Ch.7 Finance - Study Guide

The following interest rate information is observed: Spot Rates 7-13 1 year 10% 2 years 11% 3 years 12% Based on this data, the 2-year forward rate one year from now is closest to:

13%

Bond X and Bond Y were issued at a premium to par value three years ago. Bond X matures in five years, and Bond Y matures in ten years. Both bonds carry the same credit rating. Bond X has a coupon of 7 .25%, and Bond Y has a coupon of 8.00%. If the yield to maturity for both bonds is 7.60% today:

Bond X is priced at a discount, and Bond Y is priced at a premium

A bond dealer determines that the present value of a particular Treasury note, based on Treasury spot rates, is greater than its market price. The dealer can generate an arbitrage profit (assuming no transactions costs) by:

Buying the treasury Note and selling its cash flows as treasury strips

The minimum data required to calculate the implied forward rate for three years beginning three years from now is:

the 3-year and 6-year spot rates

The market Value of an 18-year 0 coupon bond with a maturity value of $1,000 discounted at a 12% annual interest rate with semi-annual compounding is closest to:

$122.74

Arts & Crafts Warehouse wants to issue 15-year, zero coupon bonds that yield 7.5%. What price should it charge for these bonds if the face value is $1,000? (Assume Semiannual)

$331.40

Parsons Inc. is issuing an annual-pay bond that will pay no coupon for the first five years and then pay a 10% coupon for the remaining five years to maturity. The 10% coupon interest for the first five years will all be paid (without additional interest) at maturity. If the annual YTM on this bond is 10%, the price of the bond per $1,000 of face value is closest to:

$814

Gerald Snow is a bond manager for Long Vision Investments. Snow is evaluating potential arbitrage opportunities. He has the following list of bonds: • Bond X is a 1-year zero coupon bond selling at 950. • Bond Y is a 2-year zero coupon bond selling at 850. • Bond Z is a 2-year bond with an annual coupon of 8%. All three bonds have a par value of $1,000. If no arbitrage opportunity exists, the price of Bond Z is closest to:

$995

A 1,000 face value bond currently has a yield to maturity of 6.69%. The bond matures in 3 years and pays interest annually. The Coupon rate is 7%. What is the current price of this bond?

1,008.18 ---

Red Mtn Inc. bonds have a face value of $1,000. The bonds carry a 7% coupon, pay interest semiannually, and mature in 13.5 years. what is the current price of these bonds if the yield to maturity is 6.82%?

1,015.72 ---

What is the price of a $1,000 face value bond if the quoted price is 102.1

1,021

The current 4 -year spot rate is 4% and the current 5-year spot rate is 5.5%. What is the I-year forward rate in four years?

11.72%

The app store needs to raise $2.2 million for an expansion project. The firm wants to raise this money by selling zero coupon bonds with a par value of $1,000 that mature in 20 years. The market yield on similar bonds is 8.8%. How many bonds must the app store sell to raise the money it needs? (Assume semiannual)

12,315 Bonds

AB Builders Inc. has 12-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%. What is the coupon rate?

3.75%

A 7% bond has a yield to maturity of 6.5%. The bond matures in 7 years, has a face value of $1,000 and pays semiannual interest payments. What is the amount of each coupon payment?

35 --- (1000*.07)/2

A bond has a par value of $1,000, a current yield of 7.5%, and semiannual interest payments. The bond quote is 98.6. What is the amount of each coupon payment?

36.98 --- [.075*(.986*1000)]/2

An investor wants to take advantage of the 5-year spot rate, currently at a level of 4.0%. Unfortunately, the investor just invested all of his funds in a 2-year bond with a yield of 3 .2%. The investor contacts his broker, who tells him that in two years he can purchase a 3-year bond and end up with the same return currently offered on the 5-year bond. What 3-year forward rate beginning two years from now will allow the investor to earn a return equivalent to the 5-year spot rate?

4.5%

Based on the following rates: 1-year spot rate 2.0% 2-year spot rate 2.5% 3-year spot rate 3.0% 4-year spot rate 3.5% The 2-year forward rate two years from now is closest to:

4.5%

Based on the following rates: 1-year spot rate 3.0% 1-year forward rate one year from now 5.0% 2-year forward rate one year from now 6.5% The 3-year spot rate is closest to:

5.3%

Deltona Motors just issued 225,000 zero coupn bonds. These bonds mature in 20 years, have a par value of $1,000, and have a yield to maturity of 7.45%. What is the approximate total amount of money the company raised from issuing these bonds? (semiannual)

52.10 Million

One year ago, Alpha supply issued 15-year bonds at par. The bonds have a coupon rate of 6.5% and pay interest annually. Today, the market rate of interest on these bonds is 7.2%. How does the price of these bonds today compare to the issue price?

6.05% lower

A 12-year, semiannual coupon bond is priced at 1,102.60. The bond has a $1,000 face value and a yield to maturity of 5.33%. What is the coupon rate?

