Question 1

Marshall Manufacturing has a bond outstanding that was issued 20 years ago at a coupon rate of 9%.The $1,000 face value bond pays interest semiannually and was originally issued with a term of 30 years.If today's interest rate is 14%,what is the value of the bond today?

Accepted Answer

The answer of Marshall Manufacturing has a bond outstanding that...

Question 2

Blue's Chips Inc.has a $1,000 face value bond that is currently selling for $1,300.It has an annual coupon rate of 7%,paid semiannually,and has nine years remaining until maturity.What is the annual yield to maturity on the bond? (Round to the nearest whole percentage. )

Accepted Answer

The answer of Blue's Chips Inc.has a $1,000 face value...

Question 3

You purchased Photon,Inc.bonds exactly one year ago today for $875.During the latest year,you received $65 in interest on the bonds.The current yield on these bonds is 6.5%.

Accepted Answer

If the current yield on the bonds is 6.5%, that means the interest rate on the bonds is 6.5% of their current market value, not their original purchase price. Without knowing the current market value of the bonds, we cannot determine whether the $65 in interest received over the past year represents a 6.5% yield.

Question 4

A basis point is equal to one hundredth of a percentage point.

Accepted Answer

This is true. One basis point is equivalent to 0.01% or one hundredth of a percentage point.

Question 5

The higher the bond rating,the more default risk associated with the bond.

Accepted Answer

This statement is false. The higher the bond rating, the less default risk associated with the bond. Bond ratings are assigned based on the creditworthiness of the issuer, and a higher rating indicates a lower risk of default.

Question 6

You paid $865.50 for a corporate bond that has a 6.75% coupon rate.What is the bond's current yield?

Accepted Answer

The current yield is calculated by dividing the annual interest payment by the bond's market price.

Annual interest payment = Coupon rate × Face value = 6.75% × $1000 = $67.50

Market price = $865.50

Current yield = Annual interest payment / Market price = $67.50 / $865.50 ≈ 0.078 or 7.800%

Therefore, the answer is choice B.

Question 7

The longer the time to maturity,the more sensitive a bond's price to changes in market interest rates.

Accepted Answer

This is because with a longer maturity, there is a higher possibility that interest rates will change multiple times during the life of the bond, increasing its sensitivity to market interest rate changes.

Question 8

Dry Seal plans to issue bonds to expand operations.The bonds will have a face value of $1,000,a 10-year maturity,and a coupon interest rate of 9%,paid semiannually.Current market conditions are such that the bonds will be sold to net $937.79.The yield-to-maturity of these bonds is 10%.

Accepted Answer

The bond is being sold at a discount because the market yield is higher than the coupon rate. Therefore, the yield-to-maturity is higher than the coupon rate (10% vs 9%).

Question 9

When a bond's coupon rate is higher than the required rate of return,the bond

Accepted Answer

A bond's coupon rate determines the amount of interest payments it makes to bondholders. If the coupon rate is higher than the required rate of return, this means the bond is paying more in interest than what investors require to hold the bond. As a result, investors may be willing to pay more than the face value of the bond (a premium) in order to receive the higher interest payments.

Question 10

A $1,000 face value bond with a 12% coupon rate currently selling for $825 has a current yield of

Accepted Answer

Current yield = Annual interest payment / Current market price 
Annual interest payment = $1,000 * 12% = $120 
Current yield = $120 / $825 = 0.1455 or 14.55%

Question 11

Miller Motorworks has a $1,000 face value,8% annual coupon bond with interest payable semiannually with a remaining term of 15 years.The annual market yield on similar bonds is 6%.This bond will at a discount from par.

Accepted Answer

Since the annual market yield (also known as the yield to maturity) is less than the coupon rate of the bond (6%<8%), the bond will be sold at a premium rather than a discount from par.

Question 12

A bond issued by Pomme Computers has a coupon rate of #5 paid semi-annually.If the market's required rate of return on this bond is also 3%,the bond will sell at face value.

Accepted Answer

The bond will sell at face value if the market's required rate of return is equal to the bond's coupon rate.

Question 13

A bond's value equals the present value of interest and principal the owner will receive.

