test #2

A debenture is:

an unsecured bond.

Which one of the following bonds is the most sensitive to changes in market interest rates?

10-year, zero coupon

Whitts BBQ would like to issue some 10-year, semiannual coupon bonds at par. Comparable bonds have a current yield of 9.16 percent, an effective annual yield of 9.68 percent, and a yield to maturity of 9.50 percent. What coupon rate should Whitts BBQ set on its bonds?

9.50 percent

A U.S. Treasury bond pays 3.05 percent interest. You are in the 28 percent marginal tax bracket. What is your after tax yield on this bond?

After tax yield = .0305 ×(1 -.28) = .0220, or 2.20 percent

A corporate bond pays 6.65 percent interest. How much would a municipal bond have to pay to be equivalent to this on an after tax basis if you are in the 25 marginal percent tax bracket?

After tax yield = .0665 ×(1 -.25) = .0499, or 4.99 percent

Which statement is true?

An indenture is a contract between a bond's issuer and its holders.

This morning, Jeff found an aged bond certificate lying on the street. He picked it up and noticed that it was a 50-year bond that matured today. He presented the bond to the bank teller at his local bank and received payment for both the entire principal and the final interest payment. The bond that Jeff found must have been which one of the following?

Bearer-form bond

Barnes Enterprises has bonds on the market making annual payments, with 17 years to maturity, a par value of $1,000, and a price of $956. At this price, the bonds yield 9.1 percent. What must the coupon rate be on the bonds?

C = $85.82 Coupon rate = $85.82 / $1,000 Coupon rate = .0858, or 8.58%

Which one of the following types of bonds permits its issuer to forego paying interest payments if certain natural events cause significant losses?

CAT

A $1,000 face value bond is currently quoted at 100.8. The bond pays semiannual payments of $22.50 each and matures in six years. What is the coupon rate?

Coupon rate = ($22.50 ×2)/$1,000 = .0450, or 4.50 percent

What is the principal amount of a bond that is repaid at the end of the loan term called?

Face value

Which one of the following terms applies to a junk bond that was originally issued with a bond rating of AA?

Fallen angel

Barnes Enterprises has bonds on the market making annual payments, with 15 years to maturity, a par value of $1,000, and a price of $971. At this price, the bonds yield 8.3 percent. What must the coupon rate be on the bonds?

Here we need to find the coupon rate of the bond. All we need to do is to set up the bond pricing equation and solve for the coupon payment as follows: P = $971 = C(PVIFA8.3%,15) + $1,000(PVIF8.3%,15) Solving for the coupon payment, we get: C = $79.55 The coupon rate is the coupon payment divided by par value. Using this relationship, we get: Coupon rate = $79.55 / $1,000 Coupon rate = .0795, or 7.95%

Stein Co. issued 17-year bonds two years ago at a coupon rate of 8.6 percent. The bonds make semiannual payments. If these bonds currently sell for 110 percent of par value, what is the YTM?

Here, we are finding the YTM of a semiannual coupon bond. The bond price equation is: P = $1,100 = $43.00(PVIFAR%,30) + $1,000(PVIFR%,30) Since we cannot solve the equation directly for R, use a spreadsheet, a financial calculator, or trial and error to find: R = 3.740% Since the coupon payments are semiannual, this is the semiannual interest rate. The YTM is the APR of the bond, so: YTM = 2 × 3.740% YTM = 7.48%

When a bond's yield to maturity is less than the bond's coupon rate, the bond:

is selling at a premium.

Which one of the following might be included in a bond's list of negative covenants?

Limit cash dividends to $1 per share or less

Stein Co. issued 15-year bonds two years ago at a coupon rate of 9.4 percent. The bonds make semiannual payments. If these bonds currently sell for 105 percent of par value, what is the YTM?

P = $1,050 = $47.00(PVIFAR%,26) + $1,000(PVIFR%,26) Since we cannot solve the equation directly for R, use a spreadsheet, a financial calculator, or trial and error to find: R = 4.374% Since the coupon payments are semiannual, this is the semiannual interest rate. The YTM is the APR of the bond, so: YTM = 2 × 4.374% YTM = 8.75%

You find a zero coupon bond with a par value of $10,000 and 30 years to maturity. The yield to maturity on this bond is 5.2 percent. Assume semiannual compounding periods. What is the price of the bond? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

P = $10,000(PVIF2.60%,60) P = $2,143.67

Arts and Crafts Warehouse wants to issue 15-year, zero-coupon bonds that yield 7.5 percent. What price should it charge for these bonds if the face value is $1,000? Assume semiannual compounding.

PV = $1,000 / [1 + (.075 / 2)]30 PV = $331.40

Smiley Industrial Goods has $1,000 face value bonds on the market with semiannual interest payments, 13.5 years to maturity, and a market price of $1,023. At this price, the bonds yield 6.4 percent. What must be the coupon rate on these bonds?

