FIN3400 Chapter 8
Kevin Rogers is interested in buying a five-year bond that pays a coupon of 10 percent on a semiannual basis. The current market rate for similar bonds is 8.8 percent. What should be the current price of this bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.) A) $1,048 B) $965 C) $1,099 D) $982 C) $1,099 D) $982
A) $1,048
Briar Corp is issuing a 10-year bond with a coupon rate of 7 percent. The interest rate for similar bonds is currently 9 percent. Assuming annual payments, what is the present value of the bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.) A) $872 B) $1,066 C) $990 D) $945
A) $872
Rachel McGovern bought a 10-year bond for $921.77 seven years ago. The bond pays a coupon of 15 percent semiannually. Today, the bond is priced at $961.22. If she sold the bond today, what would be her realized yield? (Round to the nearest percent.) A) 17% B)18% C) 9% D)10%
A) 17%
The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond. A. True B) False
A) TRUE
Which of the following statements is true? A)The longer the maturity of a security, the greater its interest rate risk. B) If investors believe inflation will be subsiding in the future, the prevailing yield curve will have a positive slope . C) The real rate of interest varies with the business cycle, with the lowest rates at the end of a period of business expansion and the highest at the bottom of a recession. D) The interest rate risk premium always adds a downward bias to the slope of the yield curve.
A) The longer the maturity of a security, the greater its interest rate risk.
The U.S. Treasury has issued 10-year zero coupon bonds with a face value of $1,000. Assume that the bond compounds interest semiannually. What will be the current market price of these bonds if the yield to maturity for similar investments in the market is 6.75 percent? (Round your answer to the nearest dollar.) A) $684 B) $860 C) $515 D) $604
C) $515
Triumph Corp. issued five-year bonds that pay a coupon of 6.375 percent annually. The current market rate for similar bonds is 8.5 percent. How much will you be willing to pay for Triumph's bond today? (Do not round intermediate computations. Round your final answer to the nearest dollar.) A) $1,023 B) $1,137 C) $916 D) $897
C) $916
Jorge Cabrera paid $980 for a 15-year bond 10 years ago. The bond pays a coupon of 10 percent semiannually. Today, the bond is priced at $1,054.36. If he sells the bond today, what will be his realized yield? (Round to the nearest percent.) A) 12% B)8% C)11% D)9%.
C) 11%
Alice Trang is planning to buy a six-year bond that pays a coupon of 10 percent semiannually. Given the current price of $878.21, what is the yield to maturity on these bonds? (Round to the closest answer.) A) 11% B) 12% C) 13% D) 14%
C) 13%
Nathan Akpan is planning to invest in a seven-year bond that pays annual coupons at a rate of 7 percent. It is currently selling at $927.23. What is the current market yield on this bond? (Round to the closest answer.) A) 10.4% B)9.5% C) 8.4% D) 7.5%
C) 8.4%
63. Huan Zhang bought a 10-year bond that pays 8.25 percent semiannually for $911.10. What is the yield to maturity on this bond? (Round your percentage answer to two decimal places.) A) 7.60% B)8.68% C)9.66% D)10.67%
C) 9.66%
Which of the following statements is true? A) Investment grade bonds are those rated single B and higher. B) Federal laws typically allow insurance companies and pension funds to purchase non-investment grade bonds. C) Because investors are risk averse, they require a premium to purchase a security that exposes them to default risk. D) All else equal, the higher a bond's rating the higher the coupon rate.
C) Because investors are risk averse, they require a premium to purchase a security that exposes them to default risk.
Which one of the following statements about vanilla bonds is NOT true? A) They have fixed coupon payments. b) The face value, or par value, for most corporate bonds is $1,000. C) Coupon payments are usually made quarterly. D) The bond's coupon rate is calculated as the annual coupon payment divided by the bond's face value.
C) Coupon payments are usually made quarterly.
