Module 4 Finance

A bond will sell at a premium if its required return or discount rate is greater than its coupon rate.

FALSE

A bond will sell at a premium if its required return or discount rate is higher than its coupon rate.

FALSE

As market rates of interest​ rise, investors move their funds into​ bonds, thus increasing their price and lowering their yield.

FALSE

If a bond's rating declines, the interest rate demanded by investors, called the required return, also decreases.

FALSE

The Wall Street Journal bond quotes indicate that the net close for a bond with a $1,000 par value is 98.75 . The closing price for that bond was $1,000

FALSE

The risk of having a bond issuer request the bond back from the bondholder thus forcing the bondholder to reinvest the proceeds at a lower interest rate is called:

call risk

The risk of having a bond issuer request the bond back from the bondholder thus forcing the bondholders reinvest the proceeds at a lower interest rate is called:

call risk

The yield to maturity on long-term bonds

is equal to the current yield if the bond is selling for face value

What is meant by Par Value?

is the issue value of the bond and the value which is paid at maturity

What is a coupon rate and what does it represent?

is the percentage of par value of the bond that will be paid periodically in the form of interest and it represents the interest that will be paid

Explain how periodic interest payments determined with a bond?

it is determined by the type of bond, interest rate, market rate, and the length of time until maturity

What is yield to maturity on a bond?

it is the annual expected return on a bond if it is held until maturity

why would your selection be more risky?

it will be more risky because they have no collateral therefore they pay relatively high interest rates to make up for the high default risk

Which type of bond would be used to build a drainage system in a city?

municipal bonds voted by citizens

As interest rates, and consequently investors' required rates of return, change over time the ________ of outstanding bonds will change as a result.

price

In actual practice, most bonds pay coupon interest:

semi-annually

The interest on corporate bonds is typically paid

semiannually

Which of the following is true of a zero coupon bond?

the bond makes no coupon payments

Andre owns a corporate bond with a coupon rate of​ 8% that matures in 10 years. Ruth owns a corporate bond with a coupon rate of​ 12% that matures in 25 years. If interest rates go​ down, then

the value of both bonds will increase.

In 2000 Jenson Inc. issued bonds with an 8 percent coupon rate and a​ $1,000 face value. The bonds mature on March​ 1, 2025. If an investor purchased one of these bonds on March​ 1, 2012, determine the yield to maturity if the investor paid​ $1,100 for the bond.

7%

Which feature determines the cash flows associated with a​ bond?

Coupon interest rates

Long-term bonds have greater interest rate risk than shorter-term bond

FALSE

Other things held​ equal, a bond with a call provision is worth more to investors than a bond without a call provision.

FALSE

Preferred stock is an equity security that has a senior claim to the firm's earnings and assets over bonds.

FALSE

The current yield is greater than the coupon rate for a bond selling above par value.

FALSE

What is meant by current yield on a bond?

The interest rate on a bond pays that is expressed as a percentage of its market price

All of the following represent bonds secured by real assets except a (n):

debenture

All of the following represent bonds secured by real assets except:

debenture

Which of the following bond types would describe unsecured obligations?

debenture bonds

If the market price of a bond decreases, then

the yield to maturity increases

Why might a firm want to maintain a high bond credit rating?

they developed a high bond rating by being financially stable, well managed, and are likely to draw insitutional and individual investors

Bonds rated higher than BB+ by Standard & Poors and Fitch are considered to be investment grade issues.

true

Put the following in order of their claim on assets of a​ firm, starting with the LAST to have a​ claim: A. Subordinated debentures B. Debentures​ (unsubordinated) C. Common Stock D. Preferred stock

​C, D,​ A, B

A bond with $1000 par value, semi-annual coupon rate of 8%, YTM of 9% that matures in 5.5 years. What if the previous bond matures in 20 years?

$ -957.36 $-907.99

What is the value of the bond to you? • Assume that the interest is paid annually Assume that the interest is paid semiannually

$-1,075.77 $-1,076.58

A bond with a 10% annual coupon rate, YTM of 6% that matures in 10 years?

$-1,294.40

A bond with a 6% quarterly coupon payment, YTM of 8% that matures in 9 years.

$-872.56

if the market interest rates rise

short-term bonds will decline in value more than long-term bonds.

Which carries more risk. Debenture or subordinate debenture bonds?

subordinate debenture bonds pay the highest coupon rates. because they are riskier than any other type

`Which of the following affect an​ asset's value to an​ investor? I. Amount of an​ asset's expected cash flow II. The riskiness of the cash flows III. Timing of an​ asset's cash flows IV.​ Investor's required rate of return

I,II,III,IV

Bondholders have priority claims over equity holders to a firm's assets and cash flows.

