FIN CH 8

3. A bond with a $1,000 par value has an 8 percent annual coupon rate. It will mature in 4 years, and annual coupon payments are made at the end of each year. Present annual yields on similar bonds are 6 percent. What should be the current price?

$1,069.31

74. A $1,000 par value bond, paying $50 semiannually, with an 8 percent yield to maturity and five years remaining to maturity should sell for

$1,081.11.

40. Morgan would like to purchase a bond that has a par value of $1,000, pays $80 at the end of each year in coupon payments, and has 10 years remaining until maturity. If the prevailing annualized yield on other bonds with similar characteristics is 6 percent, how much will Morgan pay for the bond?

$1,147.20

71. Stephanie would like to purchase a bond that has a par value of $1,000, pays $80 at the end of each year in coupon payments, and has ten years remaining until maturity. If the prevailing annualized yield on other bonds with similar characteristics is 6 percent, how much will Stephanie pay for the bond?

$1,147.20

42. Hurricane Corp. recently purchased corporate bonds in the secondary market with a par value of $11 million, a coupon rate of 12 percent (with annual coupon payments), and four years until maturity. If Bullock intends to sell the bonds in two years and expects investors' required rate of return at that time on similar investments to be 14 percent at that time, what is the expected market value of the bonds in two years?

$10.64 million

24. A bank buys bonds with a par value of $25 million for $24,040,000. The coupon rate is 10 percent, and the bonds pay annual payments. The bonds mature in four years. The bank wants to sell them in two years, and estimates the required rate of return in two years will be 8 percent. What will the market value of the bonds be in two years?

$25,891,632

12. Zero coupon bonds with a par value of $1,000,000 have a maturity of 10 years, and a required rate of return of 9 percent. What is the current price?

$422,400

22. An insurance company purchases corporate bonds in the secondary market with six years to maturity. Total par value is $55 million. The coupon rate is 11 percent, with annual interest payments. If the expected required rate of return in 4 years is 9 percent, what will the market value of the bonds be then?

$56,935,022

72. Julia just purchased a $1,000 par value bond with a 10 percent annual coupon rate and a life of twenty years. The bond has four years remaining until maturity, and the yield to maturity is 12 percent. How much did Julia pay for the bond?

$939.25

4. A bond with a ten percent coupon rate bond pays interest semi-annually. Par value is $1,000. The bond has three years to maturity. The investors' required rate of return is 12 percent. What is the present value of the bond?

$951

19. Assume that the price of a $1,000 zero coupon bond with five years to maturity is $567 when the required rate of return is 12 percent. If the required rate of return suddenly changes to 15 percent, what is the price elasticity of the bond?

.494

78. The required rate of return on a certain bond changes from 12 percent to 8 percent, causing the price of the bond to change from $900 to $1,100. The bond price elasticity of this bond is

0.67.

77. Because of a change in the required rate of return from 11 percent to 13 percent, the bond price of a zero-coupon bond will fall from $1,000 to $860. Thus, the bond price elasticity for this bond is

0.77.

44. Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to maturity, and a 10 percent yield to maturity. The modified duration of this bond is

1.73 years.

79. Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to maturity, and a 10 percent yield to maturity. The duration of this bond is ____ years.

1.90

43. Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to maturity, and a 10 percent yield to maturity. The duration of this bond is

1.90 years.

23. A $1,000 par bond with five years to maturity is currently priced at $892. Annual interest payments are $90. What is the yield to maturity?

12 percent

41. Sioux Financial Corp. has forecasted its bond portfolio value for one year ahead to be $105 million. In one year, it expects to receive $10,000,000 in coupon payments. The bond portfolio today is worth $101 million. What is the forecasted return of this bond portfolio?

13.86 percent

80. A bond has a $1,000 par value and an 8 percent coupon rate. The bond has four years remaining to maturity and a 10 percent yield to maturity. This bond's modified duration is ____ years.

3.24

5. A bond with a 12 percent quarterly coupon rate has a yield to maturity of 16 percent. The bond has a par value of $1,000 and matures in 20 years. Based on this information, a fair price of this bond is $____.

761

84. Which of the following is not a factor affecting the market price of a foreign bond held by a U.S. investor?

All of the above are factors affecting the market price of a foreign bond.

76. An economic announcement signaling ____ economic growth in the future will probably cause bond prices to ____.

Answers C and D are correct.

70. Which of the following formulas best describes the value of a bond?

PV of Bond= C/(1+k)^1+ C/(1+k)^2+ C+Par/(1+k)^x

73. To determine the present value of a bond that pays semiannual interest, which of the following adjustments should not be made to compute the price of the bond?

The par value should be split in half.

