Question 1

Compare and contrast current yield and yield to maturity.

Accepted Answer

The answer of Compare and contrast current yield and yield...

Question 2

Given the following information,determine the market value of EAO Company bonds.

Accepted Answer

The answer of Given the following information,determine the market value...

Question 3

If current market interest rates fall,what will happen to the value of outstanding bonds?

Accepted Answer

When market interest rates fall, the prevailing rate of return in the market decreases. This means that the interest rate on outstanding bonds, which was fixed at the time of issuance, is now higher than the prevailing market rate. As a result, the demand for these bonds increases, driving up their price and therefore their value. This is because investors are willing to pay more for a bond that offers a higher fixed rate of return, relative to the prevailing market rate.

Question 4

The current yield of a bond will equal its coupon rate when the bond is selling at par value.

Accepted Answer

When a bond is selling at par value, it means that the market interest rate is equal to the bond's coupon rate. Therefore, the current yield (which is the bond's annual interest payment divided by its market price) will also be equal to the coupon rate.

Question 5

Which of the following statements is true?

Accepted Answer

A bond will sell at a premium if its coupon rate is higher than the prevailing required rate of return. Choice A is incorrect because AA is considered to be an investment-grade rating, not a junk bond rating. Choice C is incorrect because a zero coupon bond does not pay interest but is sold at a discount and redeemed at face value at maturity. Choice D is incorrect because the legal document that describes all the terms and conditions of a bond issue is called an indenture agreement, not a debenture agreement.

Question 6

Junk bonds are rated BB or higher.

Accepted Answer

Junk bonds are rated BB or lower, indicating higher risk compared to investment-grade bonds, which are rated BBB or higher.

Question 7

If current market interest rates rise,what will happen to the value of outstanding bonds?

Accepted Answer

When current market interest rates rise, the yield on new bonds increases, making them more attractive to investors. As a result, the value of outstanding bonds with lower yields decreases because they become less valuable to buyers in comparison.

Question 8

If you are willing to pay $1,392.05 for a 15-year,$1,000 par value bond that pays 10% interest semiannually,what is your expected rate of return?

Accepted Answer

The answer of If you are willing to pay $1,392.05...

Question 9

If the market price of a bond increases,then:

Accepted Answer

When the market price of a bond increases, the yield to maturity decreases. This is because the bond's fixed coupon rate is based on the face value of the bond, so when the market price of the bond increases, the yield to maturity must decrease in order for the bond's coupon payments to match the new market rate.

Question 10

Calculate the value of a bond that is expected to mature in 13 years with a $1,000 face value.The interest coupon rate is 8%,and the required rate of return is 10%.Interest is paid annually.

Accepted Answer

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Question 11

DAH,Inc.has issued a 12% bond that is to mature in nine years.The bond had a $1,000 par value,and interest is due to be paid semiannually.If your required rate of return is 10%,what price would you be willing to pay for the bond?

Accepted Answer

The answer of DAH,Inc.has issued a 12% bond that is...

Question 12

A bond with a face value of $1,000 has annual coupon payments of $100 and was issued seven years ago.The bond currently sells for a premium and has eight years left to maturity.This bond's ________ must be less than 10%.

Accepted Answer

The yield to maturity (YTM) and the current yield (CY) are both measures of the bond's return to the investor. The YTM is the total return expected from holding the bond until maturity, which takes into account both the coupon payments and the premium/discount at which the bond is selling. The CY, on the other hand, is the coupon payment expressed as a percentage of the current market price of the bond.

Since the bond is currently selling at a premium, its YTM must be lower than its coupon rate, which is 10% in this case. Moreover, since the coupon payment is fixed at $100 per year and the bond's market price is now higher than its face value, the CY must also be lower than the coupon rate. Therefore, the only choice that correctly associates both YTM and CY with the bond's premium status and coupon rate is E: "yield to maturity and current yield".

Question 13

The market price of a 20-year,$1,000 bond that pays 9% interest semiannually is $774.31.What is the bond's yield to maturity?

Accepted Answer

The answer of The market price of a 20-year,$1,000 bond...