TRUE

Allstate Insurance issued callable bonds. The bonds are most likely to be called if

interest rates decrease

Progressive Corporation issued callable bonds. The bonds are most likely to be called if

interest rates decrease

The largest annual supply of external funds for business corporations comes from issuance of which one of the following sources?

bonds

Bellingham bonds have an annual coupon rate of 8 percent and a par value of $1,000 and will mature in 20 years. If you require a return of 7 percent, what price would you be willing to pay for the bond? What happens to your return if you pay more for the bond? What happens to your return if you pay less for the bond?

$-1,105.94 fall rise

The Latham Corporation is planning on issuing bonds that pay no interest but can be converted into $1,000 at maturity, 7 years from their purchase. To price these bonds competitively with other bonds of equal risk, it is determined that they should yield 6 percent, compounded annually. At what price should the Latham Corporation sell these bonds?

$-665.06

Flora Co.'s bonds, maturing in 7 years, pay 4 percent interest on a $1,000 face value. However, interest is paid semiannually. If your required rate of return is 5 percent, A. what is the value of the bond? How would your answer change if the interest were paid annually?

$-941.55 $-942.14

What is the value of a bond that matures in 5 years, has an annual coupon payment of $110, and a par value of $1,000

$1,090.58

Hamilton, Inc. bonds have a coupon rate of 15 percent. The interest is paid​ semiannually, and the bonds mature in 12 years. Their par value is ​$1,000. If your required rate of return is 12 ​percent, what is the value of the​ bond? What is the value if the interest is paid​ annually? If the interest is paid​ annually, the value of the bond is

$1,185.83

Hamilton, Inc. bonds have a coupon rate of 15 percent. The interest is paid​ semiannually, and the bonds mature in 12 years. Their par value is ​$1,000. If your required rate of return is 12 ​percent, what is the value of the​ bond? What is the value if the interest is paid​ annually? If the interest is paid​ semiannually, the value of the bond is

$1,188.26

Assume that Bunch Inc. has an issue of 18−year ​$1,000 par value bonds that pay​ 7% interest, annually. Further assume that​ today's required rate of return on these bonds is​ 5%. How much would these bonds sell for​ today? Round off to the nearest​ $1.

$1,233.79

What is the value of a bond that has a par value of $1000, a coupon of $120 annually, and matures in 10 years?`

$1,349.45

Your parents have discovered a $5,000 bond at the bottom of their safe deposit box. The bond was given to you by your late great-aunt Hilda on your second birthday and set up an account for you. The bond pays an annual interest rate of 6 percent. Interest is paid into the account that was set up for you. You are now 27 years old and the bond has redeemed. What is the total value of the account after the bond has redeemed and principal paid?

$12,500

Johnson and Johnson have issued out new 20 year bonds paying a coupon rate of 5% paying semi-annual interest. If you invested $10,000 in buying these bonds, how much money would you receive each time the bond paid its interest?

$250

A bond issued by Liberty, Inc. 10 years ago has a coupon rate of 6.5 % and a face value of $1,000. The bond will mature in 15 years. What is the value to an investor with a required return of 12.5%?

$602.03

You own a 10​-year, ​$1,000 par value bond paying 6 percent interest annually. The market price of the bond is ​$925​, and your required rate of return is 9 percent. What is the value of the bond to​ you, given your 9 percent required rate of​ return?

$807.47

An Avery Dennison bond that makes semi-annual coupon payments that matures in 14 years. The coupon rate is 6.5%. If you wanted to find a bond that would give you an expected return of 8%, how much should you pay for the bond?

$875

You are considering buying a 10-year 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?

$875.39

An O'Reilly Automotive bond maturing in 10 years pays $80 each year (including year 10) and $1,000 upon maturity. Assuming 10 percent to be the appropriate discount rate, the present value of the bond is

$877.11

A $1,000 par value 14-year bond with a 10 percent coupon rate recently sold for $965. The yield to maturity is

10.49%

A corporate bond has a coupon rate of 9%, a face value of $1,000, a market price of $850, and the bond matures in 15 years. Therefore, the bond's yield to maturity is

11.1%

What is the expected rate of return on a bond that matures in 5 years, has a par value of $1,000, a coupon rate of 11.5%, and is currently selling for $982? Assume annual coupon payments.

12.0%

Microsoft issued 20-year bond three years ago at a coupon rate of 3.25% paying semi-annual interest payments. If these bonds were priced at $976, what is the yield to maturity?

3.44%

Use the information below. Assume semi-annual coupon payment and par value of $1,000. Assume today is 4.1.2018 Note maturity date. ISSUER COUPON MATURITY S&P LAST PRICE Apple 3.5 4.1.2025 AA+ 965.00 What is the current yield for the Apple bond?