50. Which of the following is most likely to cause a decrease in bond prices?

a decrease in money supply growth and an increase in the demand for loanable funds

31. Consider a coupon bond that sold at par value two years ago. If interest rates are much lower now than when this bond was issued, the coupon rate of that bond will likely be ____ the prevailing interest rates, and the present value of the bonds will be ____ its par value.

above; above

48. With a(n) ____ strategy, funds are allocated to bonds with a short term to maturity and bonds with a long term to maturity. Thus, this strategy allocates some funds to achieving a relatively high return and other funds to covering liquidity needs.

barbell

82. In the ____ strategy, funds are allocated to bonds with a short term to maturity and bonds with a long term to maturity.

barbell

32. Consider a coupon bond that sold at par value two years ago. If interest rates are much higher now than when this bond was issued, the coupon rate of that bond will likely be ____ the prevailing interest rates, and the present value of the bonds will be ____ its par value.

below; below

27. As interest rates consistently rise over a specific period, the market price of a bond you own would likely ____ over this period. (Assume no major change in the bond's default risk.)

consistently decrease

28. As interest rates consistently decline over a specific period, the market price of a bond you own would likely ____ over this period. (Assume no major change in the bond's default risk.)

consistently increase

45. The relationship reflecting the actual response of a bond's price to a change in bond yields is

convex.

14. As interest rates increase, long-term bond prices

decrease by a greater degree than short-term bond prices.

33. If bond portfolio managers expect interest rates to increase in the future, they would likely ____ their holdings of bonds now, which could cause the prices of bonds to ____ as a result of their actions.

decrease; decrease

30. If analysts expect that the demand for loanable funds will decrease, and the supply of loanable funds will increase, they would most likely expect interest rates to ____ and prices of existing bonds to ____.

decrease; increase

52. Assume bond portfolio managers actively manage their portfolios. If they expect interest rates to ____, they would shift toward ____.

decrease; long-maturity bonds with zero-coupon rates

51. If the Treasury issues an unusually large amount of bonds in the primary market, it places ____ on bond prices, and ____ on yields to be earned by investors that purchase bonds and plan to hold them to maturity.

downward pressure; upward pressure

2. The valuation of bonds is generally perceived to be ____ the valuation of equity securities.

easier than

13. If the coupon rate ____ the required rate of return, the price of a bond ____ par value.

equals; equals

11. For a given par value of a bond, the higher the investor's required rate of return is above the coupon rate, the

greater is the discount on the price.

26. Assume that the value of liabilities equals that of earning assets. If asset portfolio durations are ____ than liability portfolio durations, then the market value of assets are ____ interest-rate sensitive than the market value of liabilities.

greater; more

6. From the perspective of investing institutions, the most attractive foreign bonds offer a ____ and are denominated in a currency that ____ over the investment horizon.

high yield; appreciates

7. The value of ____-risk securities will be relatively ____.

high; low

36. If the United States announces that it will borrow an additional $10 billion, this announcement will normally cause the bond traders to expect

higher interest rates in the future, and will sell bonds now.

29. If analysts expect that the demand for loanable funds will increase, and the supply of loanable funds will decrease, they would most likely expect interest rates to ____ and prices of existing bonds to ____.

increase; decrease

16. A(n) ____ in the expected level of inflation results in ____ pressure on bond prices.

increase; downward

18. An expected ____ in economic growth places ____ pressure on bond prices.

increase; downward

34. If bond portfolio managers expect interest rates to decrease in the future, they would likely ____ their holdings of bonds now, which could cause the prices of bonds to ____ as a result of their actions.

increase; increase

10. When financial institutions expect interest rates to ____, they may ____.

increase; sell bonds and buy short-term securities

46. If the level of inflation is expected to ____, there will be ____ pressure on interest rates and ____ pressure on the required rate of return on bonds.

increase; upward; upward

75. If the level of inflation is expected to ____, there will be ____ pressure on interest rates and ____ pressure on the required rate of return on bonds.

increase; upward; upward

47. Using a(n) ____ strategy, investors allocate funds evenly to bonds in each of several different maturity classes.

laddered

83. Using a(n) ____ strategy, investors allocate funds evenly to bonds in each of several different maturity classes.

laddered

25. The price of short-term bonds are commonly ____ those of long-term bonds.

less volatile than

49. Which of the following bonds is most susceptible to interest rate risk from an investor's perspective?

long-term, zero-coupon

39. When two securities have the same expected cash flows, the value of the ____ security will be higher than the value of the ____ security.

low-risk; high-risk

21. The prices of ____-coupon and ____ maturities are most sensitive to changes in the required rate of return.

low; long

38. The bonds that are most sensitive to interest rate movements have

no coupon and a long-term maturity.

81. If investors rely strictly on modified duration to estimate the percentage change in the price of a bond, they will tend to ____ the price decline associated with an increase in rates and ____ the price increase associated with a decrease in rates.

overestimate; underestimate

35. Which of the following will most likely cause bond prices to increase? (Assume no possibility of higher inflation in the future.)

reduced Treasury borrowing along with anticipation that money supply growth will increase

8. The larger the investor's ____ relative to the ____, the larger the ____ of a bond with a particular par value.

required rate of return; discount rate; discount

9. If the coupon rate equals the required rate of return, the price of the bond

should be equal to its par value.

37. The market value of long-term bonds is ____ sensitive to interest rate movements; as interest rates fall, the market value of long-term bonds ____.

very; rises

1. The appropriate discount rate for valuing any bond is the

yield that could be earned on alternative investments with similar risk and maturity.

15. The prices of bonds with ____ are most sensitive to interest rate movements.

zero coupon payments

20. If a financial institution's bond portfolio contains a relatively large portion of ____, it will be ____.

zero or low coupon bonds; more favorably affected by declining interest rates