Week 4

A corporation issues 50,000 bonds at $1,000 each. The bonds mature in 5 years and have a coupon rate of 7 percent. What will the total annual interest expense be for the corporation?

$3.5 million

ABC Co. issued 1 million 6 percent annual coupon bonds that mature in 10 years. The face value is $1,000 per bond. What are the expected cash flows from one of these bonds?

$60 in interest at the end of each year for 10 years and a $1,000 repayment of principal at the end of 10 years.

What is the value of a bond if the present value of interest cash flows is $200 and the present value of the par value to be received when the bond matures is $750?

$9.50

Which of these are required to calculate the current value of a bond?

- Par value - Time remaining to maturity - Coupon rate - Applicable market rate

Which of the following institutions issue bonds that are traded in the bond market?

- State governments - The federal government - Public corporations

A corporate bond's yield to maturity:

-changes over time -can be greater than, equal to, or less than the bond's coupon rate

Which of the following variables are required to calculate the value of a bond?

-remaining life of bond -coupon rate -market yield

Which of the following terms apply to a bond?

-time to maturity -par value -coupon rate

What is the coupon rate on a bond that has a par value of $1,000, a market value of $1,100, and a coupon interest payment of $100 per year

10%

What is the value of a zero-coupon bond that matures in 15 years if it promises to pay $5.000 at maturity, assuming an interest rate of 7.5 percent compounded annually?

Reason: Correct. $5,000/1.075)15 = $1.689.83.

What is the present value of the annual interest payments on a 20-year, $1,000 par value bond with a 5 percent coupon paid annually, if the yield on Similar bonds is 10 percent?

Reason: Incorrect. PV = (0.05 x $1,000) × (1 - 1/1.1020)/0.10 = $425.68.

Why does a bond's value fluctuate over time?

The coupon rate and par value are fixed, while market interest rates change.

What is a corporate bond's yield to maturity (YTM)?

YTM is the expected return for an investor who buys the bond today and holds it to maturity YTM is the prevailing market interest rate for bonds with similar features

When interest rates in the market rise, we can expect the price of bonds to

decrease

In general, a corporate bond's coupon rate

is fixed until the bond matures

What is an interest-only loan?

it's a loan which the borrower pays interest periodically and repays the principle when the bond matures