Which of the following statements is true of convertible bonds? A) The most significant disadvantage to a corporation of issuing convertible bonds is that they increase the cash that the firm must use to make interest payments. B) The typical conversion ratio is set so that the firm's stock price must appreciate 5% or less before it is profitable for the holder to convert the bond to stock. C) Firms that issue convertible bonds can do so at a lower interest rate. D) The typical issue of convertible bonds allows the holder of the bond to convert it to preferred stock.
C) Firms that issue convertible bonds can do so at a lower interest rate.
46. Jane Thorpe has been offered a seven-year bond issued by Barone, Inc., for a price of $943.22. The bond has a coupon rate of 9 percent and pays the coupon semiannually. Similar bonds in the market have a yield to maturity of 10 percent today. Should she buy the bonds at the offered price? (Do not round intermediate computations. Round your final answer to the nearest dollar.) A) Yes, the bond is worth more at $1,015. B) No, the bond is only worth $921. C) Yes, the bond is worth more at $951. D) No, the bond is only worth $912.
C) Yes, the bond is worth more at $951.
Which one of the following statements about zero coupon bonds is NOT true? A)Zero coupon bonds have no coupon payments but promise a single payment at maturity. B)Zero coupon bonds must sell for less than similar bonds that make periodic coupon payments. C) Zero coupon bonds make coupon payments but no principal payment at maturity. D) All of the above statements are true.
C) Zero coupon bonds make coupon payments but no principal payment at maturity
Downward-slopping yield curves usually occur A)when the economy is growing. B) when the economy is stagnant. C)before the beginning of a recession. D) None of the above
C) before the beginning of a recession.
The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments: A)exceed the price of the bond. B) equal to zero. C) equal to the price of the bond. D) less than the price of the bond.
C) equal to the price of the bond
Which one of the following statements is NOT true? A) Interest rate risk is the risk that bond prices will change as interest rates change. B) Interest rate changes and bond prices are inversely related. C) As interest rates increase, bond prices increase. D) Long-term bonds have more price volatility than short-term bonds of similar risk.
C)As interest rates increase, bond prices increase.
Your friend recommends that you invest in a three-year bond issued by Trimer, Inc., that will pay annual coupons of 10 percent. Similar investments today will yield 6 percent. How much should you pay for the bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.) A) $1,024 B) $979 C) $886 D) $1,107
D) $1,107
48. Jeremy Kohn is planning to invest in a 10-year bond that pays a 12 percent coupon. The current market rate for similar bonds is 9 percent. Assume semiannual coupon payments. What is the maximum price that should be paid for this bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.) A) $951 B)$882 C)$1,033 D) $1,195
D) $1,195
Five years ago, Shirley Harper bought a 10-year bond that pays 8 percent semiannually for $981.10. Today, she sold it for $1,067.22. What is the realized yield on her investment? (Round to the nearest percent.) A) 7% B)8% C)11% D) 10%
D) 10%
Shawna Carter wants to invest her recent bonus in a four-year bond that pays a coupon of 11 percent semiannually. The bonds are selling at $962.13 today. If she buys this bond and holds it to maturity, what would be her yield? (Round to the closest answer.) A) 11.5% B)11.8% C) 12.5% D) 12.2%
D) 12.2%
Suppose an investor earned a semiannual yield of 6.4 percent on a bond paying coupons twice a year. What is the effective annual yield (EAY) on this investment? (Round to two decimal places.) A) 12.80% B) 6.40% C) 6.50% D) 13.21%.
D) 13.21%
John Wong purchased a five-year bond today at $1,034.66. The bond pays 6.5 percent semiannually. What will be his yield to maturity? (Round to the closest answer.) A) 6.7% B) 6.2% C) 3.25% D)5.7%
D) 5.7%
Which of the following statements is true? A) To secure the conversion option on a bond, bondholders would be willing to pay a premium. B) Typically, the conversion ratio is set so that the firm's stock price must appreciate at least 15 to 20 percent before it is profitable to convert bonds into stock. C) Convertible bonds can be converted into shares of common stock at some predetermined ratio at the discretion of the bondholder. D) All of the above are true.
