bonds CH 6

Omega Inc. holds a 12-year bond that has a 12 percent coupon rate and a marginal tax rate of 40 percent. It is currently selling for $1,000, which is the bond's face value. If interest is paid semiannually, the bond's yield to maturity is:

equal to 12 percent.

A bond's principal value is also referred to as the maturity value because:

equal to 12% The bonds sale at face value when coupon rate equals the market rate of interest.

The financial pages of the local newspaper helped Mary in identifying that she can buy a bond ($1,000 par) for $800. If the coupon rate is 10 percent, the annual interest payments equal $80.

f

There is an inverse relationship between bond ratings and the required return on a bond. The required return is lowest for AAA rated bonds, and required returns increase as the ratings get lower (worse).

T

Stephanie purchased a corporate bond that matures in three years. The bond has a coupon interest rate of 9 percent and its yield to maturity is 6 percent. If market interest rates remain constant and Stephanie sells the bond in 12 months, her capital gain from holding the bond will be:

"Negative; because she bought the bond for a premium, which means its price has to decrease as the maturity date nears."

Tony's Pizzeria plans to issue bonds with a par value of $1,000 and 10 years to maturity. These bonds will pay $45 interest every 6 months. Current market conditions are such that the bonds will be sold at net $937.79. What is the yield to maturity (YTM) of the issue as a broker would quote it to an investor?

10% .

JRJ Corporation issued 10-year bonds at a price of $1,000. These bonds pay $60 interest every six months. Their price has remained the same since they were issued; that is, the bonds still sell for $1,000. Due to additional financing needs, the firm wishes to issue new bonds that would have a maturity of 10 years and a par value of $1,000 and pay $40 interest every six months. If both bonds have the same yield, how many new bonds must JRJ issue to raise additional capital of $2 million? Fractions of bonds cannot be issued. (Round the number of bonds to the nearest whole number.)

2,596 .

Rick bought a bond when it was issued by Macroflex Corporation 14 years ago. The bond, which has a $1,000 face value and a coupon rate equal to 10 percent, matures in six years. Interest is paid every six months; the next interest payment is scheduled for six months from today. Assuming the yield on similar risk investments is 14 percent, calculate the current market value (price) of the bond.

841.15 N=12 (6*2) Pmt=1000*.10/2=-50 FV=-1000 i/y= .14/2=0.07

Rolling Coast Inc. issued BBB bonds two years ago. These bonds provided a yield to maturity (YTM) of 11.5 percent. Long-term risk-free government bonds were yielding 8.7 percent at the time. The current risk premium on BBB bonds versus government bonds is half of what it was two years ago. If the risk-free long-term government bonds are currently yielding 7.8 percent, then at what interest rate should Rolling Coast expect to issue new bonds?

9.2%

Which of the following is true of a traditional certificate of deposit (CD)?

It pays higher interest than a saving account It is not as liquid as a savings account Funds are locked in for specific periods of time.

Floating-rate bonds pay interest based on an inflation index, such as the consumer price index (CPI).

F

Foreign debt is a debt instrument sold in a country other than the one in whose currency the debt is denominated.

F

LIBOR is the acronym for London Interbank Offer Rate, which is an average of interest rates offered by London banks to U.S. corporations.

F

Which of the following types of bonds protects a bondholder against increases in interest rates?

Floating rate bonds

Which of the following statements is true about foreign bonds?

Foreign bonds are bonds sold by a foreign borrower but convertible to bonds issued in the foreign country. Foreign bonds are bonds sold in a foreign country and are denominated in the currency of the country in which the issue is sold.

Eurocredits are bank loans that are denominated in the currency of a country other than where the lending bank is located

True

Mortgage bonds are backed by assets of the issuing firm, whereas debentures are not.

True

An increase in interest rates will help increase the future value of a portfolio because the cash flows produced by the portfolio:

can be reinvested at higher rates of return.

Municipal bonds are issued by:

issued by state and local government entities such as cities, counties, school districts, and the stat

A sinking fund call on a bond:

requires no call premium, and only a small percentage of the issue is normally callable in a given year.

Lower-rated bonds offer higher returns than higher-grade bonds because their:

risks are higher

When the market value of debt is the same as its par value, it is:

selling at its face value

A(n) _____ is a provision that facilitates the orderly retirement of a bond issue.

sinking fund

The conversion ratio is:

the number of shares of stock that the bondholder receives upon conversion of a bond

The face value of a debt is

the principal value written on the face, or outside cover, of a debt contract.