PV = $1,023 = C ×{(1 - {1 / [1 + (.064 / 2)]27}) / (.064 / 2)} + $1,000 / [1 + ( .064 / 2)]27 C = $33.28 Coupon rate = ($33.28×2) / $1,000 Coupon rate = .0666, or 6.66 percent

The $1,000 face value bonds of Galaxies International have coupon of 6.45 percent and pay interest semiannually. Currently, the bonds are quoted at 103.4 and mature in 4 years. What is the yield to maturity?

PV = $1,034 = [(.0645 × $1,000) / 2] ×{(1 - {1 / [1 + (r / 2)]8}) / (r / 2)} + $1,000 / [1 + (r/ 2)]8 r = .0549, or 5.49 percent

The 6 percent semiannual coupon bonds of IPO, Inc., are selling for $1,087. The bonds have a face value of $1,000 and mature in 11 years. What is the yield to maturity?

PV = $1,087 = [(.06 × $1,000) / 2] ×{(1 - {1 / [1 + (r / 2)]22}) / (r / 2)} + $1,000 / [1 + (r/ 2)]22 r = .0496, or 4.96 percent

AB Builders has 15-year bonds outstanding with a face value of $1,000 and a market price of $974. The bonds pay interest annually and have a yield to maturity of 4.03 percent. What is the coupon rate?

PV = $974 = PMT ×{1 - [1 / (1 + .0403)15]} / .0403 + $1,000 / (1 + .0403)15 PMT = $37.96 Coupon rate = $37.96 / $1,000 = .0380, or 3.80 percent

New Markets has $1,000 face value bonds outstanding that pay interest semiannually, mature in 14.5 years, and have a 4.5 percent coupon. The current price is quoted at 97.6. What is the yield to maturity?

PV = $976 = [(.045 × $1,000) / 2] ×{(1 - {1 / [1 + (r / 2)]29}) / (r / 2)} + $1,000 / [1 + (r/ 2)]29 r = .0473, or 4.73 percent

A six-year, semiannual coupon bond is selling for $991.38. The bond has a face value of $1,000 and a yield to maturity of 9.19 percent. What is the coupon rate?

PV = $991.38 = PMT ×{(1 - {1 / [1 + (.0919/ 2)]12}) / (.0919 / 2)} + $1,000 / [1 + ( .0919/ 2)]12 PMT = $45.00 Coupon rate = (2 ×$45.00) / $1,000 = .0900, or 9.00 percent

The 4.5 percent bond of JL Motors has a face value of $1,000, a maturity of 7 years, semiannual interest payments, and a yield to maturity of 6.23 percent. What is the current market price of the bond?

PV = [(.045 × $1,000)/ 2] ×{(1 - {1 / [1 + (.0623/ 2)]14}) / (.0623 / 2)} + $1,000 / [1 + ( .0623 / 2)]14 PV = $903.05

Blue Water bonds have a face value of $1,000, a coupon rate of 6.5 percent, semiannual interest payments, and mature in 11.5 years. What is the current price of these bonds if the yield to maturity is 6.36 percent?

PV = [(.065 × $1,000) / 2]×{(1 - {1 / [1 + (.0636/ 2)]23}) / (.0636 / 2)} + $1,000 / [1 + (.0636 /2)]23 PV= $1,011.30

A $1,000 face value bond currently has a yield to maturity of 8.22 percent. The bond matures in five years and pays interest semiannually. The coupon rate is7.5 percent. What is the current price of this bond?

PV = [(.075 × $1,000)/ 2] ×{(1 - {1 / [1 + (.0822/ 2)]10}) / (.0822 / 2)} + $1,000 / [1 + ( .0822/ 2)]10 PV= $970.96

A bond's indenture agreement generally includes all of the following except the:

names of registered shareholders.

The Timberlake-Jackson Wardrobe Co. has 11.5 percent coupon bonds on the market with nine years left to maturity. The bonds make annual payments and have a par value of $1,000. If the bonds currently sell for $1,136.78, what is the YTM?

R = YTM = 9.20%

What term is used to describe an account that a bond trustee manages for the sole purpose of redeeming bonds early?

Sinking fund

Which one of the following statements concerning sinking funds is correct?

Sinking funds may be used to purchase bonds in the open market.

Volbeat Corporation has bonds on the market with 14 years to maturity, a YTM of 10.1 percent, a par value of $1,000, and a current price of $952. The bonds make semiannual payments. What must the coupon rate be on the bonds?

Solving for the coupon payment, we get: C = $47.26 Since this is the semiannual payment, the annual coupon payment is: 2 × $47.26 = $94.52 And the coupon rate is the coupon payment divided by par value, so: Coupon rate = $94.52 / $1,000 Coupon rate = .0945, or 9.45%

Which one of the following types of bonds should an investor purchase if he or she is primarily concerned about ensuring that bond ownership will increase his or her purchasing power?

