Question 1

Determine the interest payment for the following three bonds: 5.5 percent coupon corporate bond (paid semiannually), 6.45 percent coupon Treasury note, and a corporate zero-coupon bond maturing in 10 years. (Assume a $1,000 par value.)

Accepted Answer

- 5.5 percent coupon corporate bond: The annual interest payment would be ($1,000 x 5.5%) = $55. Since the bond pays interest semiannually, each payment would be $27.50.
- 6.45 percent coupon Treasury note: The annual interest payment would be ($1,000 x 6.45%) = $64.50. Since the bond pays interest semiannually, each payment would be $32.25.
- Corporate zero-coupon bond: This bond does not pay any interest, so the interest payment is $0.

Question 2

A 6 percent corporate coupon bond is callable in 10 years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond?

Accepted Answer

The annual coupon payment is 6% * $1,000 = $60.
The call premium is one year of coupon payments, which is $60.
Therefore, the total amount paid to the bondholder upon call is:
$1,000 + $60 = $1,060.

Question 3

Calculate the price of a zero-coupon bond that matures in five years if the market interest rate is 7.50 percent. (Assume semiannual compounding and $1,000 par value.)

Accepted Answer

The formula to calculate the price of a zero-coupon bond is:
Price = Face value / (1 + R)^n

Where R is the market interest rate (7.50% in semiannual terms) and n is the number of periods until maturity (10 periods, considering semiannual compounding in five years).

Price = 1000 / (1 + 0.075/2)^10
Price = 1000 / (1.0375)^10
Price = 1000 / 1.4300
Price = $ 698.35

Therefore, the answer is A) $692.02, which is the closest to the calculated price.

Question 4

A 2.5 percent TIPS has an original reference CPI of 170.4. If the current CPI is 205.7, what is the current interest payment and par value of the TIPS? (Assume semiannual interest payments and $1,000 par value.)

Accepted Answer

First, we need to calculate the adjusted principal of the TIPS using the formula:

Adjusted principal = (original principal) x (current CPI) / (original reference CPI)

Adjusted principal = $1,000 x 205.7 / 170.4 = $1,207.16

Next, we can calculate the semiannual interest payment using the formula:

Interest payment = (adjusted principal) x (coupon rate) / 2

Interest payment = $1,207.16 x 2.5% / 2 = $15.09

Therefore, the current par value of the TIPS is $1,207.16 and the current semiannual interest payment is $15.09. The closest option is D.

Question 5

A 3.75 percent TIPS has an original reference CPI of 175.8. If the current CPI is 207.7, what is the current interest payment and par value of the TIPS? (Assume semiannual interest payments and $1,000 par value.)

Accepted Answer

The answer of A 3.75 percent TIPS has an original...

Question 6

Which of the following bonds carry significant risk that the issuer will not make current or future payments?

Accepted Answer

Junk bonds, also known as high-yield bonds, carry significant risk that the issuer will not make current or future payments. These bonds are issued by companies with low credit ratings and therefore have a higher risk of default.

Question 7

Determine the interest payment for the following three bonds: 4 percent coupon corporate bond (paid semiannually), 4.75 percent coupon Treasury note, and a corporate zero-coupon bond maturing in 15 years. (Assume a $1,000 par value.)

Accepted Answer

For the 4 percent coupon corporate bond, the semiannual interest payment is:
(0.04/2) x $1,000 = $20.00

For the 4.75 percent coupon Treasury note, the semiannual interest payment is:
(0.0475/2) x $1,000 = $23.75

For the corporate zero-coupon bond maturing in 15 years, since it is a zero-coupon bond, there is no periodic interest payment. Therefore, the interest payment is $0.

Thus, the best choice is B, as it correctly identifies the interest payments for all three bonds.

Question 8

Which of the following is a reason municipal bonds offer lower rates of interest income for their investors?

Accepted Answer

Municipal bonds are tax-exempt at the federal level, which means investors do not have to pay federal income tax on the interest income they earn from these bonds. This allows municipalities to offer lower rates of interest income to their investors as they do not need to compensate for the tax burden.

Question 9

Which of the following terms is the chance that the bond issuer will not be able to make timely payments?

Accepted Answer

Credit quality risk refers to the risk that the issuer of a bond may not be able to make timely payments or may default altogether. Interest rate risk refers to the risk of changes in interest rates affecting the value of the bond. Liquidity of interest rate risk refers to the risk of not being able to sell a bond at a fair price due to lack of marketability. Term structure of interest rates refers to the relationship between the yields of bonds with different maturities.

Question 10

Calculate the price of a zero-coupon bond that matures in 10 years if the market interest rate is 6 percent. (Assume semiannual compounding and $1,000 par value.)