Question 14

Cassel Corp.bonds pay an annual coupon rate of 10%.If investors' required rate of return is now 8% on these bonds,they will be priced at:

Accepted Answer

Since the coupon rate is higher than the required rate of return, the bonds are considered to be desirable to investors and will be priced at a premium to par value.

Question 15

The sensitivity of a bond's value to changing interest rates depends on both the bond's time to maturity and its pattern of cash flows.

Accepted Answer

This is because the longer the time to maturity, the more sensitive the bond's value will be to changes in interest rates. Additionally, the pattern of cash flows, such as whether they are fixed or variable, can also impact the bond's sensitivity to interest rate changes.

Question 16

BCD's $1,000 par value bonds currently sell for $798.50.The coupon rate is 10%,paid semiannually.If the bonds have five years before maturity,what is the yield to maturity or expected rate of return?

Accepted Answer

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Question 17

Quirk Drugs sold an issue of 30-year,$1,000 par value bonds to the public that carry a 10.85% coupon rate,payable semiannually.It is now 10 years later,and the current market rate of interest is 9.00%.If interest rates remain at 9.00% until Quirk's bonds mature,what will happen to the value of the bonds over time?

Accepted Answer

The bonds were issued with a coupon rate higher than the current market interest rate (10.85% vs. 9.00%), so they will sell at a premium. As they approach maturity, their value will converge to the par value, meaning they will decline in value until they reach $1,000 at maturity.

Question 18

Garvin,Inc.'s bonds have a par value of $1,000.The bonds pay semiannual interest of $40 and mature in five years.
a.How much would you pay for Garvin bonds if your required rate of return is 10%?
b.How much would you pay if your required rate of return is 8%?

Accepted Answer

The answer of Garvin,Inc.'s bonds have a par value of...

Question 19

Which of the following statements is true?

Accepted Answer

The answer of Which of the following statements is true?
...

Question 20

The better the bond rating,the lower the rate of return demanded in the capital markets.

Accepted Answer

This is because a better bond rating indicates lower credit risk, which makes investors more willing to invest in the bond and accept a lower rate of return. On the other hand, a lower bond rating indicates higher credit risk and investors will demand a higher rate of return to compensate for the risk.

Quiz 9: Debt Valuation and Interest Rates

Compare and contrast current yield and yield to maturity.

Given the following information,determine the market value of EAO Company bonds.

If current market interest rates fall,what will happen to the value of outstanding bonds?

The current yield of a bond will equal its coupon rate when the bond is selling at par value.

Which of the following statements is true?

Junk bonds are rated BB or higher.

If current market interest rates rise,what will happen to the value of outstanding bonds?

If you are willing to pay $1,392.05 for a 15-year,$1,000 par value bond that pays 10% interest semiannually,what is your expected rate of return?

If the market price of a bond increases,then:

Calculate the value of a bond that is expected to mature in 13 years with a $1,000 face value.The interest coupon rate is 8%,and the required rate of return is 10%.Interest is paid annually.

DAH,Inc.has issued a 12% bond that is to mature in nine years.The bond had a $1,000 par value,and interest is due to be paid semiannually.If your required rate of return is 10%,what price would you be willing to pay for the bond?

A bond with a face value of $1,000 has annual coupon payments of $100 and was issued seven years ago.The bond currently sells for a premium and has eight years left to maturity.This bond's ________ must be less than 10%.

The market price of a 20-year,$1,000 bond that pays 9% interest semiannually is $774.31.What is the bond's yield to maturity?

Cassel Corp.bonds pay an annual coupon rate of 10%.If investors' required rate of return is now 8% on these bonds,they will be priced at:

The sensitivity of a bond's value to changing interest rates depends on both the bond's time to maturity and its pattern of cash flows.

BCD's $1,000 par value bonds currently sell for $798.50.The coupon rate is 10%,paid semiannually.If the bonds have five years before maturity,what is the yield to maturity or expected rate of return?

Garvin,Inc.'s bonds have a par value of $1,000.The bonds pay semiannual interest of $40 and mature in five years. a.How much would you pay for Garvin bonds if your required rate of return is 10%? b.How much would you pay if your required rate of return is 8%?

Which of the following statements is true?

The better the bond rating,the lower the rate of return demanded in the capital markets.