Question 1

You are considering buying a 10-year, $1,000 par value bond issued by IBM.The coupon rate is 8% annually, with interest being paid semiannually.If you expect to earn a 10% rate of return on this bond, what is the maximum price you should be willing to pay for this IBM bond?

Accepted Answer

To find the maximum price you should be willing to pay for the bond, you need to calculate its present value given the desired rate of return (yield to maturity) of 10%. The bond pays semiannual interest, so the coupon payment is $40 ($1,000 * 8% / 2), and the yield per period is 5% (10% / 2). The bond has 20 periods (10 years * 2). The present value of the bond is the sum of the present value of the annuity (coupon payments) and the present value of the par value ($1,000) received at maturity. Using the present value formula for an annuity and the present value formula for a lump sum, the calculation is as follows:$$ PV = \frac{C}{r} \left(1 - \frac{1}{(1 + r)^n}\right) + \frac{F}{(1 + r)^n} $$Where:- $PV$ = present value of the bond- $C$ = semiannual coupon payment = $40- $r$ = semiannual yield = 5% or 0.05- $n$ = total number of periods = 20- $F$ = face value of the bond = $1,000$$ PV = \frac{40}{0.05} \left(1 - \frac{1}{(1 + 0.05)^{20}}\right) + \frac{1000}{(1 + 0.05)^{20}} $$$$ PV \approx 875.39 $$Therefore, the maximum price you should be willing to pay for the bond, given a 10% desired rate of return, is approximately $875.39.

Question 2

The following factors may affect a bond rating:

Accepted Answer

All three factors listed (security provisions, indenture provisions, and expected trends of industry operations) can potentially affect a bond rating. Security provisions are important because they determine the likelihood that bondholders will receive their principal and interest payments on time. Indenture provisions, which are the legal terms of the bond contract, can impact credit risk as well. Finally, expected trends of industry operations could impact the performance of the issuer and their ability to repay their debts.

Question 3

According to Standard & Poors and Fitch, bonds rated ______ and below are considered to be speculative or "junk."

Accepted Answer

The answer of According to Standard & Poors and Fitch,...

Question 4

RJR Nabisco recently experienced a market reevaluation due to a number of tobacco lawsuits.The firm has a bond outstanding with 15 years to maturity, and a coupon rate of 8%, with interest being paid semiannually.The required yield to maturity has risen to 16%.What is the price of the RJR Nabisco bond?

Accepted Answer

The bond price can be calculated using the present value of future cash flows, which include semiannual coupon payments and the face value at maturity. With a required yield of 16% (or 8% semiannually), the bond's price is lower than its face value due to the increased yield, making option D ($550) the correct choice.

Question 5

Mary wants to purchase a 20-year bond that has a par value of $1,000 and makes semiannual interest payments of $40.If her required yield to maturity is 10%, which of the following is closest to how much should Mary be willing to pay for the bond?

Accepted Answer

First, calculate the bond's semiannual coupon rate:

$40 semiannual interest / $1,000 par value = 0.04 or 4% semiannual coupon rate

Using the formula for the present value of a bond with semiannual payments, we can calculate the bond's present value:

PV = ($40 / 0.10) x [1 - 1 / (1 + 0.10 / 2)^(20 x 2)] + ($1,000 / (1 + 0.10 / 2)^(20 x 2))

PV = $400 x [1 - 1 / (1.05)^40] + $1,000 / (1.05)^40

PV = $828

Therefore, Mary should be willing to pay approximately $828 for the bond. Choice D is the closest option to this value.

Question 6

You are trying to determine the fair price to pay for a share of Philip Morris.If you buy this stock, you plan to hold it for a year.At the end of the year, you expect to receive a dividend of $5.50 and to sell the stock for $154.The discount rate for Philip Morris stock is 16%.What should be the price of this stock?

Accepted Answer

The fair price of the stock can be calculated using the dividend discount model for a one-year holding period, which is given by the formula: Price = (Dividend + Expected Price) / (1 + Discount Rate). Plugging in the values: Price = ($5.50 + $154) / (1 + 0.16) = $137.50.

Question 7

An unrated bond:

Accepted Answer

Unrated bonds do not have a credit rating, which often makes them riskier and potentially leads to higher yields compared to rated bonds. They are not specifically termed as "debentures," and they are not perceived as having lower than average risk.

Question 8

A (n) _____________ gives the bondholder a claim to specific assets (identified through serial numbers) such as railroad cars or airplanes.

Accepted Answer

An equipment trust certificate gives the bondholder a claim to specific assets (such as railroad cars or airplanes) as collateral. It is a type of secured bond in which an investor owns a proportionate share of a specific piece of equipment or property.

Question 9

The last dividend on GTE stock was $4, and the expected growth rate is 10%.If you require a rate of return of 20%, what is the highest price you should be willing to pay for GTE stock?