Accepted Answer

Using the formula for the present value of a zero-coupon bond, we have:
PV = FV / (1 + r/n)^(n*t)
PV = 1,000 / (1 + 0.06/2)^(2*10)
PV = $553.68

Question 11

Consider the following three bond quotes; a Treasury note quoted at 87.25, and a corporate bond quoted at 102.42, and a municipal bond quoted at 101.45. If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par value of $5,000, what is the price of these three bonds in dollars?

Accepted Answer

For the Treasury note:
Price in dollars = Quote / 100 x Par Value = 87.25 / 100 x 1,000 = $872.50

For the corporate bond:
Price in dollars = Quote / 100 x Par Value = 102.42 / 100 x 1,000 = $1,024.20

For the municipal bond:
Price in dollars = Quote / 100 x Par Value = 101.45 / 100 x 5,000 = $5,072.50

Therefore, the price of the three bonds in dollars are $872.50, $1,024.20, and $5,072.50, respectively.

Question 12

Determine the interest payment for the following three bonds: 2.5 percent coupon corporate bond (paid semiannually), 3.15 percent coupon Treasury note, and a corporate zero-coupon bond maturing in 10 years. (Assume a $1,000 par value.)

Accepted Answer

For the 2.5 percent coupon corporate bond, the semiannual interest payment is calculated as (2.5/2)% * $1,000 = $12.50

For the 3.15 percent coupon Treasury note, the semiannual interest payment is calculated as (3.15/2)% * $1,000 = $15.75

For the corporate zero-coupon bond maturing in 10 years, there are no periodic interest payments, so the interest payment is $0.

Therefore, the best choice is B, which represents the correct interest payments for all three bonds.

Question 13

A 5.5 percent corporate coupon bond is callable in four years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond? (Assume annual interest payments.)

Accepted Answer

The annual coupon payment is 5.5% of $1,000 = $55. The call premium is also one year of coupon payments, which is $55. Therefore, if the bond is called, the bondholder will receive $1,055 ($1,000 principal plus one year of coupon payments).

Question 14

Consider the following three bond quotes; a Treasury note quoted at 102.30, and a corporate bond quoted at 99.45, and a municipal bond quoted at 102.45. If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par value of $5,000, what is the price of these three bonds in dollars?

Accepted Answer

The answer of Consider the following three bond quotes; a...

Question 15

A bond issued by a corporation on May 1, 1999, is scheduled to mature on May 1, 2019. If today is May 2, 2009, what is this bond's time to maturity? (Assume annual interest payments.)

Accepted Answer

The bond was issued in 1999 and is scheduled to mature in 2019, which is a period of 20 years. Since it's May 2, 2009, 10 years have passed since the bond was issued. Therefore, the time to maturity is 20 years - 10 years = 10 years.

Question 16

What's the current yield of a 6 percent coupon corporate bond quoted at a price of 101.70?

Accepted Answer

The current yield of a bond is calculated by dividing the annual coupon payment by the market price of the bond. For a 6 percent coupon bond, the annual coupon payment is 6% of the face value, which is typically $100, so the payment is $6. Dividing this by the market price of 101.70 gives a current yield of approximately 5.9 percent (6 / 101.70 = 0.059 or 5.9%).

Question 17

A 4.5 percent corporate coupon bond is callable in five years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond?

Accepted Answer

The annual coupon payment is 4.5% of $1,000, which is $45.
The call premium is also one year of coupon payments, which is $45.
If the bond is called, the bondholder would receive the call price of $1,000 plus the call premium of $45, for a total of $1,045.

Question 18

Which of the following is an important advantage to the issuer of a bond with a call provision?

Accepted Answer

A bond with a call provision allows the issuer to call or redeem the bond before its maturity date. This provides the issuer with an opportunity to refinance the bond at a lower interest rate or take advantage of other market conditions. As a result, the issuer can potentially reduce their borrowing costs and improve their financial flexibility.

Question 19

A bond issued by a corporation on June 15, 2007, is scheduled to mature on June 15, 2017. If today is December 16, 2008, what is this bond's time to maturity? (Assume annual interest payments.)

Accepted Answer

The bond has a maturity of 10 years (from June 15, 2007 to June 15, 2017). Since it is December 16, 2008, the time remaining until maturity is 8 and a half years (10 years minus 1 year and 6 months). Therefore, the answer is C) 8 years, 6 months.

Question 20

A bond issued by a corporation on October 1, 2007, is scheduled to mature on October 1, 3007. If today is October 2, 2009, what is this bond's time to maturity? (Assume annual interest payments.)

Accepted Answer

The time to maturity is the difference between the maturity date (October 1, 3007) and the current date (October 2, 2009), which is 998 years.

Quiz 7: Valuing Bonds

Determine the interest payment for the following three bonds: 5.5 percent coupon corporate bond (paid semiannually) , 6.45 percent coupon Treasury note, and a corporate zero-coupon bond maturing in 10 years. (Assume a $1,000 par value.)