Question 1

Table 6.2 
-(a) Calculate the current value of Bond L. (See Table 6.2)
(b) What will happen to the value/price as the bond approaches maturity?

Accepted Answer

The answer of Table 6.2 
-(a) Calculate the current value...

Question 2

The ABC company has two bonds outstanding that are the same except for the maturity date. Bond D matures in 4 years, while Bond E matures in 7 years. If the required return changes by 15 percent

Accepted Answer

The answer of The ABC company has two bonds outstanding...

Question 3

If the required return is greater than the coupon rate, a bond will sell at

Accepted Answer

If the required return is greater than the coupon rate, it means that investors are demanding a higher return than what the bond is currently offering. Therefore, the bond will need to be sold at a discount in order to compensate for the lower coupon rate.

Question 4

A firm has an issue of $1,000 par value bonds with a 12 percent stated interest rate outstanding. The issue pays interest annually and has 10 years remaining to its maturity date. If bonds of similar risk are currently earning 8 percent, the firm's bond will sell for ________ today.

Accepted Answer

The answer of A firm has an issue of $1,000...

Question 5

If a corporate bond is issued with a coupon rate that varies directly with the required return, the price of the bond will

Accepted Answer

When a corporate bond's coupon rate varies directly with the required return, it means that the bond's interest payments adjust to match the current market rates. As a result, the bond's price remains stable at its face value, because the payments it offers to investors always align with what the market requires.

Question 6

A firm has an issue of $1,000 par value bonds with a 9 percent stated interest rate outstanding. The issue pays interest annually and has 20 years remaining to its maturity date. If bonds of similar risk are currently earning 11 percent, the firm's bond will sell for ________ today.

Accepted Answer

To calculate the price of the bond, we need to determine the present value of its future cash flows, which are the annual interest payments and the final principal payment at maturity.

We can use the following formula to calculate the present value of an annuity:

PV = PMT x [1 - (1 + r)-n] / r

Where:
PV = Present value
PMT = Annual interest payment = $1,000 x 9% = $90
r = Discount rate = 11%
n = Number of periods = 20

Plugging in the values, we get:

PV = $90 x [1 - (1 + 11%)^-20] / 11%
PV = $840.67

Therefore, the bond will sell for $840.67 today.

Question 7

Table 6.2 
-Calculate the current value of Bond M. (See Table 6.2)

Accepted Answer

The answer of Table 6.2 
-Calculate the current value of...

Question 8

On January 1, 2002, Zheng Corporation will issue new bonds to finance its expansion plans. In its efforts to price the issue, Zheng Corporation has identified a company of similar risk with an outstanding bond issue that has an 8 percent coupon rate that is due January 1, 2017. This firm's bonds currently are selling for $1,091.96. If interest is paid semiannually for both bonds, what must the coupon rate of the new bonds be in order for the issue to sell at par?

Accepted Answer

The answer of On January 1, 2002, Zheng Corporation will...

Question 9

The price of a bond with a fixed coupon rate and the market required return have a relationship that is best described as

Accepted Answer

The price of a bond and the market required return have an inverse relationship. As the market required return (yield) increases, the price of the bond decreases, and vice versa. Conversely, a decrease in the market required return leads to an increase in the price of the bond.

Question 10

Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent annual coupon interest rate. The issue has ten years remaining to the maturity date. Bonds of similar risk are currently selling to yield a 12 percent rate of return. The current value of each Hewitt bond is ________.

Accepted Answer

The answer of Hewitt Packing Company has an issue of...

Question 11

Table 6.2 
-Calculate the current value of Bond M if the time of maturity is six years. (See Table 6.2)

Accepted Answer

The answer of Table 6.2 
-Calculate the current value of...

Question 12

Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent coupon interest rate outstanding. The issue pays interest semiannually and has 10 years remaining to its maturity date. Bonds of similar risk are currently selling to yield a 12 percent rate of return. What is the value of these Hewitt Packing Company bonds?

Accepted Answer

The answer of Hewitt Packing Company has an issue of...