Accepted Answer

The value of a bond represents the present value of future cash flows (interest and principal) that a bondholder expects to receive from the issuer of the bond.

Question 14

You are considering the purchase of Hytec bonds that were issued 14 years ago.When the bonds were originally sold,they had a 30-year maturity and a 14.375% coupon interest rate that is payable semiannually.The bond is currently selling for $1,508.72.What is the yield to maturity on the bonds?

Accepted Answer

The yield to maturity (YTM) on a bond is the interest rate that equates the present value of all future cash flows from the bond (coupon payments and principal repayment) with its current price. Given that the bond's price is above its par value, we can infer that the current interest rate environment is lower than when the bond was issued, hence the YTM must be lower than the original coupon rate of 14.375%. Among the given options, 8.50% is the only rate that is lower than the original coupon rate and plausible given the bond's premium price, indicating that investors require less return for holding the bond now compared to when it was issued.

Question 15

A bond's "spread" refers to the difference between its Moody's rating and its Standard & Poor's rating.

Accepted Answer

A bond's spread refers to the difference in yields between two types of bonds, such as between two corporate bonds or between a corporate bond and a government bond. The bond's credit rating may play a role in determining its yield, but it is not the sole factor.

Question 16

Aurand,Inc.has outstanding bonds with an 8% annual coupon rate paid semiannually.The bonds have a face value of $1,000,a current price of $904,and will mature in 14 years.What is the annual yield to maturity on the bond?

Accepted Answer

Step 1: Calculate the semi-annual coupon payment:
Coupon payment = Face Value * Coupon Rate/2
Coupon payment = $1,000 * 8%/2= $40

Step 2: Calculate the number of semi-annual periods:
Number of periods = 14 years * 2 = 28

Step 3: Calculate the semi-annual yield to maturity using the bond pricing formula:
Price = Coupon payment * (1-1/(1+y)^n)/y + Face value/(1+y)^n
Where y is the semi-annual yield to maturity and n is the number of semi-annual periods.

Plugging in the numbers,
$904 = $40 * (1-1/(1+y)^28)/y + $1,000/(1+y)^28

We need to solve for y using trial and error or a financial calculator. The answer is approximately 4.62%.

Step 4: Convert the semi-annual yield to an annual yield by doubling it:
Annual yield = 2 * Semi-annual yield = 2 * 4.62% = 9.24%

Therefore, the annual yield to maturity on the bond is 9.24%, which is closest to option (C) 9.24%.

Question 17

Generic,Inc.has bonds outstanding that mature in 20 years.The bonds have $1,000 face value,pay interest annually at a rate of 10%,and have a current selling price of $875.25.The current yield on the bonds is 11.63%.

Accepted Answer

The current yield is calculated by dividing the annual interest payment by the current price of the bond. In this case, the annual interest payment is $100 ($1,000 face value x 10% interest rate) and the current price is $875.25. Therefore, the current yield is 11.43% ($100 / $875.25). The statement is false because it claims the current yield is 11.63%, which is incorrect.

Question 18

Lambda Co.has bonds outstanding that mature in 10 years.The bonds have $1,000 face value,pay interest annually at a rate of 9%,and have a current selling price of $1,125.The yield to maturity on the bonds is less than 9%.

Accepted Answer

The fact that the bonds are selling at a price above their face value ($1,125 > $1,000) indicates that the market interest rate is lower than the coupon rate of 9%. This means that the yield to maturity (which takes into account the present value of all future cash flows, including the annual interest payments and the final face value payment at maturity) is lower than 9%. Therefore, the statement is true.

Question 19

A AAA rated bond's yield to maturity will be very close to its expected yield.

Accepted Answer

AAA rated bonds have a very low risk of default, making their yield to maturity very close to their expected yield.

Question 20

A $1,000 face value bond is currently listed as selling at 92 1/8.This means

Accepted Answer

The bond is selling at 92 1/8 of its face value of $1,000. To calculate the price, we need to convert 1/8 to a decimal, which is 0.125. Therefore, 92 1/8 is 92.125% of the face value. To find the price, we multiply the face value by the percentage: $1,000 x 0.92125 = $921.25, which is the price at which the bond is currently selling.

Quiz 9: Debt Valuation and Interest Rates