D) Al of the above are true
As interest rates fall, the prices of bonds decline. A) True B) False
b) False
Robertsons, Inc., is planning to expand its specialty stores into five other states and finance the expansion by issuing 15-year zero coupon bonds with a face value of $1,000. If your opportunity cost is 8 percent and similar bonds pay coupons semiannually, what will be the price at which you will be willing to purchase these bonds? (Round your answer to the nearest dollar.) A) $308 B)$383 C) $803 D) $866
$308
Which one of the following statements is NOT true? A) The relationship between yield to maturity and marketability is known as the term structure of interest rates. B) The shape of the yield curve is not constant over time. C) As the general level of interest rises and falls over time, the yield curve shifts up and down and has different slopes. D) Yield curves show graphically how market yields vary as term to maturity changes.
A) The relationship between yield to maturity and marketability is known as the term structure of interest rates.
A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if interest rates are below 10% and at a discount if interest rates are greater than 10%. A) True B) False
A) True
All other things being equal, a given change in the interest rates will have a greater impact on the price of a low-coupon bond than a higher-coupon bond with the same maturity. A) True B) False
A) True
Convertible bonds can be converted into shares of common stock at some predetermined ratio at the discretion of the bondholder. A) True B)False
A) True
Corporate bonds have a thin market relative to market for corporate stocks. A) True B)false
A) True
Interest rate risk is the risk that bond prices will fluctuate as interest rate changes. A. True B) False
A) True
Most secondary market transactions for corporate bonds take place through dealers in the over-the-counter (OTC) market. A) True B) False
A) True
Prices in the corporate bond market tend to be more volatile than securities sold in markets with greater trading volumes. A) True B) False
A) True
The largest investors in corporate bonds are big institutional investors such as life insurance companies and pension funds. A) True B) False
A) True
The real rate of interest varies with the business cycle, with the highest rates seen at the end of a period of business expansion and the lowest at the bottom of a recession. A) True B)False
A) True
The value, or price, of any asset is the present value of its future cash flows. A) True B) False
A) True
Vanilla bonds have coupon payments that are fixed for the life of the bond, with the principal being repaid at maturity A) True B) False
A) True
If a bond's coupon rate is equal to the market rate of interest, then the bond will sell: A) at a price equal to its face value. B) at a price greater than its face value. C) at a price less than its face value. D) None of the above is true.
A) at a price equal to its face value.
Bonds sell at a premium when the market rate of interest is: A)less than the bond's coupon rate. B) greater than the bond's coupon rate. C) equal to the bond's coupon rate. D) None of the above is true.
A) less than the bond's coupon rate.
Marketability is the ability of an investor A) to sell a security quickly, at a low transaction cost, and at a price close to its fair market value. B) to sell at a profit under all circumstances. C) to sell the security above its par value. D) None of the above
A) to sell a security quickly, at a low transaction cost, and at a price close to its fair market value.
The face or par value for most corporate bonds is equal to $1,000 and is the principal amount owed to bondholders at maturity A) True B) False
A) true
The risk that the lender may not receive payments as promised is called default risk. A) True B) False
A) true
U.S. Treasury securities are the best proxy measure for the risk-free rate. A) True B) False
A) true
Regatta, Inc., has six-year bonds outstanding that pay an 8.25 percent coupon rate. Investors buying the bond today can expect to earn a yield to maturity of 6.875 percent. How much will you be willing to pay for Regatta's bond today? Assume annual coupon payments. (Do not round intermediate computations. Round your final answer to the nearest dollar.) A) $972 B) $1,066 C) $1,014 D) $923
B) $1,066
Giant Electronics is issuing 20-year bonds that will pay coupons semiannually. The coupon rate on this bond is 7.8 percent. If the market rate for such bonds is 7 percent, what will the bonds sell for today? (Do not round intermediate computations. Round your final answer to the nearest dollar.) A) $1,037 B) $1,085 C)$861 D) $923