TIPS

What condition must exist if a bond's coupon rate is to equal both the bond's current yield and its yield to maturity? Assume the market rate of interest for this bond is positive.

The bond must be priced at par.

You find a zero coupon bond with a par value of $10,000 and 23 years to maturity. The yield to maturity on this bond is 4.5 percent. Assume semiannual compounding periods. What is the price of the bond?

To find the price of a zero coupon bond, we need to find the value of the future cash flows. With a zero coupon bond, the only cash flow is the par value at maturity. We find the present value assuming semiannual compounding to keep the YTM of a zero coupon bond equivalent to the YTM of a coupon bond, so: P = $10,000(PVIF2.25%,46) P = $3,593.25

Union Local School District has bonds outstanding with a coupon rate of 2.8 percent paid semiannually and 25 years to maturity. The yield to maturity on these bonds is 2.4 percent and the bonds have a par value of $5,000. What is the price of the bonds?

To find the price of this bond, we need to find the present value of the bond's cash flows. So, the price of the bond is: P = $70(PVIFA1.20%,50) + $5,000(PVIF1.20%,50) P = $5,374.35

Harrison Co. issued 15-year bonds one year ago at a coupon rate of 7.1 percent. The bonds make semiannual payments. If the YTM on these bonds is 5.4 percent, what is the current dollar price assuming a $1,000 par value?

To find the price of this bond, we need to realize that the maturity of the bond is 14 years. The bond was issued one year ago, with 15 years to maturity, so there are 14 years left on the bond. Also, the coupons are semiannual, so we need to use the semiannual interest rate and the number of semiannual periods. The price of the bond is: P = $35.50(PVIFA2.70%,28) + $1,000(PVIF2.70%,28) P = $1,165.51

Harrison Co. issued 17-year bonds one year ago at a coupon rate of 6.3 percent. The bonds make semiannual payments. If the YTM on these bonds is 5.5 percent, what is the current dollar price assuming a $1,000 par value?

To find the price of this bond, we need to realize that the maturity of the bond is 16 years. The bond was issued one year ago, with 17 years to maturity, so there are 16 years left on the bond. Also, the coupons are semiannual, so we need to use the semiannual interest rate and the number of semiannual periods. The price of the bond is: P = $31.50(PVIFA2.75%,32) + $1,000(PVIF2.75%,32) P = $1,084.40

Whitts BBQ would like to issue some 10-year, semiannual coupon bonds at par. Comparable bonds have a current yield of 9.16 percent, an effective annual yield of 9.68 percent, and a yield to maturity of 9.50 percent. What coupon rate should Whitts BBQ set on its bonds?

To sell bonds at par, the coupon rate must be set equal to the yield to maturity on comparable bonds, which in this case is 9.50 percent.

Deltona Motors just issued 230,000 zero-coupon bonds. These bonds mature in 18 years, have a par value of $1,000, and have a yield to maturity of 5.9 percent. What is the approximate total amount of money the company raised from issuing these bonds? Assume semiannual compounding.

Total amount raised = 230,000 × {$1,000 / [1 + (.059 / 2)]36} Total amount raised = $80,756,819, or $80.76 million

Which one of the following terms applies to a bond that initially sells at a deep discount and only makes one payment to bondholders?

Zero coupon

Yan Yan Corp. has a $5,000 par value bond outstanding with a coupon rate of 4.8 percent paid semiannually and 10 years to maturity. The yield to maturity of the bond is 4.3 percent. What is the price of the bond?

o find the price of this bond, we need to find the present value of the bond's cash flows. So, the price of the bond is: P = $120(PVIFA2.15%,20) + $5,000(PVIF2.15%,20) P = $5,201.46

A call provision grants the bond issuer the:

option of repurchasing the bonds prior to maturity at a prespecified price.

The primary purpose of bond covenants is to:

protect the bondholders.

The purpose of a bond sinking fund is to:

repay bonds early either through purchases or calls.

A bond's annual interest divided by its face value is referred to as the:

coupon rate.

Miller Farm Products is issuing a 15-year, unsecured bond. Based on this information, you know that this debt can be described as a:

debenture.

Russell's has a bond issue outstanding. The issue's indenture provision prohibits the firm from redeeming the bonds during the first five years following issuance. This provision is referred to as the _____ provision.

deferred call

A company originally issued bonds that were rated investment grade. These bonds have now been downgraded to junk status. These bonds are referred to as:

fallen angels.

Municipal bonds are:

generally callable.

The yield to maturity on a discount bond is:

greater than both the current yield and the coupon rate.

The market-required rate of return on a bond that is held for its entire life is called the:

yield to maturity.