6.5% ---

Smiley Industrial Goods has bonds on the market making annual payments, with 13 years to maturity, and selling for $1,095. At this price, the bods yield 6.4%. What must the coupon rate be on these bonds?

7.5%

Kathy Hurst, CFA, is valuing a 4-year zero coupon security and has acquired the following information: 1-year spot rate 6.0% 4-year spot rate 7 .5% 1-year forward rate 1 year from now 7.3% 1-year forward rate 3 years from now 8.9% The 1-year forward rate 2 years from now is closest to:

7.8%

A bond has a $1000 face value, a market price of $1,045, and pays interest payments of $80 every year, what is the coupon rate?

8% - 80/1000

Jeffries Inc. has 6% coupon bonds on the market that have 11 years left to maturity. The bonds make annual payments. If the YTM on these bonds is 7.4%, what is the current bond price?

897.08

A 6-year, semiannual coupon bond is selling for 991.38. The bond has a face value of $1000 and a yield to maturity of 9.19%. What is the coupon rate?

9% ---

An analyst collects the following information regarding spot rates: • 1-year rate = 4%. • 2-year rate = 5%. • 3-year rate = 6%. • 4-year rate = 7%. The 2-year forward rate two years from today is closest to:

9.04%

A 5.5% 1,000 bond matures in 7 years, pays interest semiannually, and has a yield to maturity of 6.23%. What is the current market price of the bond?

959.09 ---

An investor purchases the bonds of JDL Corp., which pays an annual coupon of 10% and mature in 10 years, at an annual yield to maturity of 12%. The bonds will most likely be selling at:

A Discount

A Treasury bond dealer observes the following Treasury spot rates: 6-month 7.4%, 12-month 7.0%, and 18-month 6.3%. The dealer also observes that the market price of an 8% coupon Treasury note with 18 months to maturity is $1,019.50. The dealer can earn:

An arbitrage profit because the 8% coupon bond in the open market, stripping it, and selling the pieces

Coupon Rate

Annual interest divided by the face value of a bond

Coupon

Annual interest payment

Current Market Price

Current Yield on a bond is equal to the annual interest divided by ________

Maturity Date

Date the principal amount of the bond is repaid

A 7.5% coupon, semiannual-pay, five-year bond has a yield to maturity of 6.80%. Over the next year, if the bond's yield to maturity remains unchanged, its price will:

Decrease

A 10%, 10-year bond is sold to yield 8%. One year passes, and the yield remains unchanged at 8%. Holding all other factors constant, the bond's price during this period will have:

Decreased

The yield to maturity on a discount bond is:

Greater than both the current yield and the coupon rate

If intermediate-term, default-free, pure discount bonds have a higher rate of return than either the comparable shorter-term or longer-term bonds, the term structure of interest rates will be:

Humped

A discount bond has a coupon rate that is:

Less than the bond's yield to maturity

Treasury Yield curve plots the yields on treasury notes and bonds relative to the ____ of those securities

Maturity

One year ago, an investor purchased a IO-year, $1,000 par value, 8% semiannual coupon bond with an 8% yield to maturity. Now, one year later, interest rates remain unchanged at 8%. If the investor sells the bond today (immediately after receiving the second coupon payment, and with no transaction costs), he will have:

No capital Gain or Loss

The term structure of interest rates represents what relationship?

Nominal Rates on Default free, pure discount bonds & time to maturity

Face Value

Principal amount of a bond that is repaid at the end of the loan term

Assume that there is a widely accepted belief in the U.S. that 1-year interest rates will remain stable for the foreseenable future. A yield curve derived from spot rates on U.S. Treasury securities shows the following data: Maturity Spot Rate 1 year 3.25% 2 years 4.00% 5 years 6.80% 10 years 7.20% This yield curve is least consistent with which theory of the term structure of interest rates?

Pure expectations

An upward sloping term structure of interest rates indicates:

The nominal rate is increasing as the time to maturity increases

An investor who is calculating the arbitrage-free value of a Treasury security should discount each cash flow using the:

Treasury Spot Rate that is specific to its maturity

Consider the following Treasury spot rates expressed as bond equivalent yields: Maturity Spot Rate 6 months 3.0% 1 year 3.5% 1.5 years 4.0% 2 years 4.5% If a Treasury note with two years remaining to maturity has a 5% semiannual coupon and is priced at $1,008, the note is:

Underpriced

A 10-year spot rate is least likely the:

YTM on a 10-year coupon bond

Yield to Maturity

bond's rate of return that is required by the marketplace

Ron Logan, CFA, is a bond manager. He purchased $50 million in 6.0% coupon Southwest Manufacturing bonds at par three years ago. Today, the bonds are priced to yield 6.85%. The bonds mature in nine years. The Southwest bonds are trading at a:

discount, and the TYM has increased sine purchase

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

is selling at a premium