Question 1

The bonds issued by Manson and Son bear a coupon of 6 percent,payable semiannually.The bond matures in 15 years and has a $1,000 face value.Currently,the bond sells at par.What is the yield to maturity?

Accepted Answer

Since the bond is selling at par, the yield to maturity is equal to the coupon rate of 6 percent. No further calculations are required.

Question 2

The term structure of interest rates:

Accepted Answer

The answer of The term structure of interest rates:
...

Question 3

What is the value of a 20-year,zero-coupon bond with a face value of $1,000 when the market required rate of return is 9.6 percent,compounded semiannually?

Accepted Answer

The value of a zero-coupon bond can be calculated using the present value formula: $PV = \frac{FV}{(1 + r)^n}$, where PV is the present value (price) of the bond, FV is the face value, r is the semiannual interest rate, and n is the total number of compounding periods. Given a face value (FV) of $1,000, an annual interest rate of 9.6% (or 0.096), which when divided by 2 gives a semiannual rate of 0.048, and a term of 20 years (which equals 40 semiannual periods), the calculation is as follows: $PV = \frac{1,000}{(1 + 0.048)^{40}}$, resulting in approximately $153.30.

Question 4

Westover's has an outstanding bond with a coupon rate of 5.5 percent that matures in 12 years.The bond pays interest semiannually.What is the market price of one $1,000 face value bond if the yield to maturity is 7.13 percent?

Accepted Answer

The answer of Westover's has an outstanding bond with a...

Question 5

Moon Lite Cafe has a semiannual,5 percent coupon bond with a current market price of $988.52.The bond has a par value of $1,000 and a yield to maturity of 5.68 percent.How many years is it until this bond matures?

Accepted Answer

The answer of Moon Lite Cafe has a semiannual,5 percent...

Question 6

TJ's offers a $1,000 face value,zero coupon bond with a yield to maturity of 11.3 percent,given annual compounding.The bond matures in 16 years.What is the current price?

Accepted Answer

The answer of TJ's offers a $1,000 face value,zero coupon...

Question 7

The ________ premium is that portion of the bond yield that represents compensation for potential difficulties that might be encountered should the bond holder wish to sell the bond prior to maturity.

Accepted Answer

The liquidity premium compensates investors for the potential difficulty or cost of selling a bond prior to maturity. The other choices may also affect bond yields, but they do not directly relate to the potential difficulty of selling a bond prior to maturity.

Question 8

A firm offers a zero coupon bond with a face value of $1,000 that matures in 10 years.What is the current market price if the yield to maturity is 7.6 percent,given semiannual compounding?

Accepted Answer

The correct answer is A because the current market price of the bond is $474.30. This can be calculated using the formula:Bond Price = Face Value / (1 + Yield to Maturity / Number of Compounding Periods)^ (Number of Compounding Periods * Number of Years to Maturity)In this case, the face value is $1,000, the yield to maturity is 7.6%, the number of compounding periods is 2 (since it is compounded semiannually), and the number of years to maturity is 10. Plugging these values into the formula, we get:Bond Price = 1000 / (1 + 0.076 / 2)^ (2 * 10)= 1000 / (1.038)^20= 1000 / 2.106= $474.30

Question 9

The ________ premium is that portion of a nominal interest rate or bond yield that represents compensation for expected future loss in purchasing power.

Accepted Answer

The term "loss in purchasing power" refers to the effects of inflation, hence the premium referred to in the question is the inflation premium.

Question 10

The term structure of interest rates reflects the:

Accepted Answer

The answer of The term structure of interest rates reflects...

Question 11

Guggenheim offers a bond with annual payments and a coupon rate of 5 percent.The yield to maturity is 5.62 percent and the maturity date is 9 years away.What is the market price of one $1,000 face value bond?

Accepted Answer

The answer of Guggenheim offers a bond with annual payments...

Question 12

The zero coupon bonds of Mark Enterprises have a market price of $394.47,a face value of $1,000,and a yield to maturity of 6.87 percent based on semiannual compounding.How many years is it until this bond matures?

Accepted Answer

The formula for the price of a zero-coupon bond is P = F / (1 + r/n)^(nt), where P is the price, F is the face value, r is the yield to maturity, n is the number of compounding periods per year, and t is the number of years. Solving for t using the given values (P = $394.47, F = $1,000, r = 0.0687, n = 2) gives approximately 13.77 years.

Question 13

Consider a bond with a coupon rate of 8 percent that pays semiannual interest and matures in eight years.The market rate of return on bonds of this risk is currently 11 percent.What is the current value of a $1,000 face value bond?

Accepted Answer

The current value of the bond can be calculated using the formula for the present value of an annuity (for the semiannual interest payments) plus the present value of a lump sum (for the face value of the bond at maturity). Given a semiannual coupon rate of 4% (8% annual rate divided by 2), a market rate of 5.5% per semiannual period (11% annual rate divided by 2), and a total of 16 semiannual periods (8 years times 2), the calculation is as follows:Present value of the annuity (interest payments) = C * [(1 - (1 + r)^-n) / r]= $40 * [(1 - (1 + 0.055)^-16) / 0.055]= $40 * 10.5753= $423.41Present value of the lump sum (face value) = F / (1 + r)^n= $1,000 / (1 + 0.055)^16= $419.66Current value of the bond = $423.41 + $419.66 = $843.07

Question 14

An upward-sloping term structure of interest rates indicates that:

Accepted Answer

An upward-sloping term structure of interest rates indicates that longer-term rates are higher than shorter-term rates, which is typically the case in a healthy economy where investors expect greater returns for lending money for longer periods of time.

