company needs to raise $28 million and you want to issue 20-year bonds for this purpose.Assume the required return on your bond issue will be 8 percent,and you're evaluating two issue alternatives: an 8 percent annual coupon and a zero coupon bond.Your company's tax rate is 25 percent.In 20 years,what will your company's repayment be if you issue the coupon bonds?
What if you issue the zeros?
(Assume annual compounding on the zero coupon bond.)

Accepted Answer

Coupon bond = $28m + (0.08 × $28m) = $30.24m; PV of a $1,000 face value zero coupon bond = $1,000/(1.08)²⁰ = $214.548207; Number of zero coupon bonds required = $28m/$214.548207 = 130,506.80 bonds; Payment on zero coupon bonds = $1,000 × 130,506.80 = $130.51m

Question 15

A $100,000 Treasury bond has a bid price quote of 115.20 and an asked quote of 115.23.In dollars,what is the value of the bid-ask spread on this bond?

Accepted Answer

Bid-ask spread = 115.23 - 115.20 = 0.03 = 3/32 of 1 percent = 0.0009375; Spread in dollars = $100,000 × 0.0009375 = $93.75

Question 16

Today,you are buying a $1,000 face value bond at an invoice price of $987.The bond has a 6 percent coupon and pays interest semiannually.There are two months until the next coupon date.What is the clean price of this bond?

Accepted Answer

To calculate the clean price of the bond, we first need to calculate the accrued interest since the last coupon payment. Since there are two months until the next coupon date, the accrued interest can be calculated as:

Accrued Interest = (6% x $1,000) x (2/12) = $10

Therefore, the clean price of the bond can be calculated as:

Clean Price = Invoice Price - Accrued Interest 
Clean Price = $987 - $10 
Clean Price = $977

Therefore, the best choice is (D) $977.

Question 17

The Texas Instruments Company has 9 percent coupon bonds on the market with seven years left to maturity.The bonds make annual payments.If the bond currently sells for $874.60,what is its YTM?

Accepted Answer

Using a financial calculator or Excel, you can solve for YTM with the given information:
N = 7, PMT = 9% of $1,000 = $90, PV = -$874.60, FV = $1,000
Solving for YTM gives a result of approximately 11.72%. Therefore, the correct answer is (D).

Question 18

You've just found a 7 percent coupon bond on the market that sells for par value.What is the maturity on this bond?

Accepted Answer

Since the bond sells for par, the maturity can be any date.

Question 19

A bond yielded a real rate of return of 3.87 percent for a time period when the inflation rate was 3.75 percent.What was the actual nominal rate of return?

Accepted Answer

R = (1 + 0.0387)(1 + 0.0375) - 1 = 7.77 percent

Question 20

You purchase a bond with a coupon rate of 7 percent,semiannual coupons,and a clean price of $1,011.If the next coupon payment is due in four months,what is the invoice price?

Accepted Answer

Invoice price = $1,011 + [(0.07 × $1,000)/2][(6 - 4)/6] = $1,022.67

Quiz 6: Interest Rates and Bond Valuation