Chapter 6

What is the PV of a 1-year $100 bond that pays no coupon payments if borrowing rates are 4%? $90.02 $96.15 $130.22 $100.00 $102.35

Answer: $96.15 N 1 PMT 0 FV 100 I 0.04 PV ($96.15)

You are considering investing in a bond that has a 12% coupon rate, 10 years to maturity, and is priced at $900. What would be your YTM if you received your coupon payments quarterly? (Assume a $1,000 face value). 27.8% 12.0% 13.9% 18.6% 55.6%

Answer: 13.9% Calculator inputs PMT = 1000 * .12 = 120/4 = 30 N = 10 * 4 = 40 PV = -900 FV = 1000 I = 3.47 * 4 = 13.9%

What are affirmative covenants? Obligations a firm agrees not to do Obligations a firm agrees to do Requirement to pay a certain percentage of the total value each year Obligation to pay a certain percentage of the par value each year Requirements enforced by regulating agencies

Answer: Obligations a firm agrees to do Affirmative covenants describe things the company pledges itself to do. Examples include paying taxes on time, maintaining a certain level of working capital, and maintaining a minimum debt ratio

The amount repaid at the expiration date is called: Maturity Rate Expiration Rate Coupon Rate Yield to Maturity Par Value

Answer: Par Value

Which type of bond is the lowest priority for repayment in the event of liquidation of a firm? Muni-bond Mortgage Bond Debenture Zeros Subordinated Debenture

Answer: Subordinated Debenture

Which of the following statements about a bond are true? i. A bond is a fixed-income security ii. The bond's interest payments vary each year with the market iii. Bonds allow firms to save on banker's overhead compared to bank loans ii and iii Only i Only iii i, ii, and iii i and iii Only ii i and ii

Answer: i and iii

Johnny Jims Corporation is issuing new bonds. They will pay a semi-annual coupon and mature in 15 years. They are currently selling for $800.00, the annual coupon rate is 8%. What is the yield to maturity on Johnny Jims' bonds? (Assume a $1,000 face value). 21.5% 12.1% 10.7% 20.3% 8.0%

0 / 1 (0.0%) Answer: 10.7% Calculator Inputs N = 15 * 2 = 30 PV = -800 PMT = .08 * 1000 = 80/2 = 40 FV = 1000 Found in the following section(s) of the text:

Risky, Inc. bonds have a 12 percent coupon rate. The interest rate is paid semiannually and the bonds mature in 6 years. The bonds have a par value of $1,000. If your required rate of return is 7 percent, what is the value of the bond? $920.57 $1,133.21 $1,241.58 $1,821.38

Answer: $1,241.58 Calculator Inputs PMT = 1000*.12 = 120/2 = 60 N = 6*2 = 12 FV = 1000 I = 7/2 = 3.5

Calculate the PV of the cash flows associated with a 10-year bond that pays $30 coupon payments every 6 months and a face value of $1000. The current interest rate is 6% APR. $655.90 $534.89 $790.00 $1000.00 $779.20

Answer: $1000.00 N 20 =10*2 PMT 30 FV 1000 Rate 0.03 =0.06/2 PV ($1,000.00)

Give Me Your Paycheck, a short-term loan institution, advertises a new long-term car loan rate of 1% per day (or 365% APR). In the small print, you notice that this loan compounds daily. What is the APY of the advertised car loan? 159.00% 15.90% 36.78% 1.00% 3678%

0 / 1 (0.0%) Answer: 3678% APY = (1+.01)365-1 = 3678% using daily rate APY = (1+3.65/365)365-1 = 3678% using APR In this one, notice the rate is already given as a DAILY rate, so you do not divide by 365 days. In effect, the 1% DAILY rate is already the APR/365. The question also lists 365% as an APR and you divide it by 365 days and end up with the same result. This question tests to see if you understand the intuition behind the equation as well as the calculation.

You are thinking of investing in a semi-annual bond that has a face value of $1,000 and offers a coupon rate of 2.5%. How much would your semi-annual coupon payment be? $1.25 $12.50 $125.00 $1,000.000 None of these choices

Answer: $12.50 Remember, to compute the semi-annual coupon payment, we multiply the face value ($1,000) by the semi-annual coupon rate (expressed as a decimal, so 0.025/2 = 0.0125). $1,000 * 0.0125 = $12.50 every six months. We divide the 2.5% annual coupon rate by 2 to make it a semi-annual coupon rate.

Calculate the value of a bond that matures in 15 years and has a $1,000 face value. The coupon rate is 9 percent and the investor's required rate of return is 11 percent. Assume annual compounding. $798.64 $856.18 $1,000.00 $1,123.00

Answer: $856.18 Calculator Inputs N = 15 FV = 1000 PMT = 1000*.09 = 90 I = 11

Which is the largest source of capital for firms? Secured Loans Bonds Donations Stocks Unsecured Loans

Answer: Bonds

What type of bond is tax exempt? Foreign Bond Zero-coupon Bond Convertible Bond Muni-bond Euro Bond

Answer: Muni-bond Municipal bonds (often issued by state, city, and local governments) are usually tax exempt at the federal level.