3.63

Messenger, Inc. bonds have a 4% coupon rate with semiannual coupon payments and a $1,000 par value. The bonds have 11 years until maturity, and sell for $925. What is the current yield for Messenger's bonds?

4.32%

Use the information below. Assume semi-annual coupon payment and par value of $1,000. Assume today is 4.1.2018 Note maturity date. ISSUER COUPON MATURITY S&P LAST PRICE Advanced Auto Parts 6.50 4.1.2025 BBB- 1,105.00 What is the Yield to Maturity for Advanced Auto Parts bonds? Enter as XX.X

4.72

Cooper Companies bonds are currently priced at $1,088. They have 12 years to maturity. They pay an annual coupon rate of 6%. What is the yield to maturity on this bond?

5.0%

Deere & Co. issued bonds that have an annual coupon rate of 6.5%. The present market value of the bonds is $1,225. If the bonds have 17 years remaining until maturity, what is the current yield on Deere & Co. bonds?

5.3%

What is the yield to maturity of a corporate bond with 13 years to maturity, a coupon rate of 8% per year, a $1,000 par value, and a current market price of $1,250? Assume semiannual coupon payments.

5.3%

A Procter and Gamble bond has outstanding with 12 years remaining to maturity, a coupon rate of 4.5 %, and semi-annual payments. If the current market price of the bond is $902.30, what is the yield to maturity?

5.6%

Use the information below. Assume semi-annual coupon payment and par value of $1,000. Assume today is 4.1.2018 Note maturity date. ISSUER COUPON MATURITY S&P LAST PRICE Advanced Auto Parts 6.50 4.1.2025 BBB- 1,105.00 What is the current yield for the Advanced Auto Parts bond? Enter answer as XX.X

5.88

NetApp Corporation issued bonds on January 1, 2006. The bonds had a coupon rate of 5.5%, with interest paid semiannually. The face value of the bonds is $1,000 and the bonds mature on January 1, 2021. What is the yield to maturity for a NetApp Corporation bond on January 1, 2012 if the market price of the bond on that date is $950?

6.23%

ExxonMobil 20-year bonds pay a coupon rate of 6 % interest annually on a $1,000 par value. If the bonds sell at $945, what is the bonds' expected rate of return?

6.50%

Xerox issued bonds that pay $67.50 in interest each year and will mature in 5 years. You are thinking about purchasing the bonds. You have decided that you would need to receive a 5 percent return on your investment. • What is the coupon rate?

6.75%

​(Bond valuation​) You own a 10​-year, ​$1,000 par value bond paying 6 percent interest annually. The market price of the bond is ​$925​, and your required rate of return is 9 percent. a. Compute the​ bond's expected rate of return. What is the expected rate of return of the 10​-year, ​$1,000 par value bond paying 6 percent interest annually if its market price is ​$925​?

7.07%

FYI bonds have a par value of $1,000. The bonds pay $40 in interest every six months and will mature in 10 years. • Calculate the price if the yield to maturity on the bonds is 7, 8, and 9 percent, respectively. • Explain the impact on price if the required rate of return decreases.

7: $1,071.06 8: $1,000.00 9: $934.96

Compute the coupon rate on the bonds. How does the relationship between the coupon rate and the yield to maturity determine how a bond's price will compare to it par value? The bond price will increase The coupon rate equals the yield at par value.

8%

You own a 20-year, $1,000 par value bond with a coupon rate of 7 % annually. The market price of the bond is $875, and your required rate of return is 10 %. • Compute the bond's expected rate of return. Determine the value of the bond to you, given your required rate of return.

8.30% $-744.59

Assuming a Ingersoll-Rand bond has a coupon rate of 6 %, pays semi-annual interest payments, and has twelve years to maturity. If investors are willing to accept a 8% rate of return on bonds of similar quality, what is the value of the Ingersoll-Rand?

847.53

Assuming a A.O. Smith bond has a coupon rate of 8.5%, pays semi-annual interest payments, and has eight years to maturity. If investors are willing to accept a 10% rate of return on bonds of similar quality, what is the value of this bond?

918.72

A corporate bond has a coupon rate of 9%, a face value of $1,000, and matures in 15 years. Which of the following statements is MOST correct?

An investor who buys the bond for $900 will have a yield to maturity on the bond greater than 9%.

How does the bond rating affect a high bond credit rating?

Bond rating determine the interest rates that bondholders are entitled to recieve

which of the following statements concerning bonds and risk is true?

Bonds are generally less risky than common stock because of the preference for debt over equity in the event of bankruptcy and liquidation

Which of the following statements concerning bonds and risk is​ true?

Bonds are generally less risky than common stock because of the preference for debt over equity in the event of bankruptcy and liquidation.

