Question 1

McCue Inc.'s bonds currently sell for $1,250.They pay a $120 annual coupon,have a 15-year maturity and a $1,000 par value,but they can be called in 5 years at $1,050.Assume that no costs other than the call premium would be incurred to call and refund the bonds,and also assume that the yield curve is horizontal,with rates expected to remain at current levels into the future.What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM.)

Accepted Answer

The YTM is the yield to maturity, which is the annual rate of return an investor can expect to receive if they hold the bond until maturity. The YTC is the yield to call, which is the annual rate of return an investor can expect to receive if the bond is called in 5 years. The difference between the YTM and the YTC is the call premium, which is the amount of money the investor will receive if the bond is called. In this case, the call premium is $50 ($1,050 - $1,000). The YTM is 9.6% ($120 / $1,250), and the YTC is 7.29% ($120 / $1,050). Therefore, the difference between the YTM and the YTC is 2.31% (9.6% - 7.29%).

Question 2

Sadik Inc.'s bonds currently sell for $1,280 and have a par value of $1,000.They pay a $135 annual coupon and have a 15-year maturity,but they can be called in 5 years at $1,050.What is their yield to call (YTC)?

Accepted Answer

The answer of Sadik Inc.'s bonds currently sell for $1,280...

Question 3

If the yield to maturity is 5.5%,what is the price of a 15-year,zero-coupon bond with a par value of $1,000?

Accepted Answer

The formula to calculate the price of a zero-coupon bond is:

Price = Par Value / (1 + Yield to Maturity)^(Number of Years to Maturity)

Plugging in the given values, we get:

Price = 1000 / (1 + 0.055)^15
Price = 1000 / 1.896
Price = $527.88

Therefore, the correct answer is C) $447.93.

Question 4

Assume that a 10-year Treasury bond has a 12% annual coupon,while a 15-year T-bond has an 8% annual coupon.Assume also that the yield curve is flat,and all Treasury securities have a 10% yield to maturity.Which of the following statements is correct?

Accepted Answer

When interest rates decline, the prices of existing bonds increase because their fixed coupon payments become more attractive compared to new bonds issued at the lower rates. Longer-duration bonds, like the 15-year bond in this case, are more sensitive to interest rate changes and thus would experience a larger percentage increase in price compared to shorter-duration bonds, like the 10-year bond.

Question 5

Suppose a new company decides to raise a total of $200 million,with $100 million as common equity and $100 million as long-term debt.The debt can be mortgage bonds or debentures,but by an ironclad provision in its charter,the company can never raise any additional debt beyond the original $100 million.Given these conditions,which of the following statements is correct?

Accepted Answer

It is not possible to determine the impact of the mix of debentures versus first mortgage bonds on the firm's total interest expense as we are not given information on the interest rates on each type of bond. While it is true that the riskiness of mortgage bonds increases as its percentage of the debt increases, it does not necessarily mean that the total dollar interest charges will be higher. The statement in option B is also incorrect as the total interest expense will depend on the interest rates on each type of bond, not just the proportion in which they are issued. Option D is also incorrect as a higher percentage of debentures does not necessarily mean a greater risk borne by each debenture.

Question 6

The following are some provisions that are often found in a bond indenture.Which of these provisions would probably NOT reduce the yield to maturity that investors would otherwise require on a newly issued bond?

Accepted Answer

Subordination to other classes of debt would increase the risk for bondholders, thereby likely increasing the required yield to maturity, rather than decreasing it. The other three provisions would typically provide some degree of protection for bondholders, potentially reducing the risk and therefore the required yield to maturity.

Question 7

What is the semiannual coupon payment for a 12% bond with a $1,000 par?

Accepted Answer

The semiannual coupon payment for a 12% bond with a $1,000 par value is calculated as (12%/2) * $1,000 = 6% * $1,000 = $60.

Question 8

The Morrissey Company's bonds mature in 7 years,have a par value of $1,000,and make an annual coupon payment of $70.The market interest rate for the bonds is 8.5%.What is the bond's price?

Accepted Answer

The bond's price can be calculated using the present value formula for bonds, which takes into account the present value of the bond's future coupon payments and the present value of its par value at maturity. Given the annual coupon payment of $70, a market interest rate of 8.5%, and a maturity of 7 years, the bond's price is calculated to be $923.22.

Question 9

Assuming all else is constant,which of the following statements is correct?