B) $1,085
Jarmine Corp., is planning to fund a project by issuing 10-year zero coupon bonds with a face value of $1,000. Assuming semiannual compounding of interest, what will be the price of these bonds if the appropriate discount rate is 14 percent? (Round your answer to the nearest dollar.) A) $852 B)$258 C)$419 D) $841
B) $258
Shana Norris wants to buy five-year zero coupon bonds with a face value of $1,000. Her yield to maturity is 8.5 percent. Assuming annual compounding, what would be the current market price of these bonds? (Round your answer to the nearest dollar.) A) $1,023 B) $665 C) $890 D) $1,113
B) $665
Highland Corp., a U.S. company, has a five-year bond whose yield to maturity is 6.5 percent. The bond has no coupon payments. What is the price of this zero coupon bond? (Assume semi-annual compounding for these zero-coupon bonds.) A) $927.83 B)$726.27 C) $890.45 D) $1,113.23
B) $726.27
Kevin Oh is planning to sell a bond that he owns. This bond has four years to maturity and pays a coupon of 10 percent on a semiannual basis. Similar bonds in the current market have a yield to maturity of 12 percent. What will be the price that he will get for his bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.) A) $1,044 B) $938 C) $970 D) $1,102
B) $938
Stanley Hart invested in a municipal bond that promised an annual yield of 6.7 percent. The bond pays coupons twice a year. What is the effective annual yield (EAY) on this investment? (Round percentage to two decimal places.) A) 13.4% B)6.81% C) 6.70% D) None of the above
B) 6.81
Jenny LePlaz is looking to invest in a five-year bond that pays annual coupons of 6.25 percent and currently sells at $912.34. What is the current market yield on such bonds? (Round to the closest answer.) A) 9.5% B) 8.5% C) 6.5% D) 7.5%
B) 8.5%
Which of the following statements is true? A) Long-term bonds have lower price volatility than short-term bonds of similar risk. B) As interest rates decline, the prices of bonds rise and as interest rates rise, the prices of bonds decline. C) All other things being equal, short-term bonds are riskier than long-term bonds. D) Interest rate risk decreases as maturity increases.
B) As interest rates decline, the prices of bonds rise and as interest rates rise, the prices of bonds decline.
Which one of the following statements is NOT true? A)Prices in the corporate bond market tend to be more volatile than the markets for stocks or money market securities. B) Corporate bonds are more marketable than the securities that have higher daily trading volumes. C) The market for corporate bonds is thin compared to the market for corporate stocks. D) The largest investors in corporate bonds are life insurance companies and pension funds.
B) Corporate bonds are more marketable than the securities that have higher daily trading volumes.
Bonds with a call provision pay lower yields than comparable noncallable bonds. A) True B) False
B) False
Higher coupon bonds have greater interest rate risk. A)True B) False
B) False
If investors believe inflation will be increasing in the future, the prevailing yield curve will be downward sloping A) True B) False
B) False
The largest investors in corporate bonds are state government agencies. A) True B) False
B) False
Upward-sloping yield curves often occur before the beginning of recession. A) True B) False
B) False
You can buy a $1,000 par value bond for $800. The coupon rate is 10% (with annual payments), and there are 10 years before the bond will mature and pay off its $1,000 par value. The price of the bond suggests that the expected return on bonds with this risk is lower than 10%. A) True B) False
B) False
Zero coupon bonds sell well above their par value because they offer no coupons. A) True B) False
B) False
Downward-slopping yield curves usually occur A) when the economy is growing. B) when the economy is stagnant. C) before the beginning of a recession. D) None of the above
B) Investors must pay a premium to purchase a security that exposes them to default risk.
Which one of the following statements is NOT true of realized yield? A) The realized yield is the return earned on a bond given the cash flows actually received by the investor. B) The realized yield is equal to the yield to maturity even if the bond is sold prior to maturity. C) It is the interest rate at which the present value of the actual cash flows generated by the investment equals the bond's price at the time of sale of the bond. D) All of the above are true.
B) The realized yield is equal to the yield to maturity even if the bond is sold prior to maturity.