Is an investment portfolio explain how bonds diversify the portfolio

Bonds diversify the portfolio by spreading investments across different asset classes and industries to reduce the risk of an investment

Is par value the same as market value?

No, par value is the assigned value that an issuer gives to a security and market value is the price that a security is worth

William Corp. bonds have a current yield of 7% and mature in 10 years. Smith Corp. bonds have a current yield of 5% and mature in 10 years. Given this information, which of the following statements is MOST correct?

If both bonds have the same yield to maturity, then the price of Smith Corp. bonds must be less than the price of William Corp. bonds.

The three types of risk faced by investors in domestic bonds include all of the following EXCEPT:

NOT CREDIT RISK

All other things being equal, A bond's value will be above its maturity value of $1,000 if it pays interest of $ 70 per year and investors require a rate of return that is:

NOT exactly 7%

is the term for the principal amount that the issuer is obligated to repay at maturity.

Par value

As interest​ rates, and consequently​ investors' required rates of​ return, change over time the​ ________ of outstanding bonds will change as a result.

Price

A bond with a par value of​ $1,000 is listed in the Wall Street Journal at a price of 100.50. This bond is selling for​ $1,005.

TRUE

Bonds rated higher than BB+ by standard and poor fitch are considered to be investment grade issues

TRUE

If a bond sells for its par value, the coupon interest rate and yield to maturity are equal.

TRUE

Junk bonds are also called high yield bonds

TRUE

Which of the following is true of a zero coupon bond?

The bond makes no coupon payments

Which of the following is true of a zero coupon​ bond?

The bond makes no coupon payments.

Which of the following gives the bond issuer the right to redeem or repurchase a bond issue before its maturity​ date?

The call provision

Assume you have a bond with a​ semi-annual interest payment of ​$45​, a par value of ​$1,000​, and a current market price of ​$850. What is the current yield of the​ bond?

The current yield of the bond is 10.59%

The Latham Corporation is planning on issuing bonds that pay no interest but can be converted into ​$1,000 at​ maturity, 5 years from their purchase. To price these bonds competitively with other bonds of equal​ risk, it is determined that they should yield 8 ​percent, compounded annually. At what price should the Latham Corporation sell these​ bonds?

The price of the Latham Corporation bonds should be ​$680.58

Will a company with a AAA bond rating pay higher interest rate on its bonds than a company with BBB rating? Why or why not?

This is true a company with AAA bond rating pays a higher interest rate on than a company with BBB rating because the AAA bond has the highest rating

Why do companies issue bonds?

To raise money for Capital Construction or product development projects

You own a 10​-year, ​$1,000 par value bond paying 6 percent interest annually. The market price of the bond is ​$925​, and your required rate of return is 9 percent. Should you sell the bond or continue to own​ it?

You should sell the bond because the​ bond's yield to maturity is lower than your expected rate of return and thus it is overvalued.

Zenith​ Co.'s bonds mature in 15 years and pay 8 percent interest annually. If you purchase the bonds for ​$1,100​, what is your expected rate of​ return?

Your expected rate of return is 6.91%

an example of an asset that is unsecured is

a bond backed by credit card recievables

what is the definition of a bond?

a contract to loan money to a corporation and earn interest on a fixed schedule in return

A bond that is selling below par value is referred to as what kind of bond?

a discount bond

What is the main advantage of owning bonds over stock in a firm?

a priority claim on the firms cash flows and assets

Time Warner has bonds that are selling for $716. The coupon interest rate on the bonds is 10.45 percent and they mature in 16 years. What is the yield to maturity on the​ bonds? What is the current​ yield?

a. The yield to maturity on the bond is 15.29%. ​ Part 2 b. The current yield is 14.59%. ​

When the market interest rate is above the coupon rate for a particular quality of bond, the bond will be priced:

at its par value

You want to invest in bonds. Explain whether or not each provision listed will make the bonds more or less desirable as an investment:

credit rating

In the present value bond valuation model, risk is generally incorporated into the

discount rate or required return

Which of the following is NOT one of the important features of a​ bond?

dividend

Which of the following risks would not be faced by investors in domestic bonds?

exchange rate risk

What factors determine a bond rating and why is it important

factors determine a bond rating including yield, company assets, finnancial risk, industry risk, and rules governing the securities

A bond with a coupon rate of 4% and a discount rate of 6% will pay $60 in interest each year.

false

If a bond's rating declines, the interest rate demanded by investors, called the required return, also decreases.

false

Which of the following is not an advantage of owning debt securities?

highest return of corporate securities

Progressive corporation issued callable bonds. The bonds are most likely to be called if

interest rates decrease

A bond will sell at a premium (above par value) if

investor's current required rate of return is below the coupon rate of the bond