Fina ch 6

A "convertible bond" provides the option to convert:

a bond into shares of common stock.

The coupon rate of a bond equals:

a defined percentage of its face value.

A bond's yield to maturity takes into consideration:

both the current yield and any price changes.

What price will be paid for a U.S. Treasury bond with an ask price of 135.4062 if the face value is $100,000?

$135,406.20 Price = 1.354062 × $100,000 = $135,406.20

You purchased a 6% annual coupon bond at par and sold it one year later for $1,015.16. What was your rate of return on this investment if the face value at maturity was $1,000?

7.52% Rate of return = [$1,015.16 + (.06 × $1,000) - $1,000]/$1,000 = .0752, or 7.52%

How much would an investor expect to pay for a $1,000 par value bond with a 9% annual coupon that matures in 5 years if the interest rate is 7%?

$1,082.00 Price = (.09 × $1,000) {(1/.07) - [1/.07(1.07)5]} + $1,000/1.075 Price = $1,082.00

A bond is priced at $1,100, has 10 years remaining until maturity, and has a 10% coupon, paid semiannually. What is the amount of the next interest payment?

$50 Coupon payment = (.10 × $1,000)/2 = $50

If a 4-year bond with a 7% coupon and a 10% yield to maturity is currently worth $904.90, how much will it be worth 1 year from now if interest rates are constant?

$925.39

How much should you pay for a $1,000 bond with 10% coupon, annual payments, and 5 years to maturity if the interest rate is 12%?

$927.90 Price = (.10 × $1,000) {(1/.12) - [1/.12(1.12)5]} + $1,000/1.125 Price = $927.90

What is the yield to maturity for a bond paying $100 annually that has 6 years until maturity and sells for $1,000?

10.0% Since the bond is selling at par, the yield to maturity must equal the coupon rate which is: Coupon rate = $100/$1,000 = .10, or 10%

What is the rate of return for an investor who pays $1,054.47 for a 3-year bond with coupon of 6.5% and sells the bond 1 year later for $1,037.19?

4.53% Rate of return = [$1,037.19 + (.065 × $1,000) - $1,054.47]/$1,054.47 = .0453, or 4.53%

What is the current yield of a bond with a 6% coupon, 4 years until maturity, and a price quote of 84?

7.14% Current yield = $60/(.84 × $1,000) = .0714, or 7.14%

The market price of a bond with 12 years until maturity and an annual coupon rate of 8% increased yesterday. Which one of these may have caused this price increase?

Market interest rates decreased.

An investor holds two bonds, one with 5 years until maturity and the other with 20 years until maturity. Which of the following is more likely if interest rates suddenly increase by 2%?

The 20-year bond will decrease more in price.

What happens to a discount bond as the time to maturity decreases?

The bond price increases.

Which of the following statements is correct for a 10% coupon bond that has a current yield of 7%?

The bond's maturity value is lower than the bond's price.

What happens to the coupon rate of a $1,000 face value bond that pays $80 annually in interest if market interest rates change from 9% to 10%?

The coupon rate remains at 8%.

What is the relationship between a bondholder's rate of return and the bond's yield to maturity if he does not hold the bond until it matures?

There is no predetermined relationship between the rate of return and the yield to maturity.

The current yield of a bond can be calculated by:

dividing the annual coupon payments by the price.

Consider a 3-year bond with a par value of $1,000 and an 8% annual coupon. If interest rates change from 8 to 6% the bond's price will:

increase by $53.46.

When an investor purchases a $1,000 par value bond that was quoted at 97.162, the investor:

pays 97.162% of face value for the bond.

The discount rate that makes the present value of a bond's payments equal to its price is termed the:

yield to maturity.