A thin market for a security implies a high frequency of trades for that type of security in the markets. A) True B) false
B) false
Most secondary market transactions for corporate bonds take place on the New York Stock Exchange. A) True B) False
B) false
Bonds sell at a discount when the market rate of interest is: A) less than the bond's coupon rate. B) greater than the bond's coupon rate. C) equal to the bond's coupon rate. D) None of the above is true.
B) greater than the bond's coupon rate.
Which of the following statements is true? A) Downward sloping yield curves typically appear in the early to mid-period of a business expansion. B)The interest rate risk premium always adds an upward bias to the slope of the yield curve. C) If investors believe that inflation will be increasing in the near future, the yield curve will be downward sloping. D) The yield curve most commonly observed is downward-sloping.
B)The interest rate risk premium always adds an upward bias to the slope of the yield curve.
Which one of the following statements about bonds is NOT true? A)To compute a bond's price, one needs to calculate the present value of the bond's expected cash flows. B)The value, or price, of any asset is the future value of its cash flows. C) The required rate of return, or discount rate, for a bond is the market interest rate called the bond's yield to maturity D) The expected future cash flows are estimated using the coupons that the bond will pay and the maturity value to be received.
B)The value, or price, of any asset is the future value of its cash flows.
The three economic factors that affect the shape of the yield curve are: A) the real rate of interest, the expected rate of inflation, and marketability. B) the real rate of interest, the expected rate of inflation, and interest rate risk. C) the nominal rate of interest, the expected rate of inflation, and default risk. D) the real rate of interest, the nominal rate of interest, and currency risk.
B)the real rate of interest, the expected rate of inflation, and interest rate risk
54. Which one of the following statements is true of a bond's yield to maturity? A) The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond. B) It is the annual yield that the investor earns if the bond is held to maturity, and all the coupon and principal payments are made as promised. C) A bond's yield to maturity changes daily as interest rates increase or decrease. D)All of the above are true.
D) All of the above are true
Which of the following statements is true of zero coupon bonds? A) Zero coupon bonds have no coupon payments over its life and only offer a single payment at maturity. B) Zero coupon bonds sell well below their face value (at a deep discount) because they offer no coupons. C) The most frequent and regular issuer of zero coupon securities is the U.S. Treasury Department. D) All of the above are true.
D) All of the above are true
Which of the following statements is true? A)The largest investors in corporate bonds are institutional investors such as life insurance companies and pension funds. B)The market for corporate bonds is thin compared to the market for corporate stocks. C) Prices in the corporate bond market tend to be more volatile than prices of securities sold in markets with greater trading volumes. D) All of the above are true.
D) All of the above are true
Which of the following statements is true? A) The lower the transaction costs are, the greater a security's marketability. B) The interest rate, or yield, on a security varies with its degree of marketability. C) U.S. Treasury bills have the largest and most active secondary market and are considered to be the most marketable of all debt securities. D) All of the above are true.
D) All of the above are true
In calculating the current price of a bond paying semiannual coupons, one needs to A) use double the number of years for the number of payments made. B) use the semiannual coupon. C) use the semiannual rate as the discount rate. D) All of the above need to be done.
D) All of the above need to be done.
Which of the following statements is true? A)For a given change in market interest rates, the prices of higher-coupon bonds change more than the prices of lower-coupon bonds. B) If market interest rates rise, a 1-year bond will fall in value more than a 10-year bond. C) If market interest rates rise, bond prices will rise. D) If market interest rates rise, a 10-year bond will fall in value more than a 1-year bond.
D) If market interest rates rise, a 10-year bond will fall in value more than a 1-year bond.
It is easy for individuals to trade in the corporate bond market because: A) the corporate bond market is considered to be very transparent. B) prices in the corporate bond market tend to be more stable. C) centralized reporting of deals between buyers and sellers take place. D) None of the above statements is true.
D) None of the above statements are true
Which of the following statements is most true about zero coupon bonds? A. They typically sell at a premium over par when they are first issued. B. They typically sell for a higher price than similar coupon bonds. C. They are always convertible to common stock. D) They typically sell at a deep discount below par when they are first issued.
D) They typically sell at a deep discount below par when they are first issued.