Accepted Answer

Bond prices and interest rates have an inverse relationship, and the effect of interest rate changes on bond prices is convex. This means that for a given change in interest rates, the price decrease from a rate increase is larger than the price increase from a rate decrease of the same magnitude.

Question 10

Quigley Inc.'s bonds currently sell for $1,080 and have a par value of $1,000.They pay a $100 annual coupon and have a 15-year maturity,but they can be called in 5 years at $1,125.What is their yield to maturity (YTM)?

Accepted Answer

The yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until it matures. It can be calculated using financial calculators or spreadsheet software by inputting the current price of the bond ($1,080), the par value ($1,000), the annual coupon payment ($100), and the number of years to maturity (15). The correct YTM in this case is 9.01%, which accounts for the bond's price premium, its coupon rate, and its time to maturity.

Question 11

Which of the following is NOT an action or consequence of the activities of bond rating agencies?

Accepted Answer

B is incorrect because bond rating agencies do not immediately announce a change in the rating upon identifying a material change. They typically undergo a review process before making any rating changes public.

Question 12

Ezzell Enterprises' noncallable bonds currently sell for $1,165.They have a 15-year maturity,an annual coupon of $95,and a par value of $1,000.What is their yield to maturity?

Accepted Answer

The answer of Ezzell Enterprises' noncallable bonds currently sell for...

Question 13

D.J.Masson Inc.recently issued noncallable bonds that mature in 10 years.They have a par value of $1,000 and an annual coupon of 5.5%.If the current market interest rate is 7.0%,at what price should the bonds sell?

Accepted Answer

The answer of D.J.Masson Inc.recently issued noncallable bonds that mature...

Question 14

If 10-year T-bonds have a yield of 6.2%,10-year corporate bonds yield 8.5%,the maturity risk premium on all 10-year bonds is 1.3%,and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds,what is the default risk premium on the corporate bond?

Accepted Answer

The default risk premium is the difference between the yield on corporate bonds and the yield on T-bonds, minus the maturity risk premium and the liquidity premium. In this case, the default risk premium is 8.5% - 6.2% - 1.3% - 0.4% = 1.90%.

Question 15

Consider some bonds with one annual coupon payment of 7.25%.The bonds have a par value of $1,000,a current price of $1,125,and they will mature in 13 years.What is the yield to maturity on these bonds?

Accepted Answer

To find the yield to maturity, we need to calculate the discount rate that will make the present value of the bond's cash flows equal to its current price.
Using a financial calculator or spreadsheet software, we can estimate that the yield to maturity is approximately 5.85%. Therefore, the best choice is B.

Question 16

Assume that you are considering the purchase of a 15-year bond with an annual coupon rate of 9.5%.The bond has face value of $1,000 and makes semiannual interest payments.If you require an 11.0% nominal yield to maturity on this investment,what is the maximum price you should be willing to pay for the bond?

Accepted Answer

The answer of Assume that you are considering the purchase...

Question 17

Garvin Enterprises' bonds currently sell for $1,150.They have a 6-year maturity,an annual coupon of $85,and a par value of $1,000.What is their current yield?

Accepted Answer

The current yield is calculated as the annual coupon payment divided by the current market price of the bond. Here, the annual coupon payment is $85, and the current market price is $1,150. So, the current yield is $85 / $1,150 = 0.0739 or 7.39%.

Question 18

Wachowicz Corporation issued 15-year,noncallable,7.5% annual coupon bonds at their par value of $1,000 one year ago.Today,the market interest rate on these bonds is 5.5%.What is the current price of the bonds,given that they now have 14 years to maturity?

Accepted Answer

The answer of Wachowicz Corporation issued 15-year,noncallable,7.5% annual coupon bonds...

Question 19

Which of the following statements is correct?

Accepted Answer

If a bond's yield to maturity exceeds its coupon rate, it indicates that the bond is selling at a discount, meaning its price is less than its maturity value.

Question 20

Which statement regarding rate risk is true?

Accepted Answer

A lower coupon bond has more interest rate price risk than a higher coupon bond if other characteristics, including maturity, are the same.

Quiz 6: Bonds, Bond Valuation, and Interest Rates

Sadik Inc.'s bonds currently sell for $1,280 and have a par value of $1,000.They pay a $135 annual coupon and have a 15-year maturity,but they can be called in 5 years at $1,050.What is their yield to call (YTC) ?