Question 13

A bond will sell ________ when the stated rate of interest exceeds the required rate of return, ________ when the stated rate of interest is less than the required return, and ________ when the stated rate of interest is equal to the required return.

Accepted Answer

A bond will sell at a premium when the stated rate of interest exceeds the required rate of return because investors are willing to pay more for the higher interest rate. A bond will sell at a discount when the stated rate of interest is less than the required return because investors will only be willing to purchase the bond at a lower price to compensate for the lower interest rate. A bond will sell equal to the par value when the stated rate of interest is equal to the required return because it is neither more attractive nor less attractive than other investments.

Question 14

If the required return is less than the coupon rate, a bond will sell at

Accepted Answer

If the required return is less than the coupon rate, the bond is more attractive to buyers and they are willing to pay more for it, resulting in a premium above its par value.

Question 15

When the required return is constant but different from the coupon rate, the price of a bond as it approaches its maturity date will

Accepted Answer

When the required return is constant but different from the coupon rate, the price of a bond will approach its par value as it nears its maturity date. This is because the bond's value will increasingly reflect its redemption value rather than its coupon payments.

Question 16

When valuing a bond, the characteristics of the bond that remain fixed are all of the following EXCEPT the

Accepted Answer

The price of a bond may vary depending on market conditions, such as changes in interest rates or credit ratings. The coupon rate, face value, and interest payment are all fixed characteristics of the bond.

Question 17

Table 6.2 
-(a) Calculate the current value of Bond N. (See Table 6.2)
(b) What will happen to value/price as the bond approaches maturity?

Accepted Answer

The answer of Table 6.2 
-(a) Calculate the current value...

Question 18

Jia Hua Enterprises wants to issue sixty 20-year, $1,000 par value, zero-coupon bonds. If each bond is priced to yield 7 percent, how much will Jia Hua receive (ignoring issuance costs) when the bonds are first sold?

Accepted Answer

Each bond has a face value of $1,000 and will be priced to yield 7 percent, meaning investors will pay a discounted rate of 0.07/2 = 0.035 per half-year period. With a maturity of 20 years and semi-annual compounding, each bond will have 40 periods. Therefore, the present value of each bond can be calculated using the following formula:

PV = 1000 / (1 + 0.035)^40 = $214.37

The total amount Jia Hua will receive when the bonds are first sold is equal to the sum of the present values of all 60 bonds:

Total amount = 60 x $214.37 = $12,862.20

Therefore, the closest answer choice is C, $15,505.

Question 19

Calculate the value of a $1,000 bond which has 10 years until maturity and pays quarterly interest at an annual coupon rate of 12 percent. The required return on similar-risk bonds is 20 percent.

Accepted Answer

First we need to calculate the semi-annual coupon payment:
Annual coupon rate = 12%
Semi-annual coupon rate = 6%
Semi-annual coupon payment = 6% x $1,000 / 2 = $30
Next we need to determine the number of coupon payments remaining until maturity:
10 years until maturity x 4 quarters per year = 40 quarters remaining
Using the formula for the present value of an annuity, we can calculate the present value of the remaining coupon payments:
PV = C x [1 - (1 + r)^-n] / r
PV = $30 x [1 - (1 + 0.20 / 4)^-40] / (0.20 / 4)
PV = $458.91
Finally, we need to calculate the present value of the face value (or principal) of the bond:
PV = F / (1 + r)^n
PV = $1,000 / (1 + 0.20 / 4)^40
PV = $197.14
The total present value of the bond is the sum of the present value of the remaining coupon payments and the present value of the face value:
Total PV = $458.91 + $197.14 = $656.77 
Therefore, the correct answer is A.

Question 20

To expand its business, the Kingston Outlet factory would like to issue a bond with par value of $1,000, coupon rate of 10 percent, and maturity of 10 years from now. What is the value of the bond if the required rate of return is 1) 8 percent, 2) 10 percent, and 3) 12 percent?

Accepted Answer

The answer of To expand its business, the Kingston Outlet...

Quiz 6: Interest Rates and Bond Valuation

Table 6.2 -(a) Calculate the current value of Bond L. (See Table 6.2) (b) What will happen to the value/price as the bond approaches maturity?