Accepted Answer

The answer of The last dividend on GTE stock was...

Question 10

Which of the following statements is most correct?

Accepted Answer

The answer of Which of the following statements is most...

Question 11

Ameritech has just issued a $1,000 par value bond that will mature in 10 years.This bond pays interest of $45 every six months.If the annual yield to maturity of this bond is 8%, what is the price of the Ameritech bond if the market is in equilibrium?

Accepted Answer

The bond pays $45 every six months, so the semi-annual coupon rate is 4.5%. The yield to maturity is 8% annually, or 4% semi-annually. Using the present value formula for bonds, the price is calculated as the present value of the annuity of coupon payments plus the present value of the par value, which results in approximately $1,067.96.

Question 12

Consolidated Edison has just paid an annual dividend of $3 per share.If the expected growth rate for Con Ed is 10%, and your required rate of return is 16%, how much are you willing to pay for this stock?

Accepted Answer

The answer of Consolidated Edison has just paid an annual...

Question 13

To accurately compare the rate of return on one investment with another, they should be:

Accepted Answer

To accurately compare the rate of return on one investment with another, they should be measured over equal time periods. This allows for a fair and consistent comparison of the returns on both investments. If the investments are not measured over equal time periods, it is difficult to determine which investment performed better overall.

Question 14

Which of the following are not bond rating agencies?

Accepted Answer

The answer of Which of the following are not bond...

Question 15

A speculative (junk) bond issue as rated under Standard & Poor's would be rated ______ or below:

Accepted Answer

The answer of A speculative (junk) bond issue as rated...

Question 16

Bond ratings are paid for by:

Accepted Answer

Bond ratings are typically paid for by the issuing firm, as they are seeking a rating to help market their bonds to potential investors. The ratings agencies provide an independent assessment of the creditworthiness of the issuer and the likelihood that they will be able to repay the bondholder. It is not typically the responsibility of the trustee or the investment banker to pay for the bond rating.

Question 17

Which of the following statements is false?

Accepted Answer

Yankee bonds are actually dollar-denominated bonds that are issued in the United States by foreign entities, not sold outside the United States.

Question 18

Which of the following statements is most correct?

Accepted Answer

Most of the annual funds raised from security issues come from corporate bond sales. This statement is correct as corporate bonds are a significant source of capital for companies.

Question 19

Chrysler has a bond outstanding with eight years remaining to maturity, a coupon rate of 5%, and semiannual payments.If the market price of the Chrysler bond is $729.05, what is the yield to maturity?

Accepted Answer

Using a financial calculator or Excel function, we can find that the yield to maturity (YTM) of the Chrysler bond is 10%. Therefore, the best choice is C.

Question 20

Which of the following constitute default on a bond?

Accepted Answer

Default on a bond can occur from nonpayment of par value, nonpayment of coupon, or violation of the indenture. Therefore, all of the above constitute default on a bond.

Quiz 10: Bonds and Stocks: Characteristics and Valuation

You are considering buying a 10-year, $1,000 par value bond issued by IBM.The coupon rate is 8% annually, with interest being paid semiannually.If you expect to earn a 10% rate of return on this bond, what is the maximum price you should be willing to pay for this IBM bond?

The following factors may affect a bond rating:

According to Standard & Poors and Fitch, bonds rated ______ and below are considered to be speculative or "junk."

Mary wants to purchase a 20-year bond that has a par value of $1,000 and makes semiannual interest payments of $40.If her required yield to maturity is 10%, which of the following is closest to how much should Mary be willing to pay for the bond?

An unrated bond:

A (n) _____________ gives the bondholder a claim to specific assets (identified through serial numbers) such as railroad cars or airplanes.

The last dividend on GTE stock was $4, and the expected growth rate is 10%.If you require a rate of return of 20%, what is the highest price you should be willing to pay for GTE stock?

Which of the following statements is most correct?

Ameritech has just issued a $1,000 par value bond that will mature in 10 years.This bond pays interest of $45 every six months.If the annual yield to maturity of this bond is 8%, what is the price of the Ameritech bond if the market is in equilibrium?

Consolidated Edison has just paid an annual dividend of $3 per share.If the expected growth rate for Con Ed is 10%, and your required rate of return is 16%, how much are you willing to pay for this stock?

To accurately compare the rate of return on one investment with another, they should be:

Which of the following are not bond rating agencies?

A speculative (junk) bond issue as rated under Standard & Poor's would be rated ______ or below:

Bond ratings are paid for by:

Which of the following statements is false?

Which of the following statements is most correct?

Chrysler has a bond outstanding with eight years remaining to maturity, a coupon rate of 5%, and semiannual payments.If the market price of the Chrysler bond is $729.05, what is the yield to maturity?

Which of the following constitute default on a bond?