Question 15

A corporate bond has a coupon of 7.5 percent and pays interest annually.The face value is $1,000 and the current market price is $1,108.15.The bond matures in 14 years.What is the yield to maturity?

Accepted Answer

The yield to maturity (YTM) can be calculated using a financial calculator or spreadsheet software by inputting the current market price, the annual coupon payment, the face value, and the time to maturity. The correct answer, 6.31 percent, reflects the bond's annual return considering its current price, coupon rate, and time until maturity.

Question 16

The Lo Sun Corporation offers a bond with a current market price of $1,029.75,a coupon rate of 8 percent,and a yield to maturity of 7.52 percent.The face value is $1,000.Interest is paid semiannually.How many years is it until this bond matures?

Accepted Answer

The bond pays interest semiannually, so the yield to maturity per period is 3.76% (7.52%/2), and the coupon payment per period is $40 (8% of $1,000/2). Using the bond pricing formula and solving for the number of periods, we find it is 17 periods, which corresponds to 8.5 years (17/2).

Question 17

Which of these is included in the return on a municipal bond but excluded from the return on a US Treasury bond?

Accepted Answer

Municipal bonds often have a taxability premium because the interest income from these bonds is usually exempt from federal income taxes, and sometimes from state and local taxes as well, depending on where the investor lives and where the bond was issued. This tax advantage is not present in U.S. Treasury bonds, whose interest is subject to federal income tax. Liquidity premium might be included for both, but it's the taxability premium that is specifically relevant and differentiates municipal bonds from U.S. Treasury bonds in this context.

Question 18

The term structure of interest rates:

Accepted Answer

The term structure of interest rates can be humped in the middle, meaning that intermediate-term interest rates are higher than both short-term and long-term rates.

Answer: D
 The slope of the term structure of interest rates is determined by the real rate of return, which is the nominal rate minus the expected inflation rate.

Question 19

Chocolate and More offers a bond with a coupon rate of 6 percent,semiannual payments,and a yield to maturity of 7.73 percent.The bonds mature in 9 years.What is the market price of a $1,000 face value bond?

Accepted Answer

The market price of the bond can be calculated using the present value of the bond's future cash flows, which include the semiannual coupon payments and the face value at maturity. The bond's coupon rate is 6%, so the semiannual coupon payment is $30. The yield to maturity is 7.73%, or 3.865% per period. Using these values, the present value of the bond's cash flows is approximately $889.29.

Question 20

Otto Enterprises has a bond issue outstanding with a coupon of 8 percent that matures in 15 years.The bond is currently priced at $923.60 and has a par value of $1,000.Interest is paid semiannually.What is the yield to maturity?

Accepted Answer

The answer of Otto Enterprises has a bond issue outstanding...

Quiz 8: Interest Rates and Bond Valuation

The bonds issued by Manson and Son bear a coupon of 6 percent,payable semiannually.The bond matures in 15 years and has a $1,000 face value.Currently,the bond sells at par.What is the yield to maturity?

The term structure of interest rates:

What is the value of a 20-year,zero-coupon bond with a face value of $1,000 when the market required rate of return is 9.6 percent,compounded semiannually?

Westover's has an outstanding bond with a coupon rate of 5.5 percent that matures in 12 years.The bond pays interest semiannually.What is the market price of one $1,000 face value bond if the yield to maturity is 7.13 percent?

Moon Lite Cafe has a semiannual,5 percent coupon bond with a current market price of $988.52.The bond has a par value of $1,000 and a yield to maturity of 5.68 percent.How many years is it until this bond matures?

TJ's offers a $1,000 face value,zero coupon bond with a yield to maturity of 11.3 percent,given annual compounding.The bond matures in 16 years.What is the current price?

The ________ premium is that portion of the bond yield that represents compensation for potential difficulties that might be encountered should the bond holder wish to sell the bond prior to maturity.

A firm offers a zero coupon bond with a face value of $1,000 that matures in 10 years.What is the current market price if the yield to maturity is 7.6 percent,given semiannual compounding?

The ________ premium is that portion of a nominal interest rate or bond yield that represents compensation for expected future loss in purchasing power.

The term structure of interest rates reflects the:

Guggenheim offers a bond with annual payments and a coupon rate of 5 percent.The yield to maturity is 5.62 percent and the maturity date is 9 years away.What is the market price of one $1,000 face value bond?

The zero coupon bonds of Mark Enterprises have a market price of $394.47,a face value of $1,000,and a yield to maturity of 6.87 percent based on semiannual compounding.How many years is it until this bond matures?

Consider a bond with a coupon rate of 8 percent that pays semiannual interest and matures in eight years.The market rate of return on bonds of this risk is currently 11 percent.What is the current value of a $1,000 face value bond?

An upward-sloping term structure of interest rates indicates that:

A corporate bond has a coupon of 7.5 percent and pays interest annually.The face value is $1,000 and the current market price is $1,108.15.The bond matures in 14 years.What is the yield to maturity?

The Lo Sun Corporation offers a bond with a current market price of $1,029.75,a coupon rate of 8 percent,and a yield to maturity of 7.52 percent.The face value is $1,000.Interest is paid semiannually.How many years is it until this bond matures?

Which of these is included in the return on a municipal bond but excluded from the return on a US Treasury bond?

The term structure of interest rates:

Chocolate and More offers a bond with a coupon rate of 6 percent,semiannual payments,and a yield to maturity of 7.73 percent.The bonds mature in 9 years.What is the market price of a $1,000 face value bond?

Otto Enterprises has a bond issue outstanding with a coupon of 8 percent that matures in 15 years.The bond is currently priced at $923.60 and has a par value of $1,000.Interest is paid semiannually.What is the yield to maturity?