What is the value of a bond? The coupon payments of the bond The future value of its cash flows The face value of the bond The present value of its cash flows The face value of the bond plus the coupon payments

Answer: The present value of its cash flows

Why are bonds the primary method for raising capital? Coupon payments are flexible from year to year Issuing bonds is never restricted by the debt ratio of the firm They avoid the costs of the intermediary Coupon payments may be skipped in times of financial distress They repay the principle slowly over the life of the loan

Answer: They avoid the costs of the intermediary

Some New Co. needs funding for a new product that will revolutionize the world. They want to issue new bonds to fund their project. Some New Co. is worried about generating enough cash to make coupon payments during the introduction phase of their product, so they would like to keep the coupon payments below the market interest rate. They are offering a 5-year, $1000 face value bond with a YTM of 15% for $750. What will their coupon payments be if they make coupon payments semi-annually? $35.14 $42.73 $29.79 $38.58 $30.00

Answer: $38.58 N 10 =5*2 FV 1000 Rate 0.075 =0.15/2 PV -750 PMT $38.58

Trampoline Inc. wants to expand their business. They will issue bonds to fund their expansion. If the current required rate of return for investors is 11%, what should the price be for their bonds with a $1000 face value, 15 years to maturity, and a coupon rate of 8% paid semi-annually? $957.01 $884.27 $1345.88 $781.99 $1198.43

Answer: $781.99 I=11%/2 = 5.5% N=15*2 = 30 PMT=(0.08*1000)/2 = 40 FV=1000 Price ($781.99)

Trampoline Inc. wants to expand their business. They will issue bonds to fund their expansion. If current required rate of return for investors is 11%, what should the price be for their bonds with a $1000 face value, 15 years to maturity, and a coupon rate of 10.5% paid semi-annually? $889.76 $921.13 $947.52 $963.67 $901.98

Answer: $963.67 I 5.5% =11%/2 N 30 =15*2 PMT 52.5 =(0.105*1000)/2 FV 1000 Price ($963.67)

You want to buy a semiannual bond that has four years left before maturity. It has a 6% coupon rate and the market yield is currently 5.2%. What is the price you are willing to pay? 1,253.89 868.95 1,034.13 1,028.56

Answer: 1,028.56 N = 8 , I/Y = 2.6 , PMT = 30 , PV = ? , FV = 1,000 PV = -1028.56

Your credit union is advertising a 10 year CD at a rate of 3% EAR. These CD's compound quarterly. What is the APR? 3.12% 1.50% 2.97% 2.56% 2.00%

Answer: 2.97% 1.03 = (1 +rq)4 Effective quarterly rate = 1.031/4 - 1 Effective quarterly rate = .0074 APR = .0074 * 4 APR = 2.97%

Jayne and Josh are ready to buy a house. The bank is advertising an APR for 30-year fixed rate mortgages of 4.75%. What is the EAR for this mortgage that is compounded monthly? 4.55% 4.00% 4.85% 4.99% 4.25%

Answer: 4.85% EAR =(1+(.0475/12))^12 - 1

A $1,000 bond matures in six years. It pays $35 every six months. The current market price is $1,075. What is the yield? 2.76 3.12 6.03 5.51

Answer: 5.51 N = 2 x 6, PV = -1,075, PMT = 35 (already calculated), FV = 1,000, I/Y = 2.755 x 2 = 5.51

Currently, Sport City's 10-year bonds are selling for $975. What is the bond's yield to maturity given that the bond has a $1,000 face value and that it pays 6% interest annually? 5.76% 2.97% 6.34% 3.17% 4.17%

Answer: 6.34% N 20 PMT 30 FV 1000 PV -975 R 3.17% YTM 6.34%

Currently, Sport City's 10-year bonds are selling for $975. What is the bond's yield to maturity given that the bond has a $1,000 face value and that it pays 6% interest annually? (Assume coupons are paid semi-annually.) 4.17% 3.17% 5.76% 2.97% 6.34%

Answer: 6.34% N 20 PMT 30 FV 1000 PV -975 R 3.17% YTM 6.34%

What is the YTM for a 14-year semiannual bond that pays $35 every six months and has a purchase price of $980? Face value is $1,000. 3.61% 7.23% 3.75% 5.25%

Answer: 7.23% N = 28 , I/Y = ? , PMT = 35 , PV = - 980, FV = 1,000 I/Y = 3.6148 x 2 = 7.23%

North Rim bonds are being issued at a market price of $1000. They have a face value of $1000 and have a coupon rate of 9% that is paid monthly. These bonds mature in 8 years. What is the YTM? 8.0% 9.0% 10.0% 11.0% 12.0%

Answer: 9.0% Calculator Inputs PV = -1000 FV = 1000 N = 8 * 12 = 96 PMT = 1000 * .09 = 90/12 = 7.5 I = .75 * 12 = 9%

Which type of bond is an unsecured bond? Eurobonds Foreign Bond Muni-bond Zeros All of these choices 0 / 1 (0.0%)

Answer: All of these choices

What type of bond can be traded in for stock? Zero-coupon Bond Convertible Bond Euro Bond Muni-bond Foreign Bond

Answer: Convertible Bond

The stated interest rate on a bond is the: Par value Yield to maturity Coupon Face value Maturity rate

Answer: Coupon The coupon rate is the interest rate of the bond, also known as the coupon yield.

What is the interest rate for annual payments of the bond known as? Coupon Rate Covenants Par Value Maturity

Answer: Coupon Rate

What type of bond is paid in a different currency than the country's issuing it? Euro Bond Muni-Bond Convertbile Bond Foreign Bond Zero- coupon

Answer: Euro Bond