Finance chapter 7, bonds

What rate does an investor need to earn on a corporate bond to earn the same return as he can on a 3.5% muni if his tax rate is 28% ?

0.035/(1-0.28) = 0.0486 = 4.86%

A corporate bond has a current yield of 6.39% and a price quote of 97.8. What is the coupon rate?

0.0639 = annual interest rate/978 annual interest = 62.49 Coupon rate = 62.49/1,000 = 0.0625 = 6.25%

At what tax rate will an investor be indifferent between a 4.2 municipal bond and a 7% corporate bond?

0.07=0.042/(1-tax rate); tax rate=40%

You purchased a $5,000 face value corporate bond today at an asked bid of 98.76. The bond matures in 7.5 year and carries a 7% coupon. What annual rate of return will you earn if you hold the bond until maturity?

7.22% N=15 PV = -4,938 PMT = 175 FV = 5,000 CPT I = 3.61 2 x 3.61 = 7.22%

Which of the following statements are correct?

A Treasury bond should have a higher yield to maturity than a comparable muni bond If the market interest rate rises, bond prices will fall, and yields to maturity will rise

You manage a trust fund and have a fiduciary responsibility to only purchase investment grade bonds. Which bond rating indicates a bond you could not purchase?

BB, below investment grade

What is correct if a bond is selling at premium?

Coupon rate>current yield>yield to maturity

A corporate bond pays $45 in interest every six months and matures in 11 years. What is the yield to maturity if the bond currently sells for 1,213

N=22; PV = -1,213; PMT=45; FV= 1,000; CPT I, I=3.144 Semi-annual rate = 2x3.144 = 6.29%

What is a term that indicates that a bond is unsecured?

Debenture

For a typical bond, which of the following values are expressed in semiannual terms? when computing the yield to maturity? Select all that apply.

Discount rate, or rate of return, I Interest payments, PMT Number of time periods, N

What are characteristics of high yield bonds?

Increased credit risk, low quality

Which one of these formulas correctly computes the equivalent taxable yield?

Muni yield/(1-tax rate)

A corporate bond has yield to maturity of 6.48 %, a current price of $916.58 and matures in 5 years. What is the coupon rate?

N = 10 I = 3.24 PV = -916.58 PMT = 22.50 Coupon rate = (2 x 22.50)/$1,000 = 0.045 = 4.50%

Where does the majority of trading volumes in bonds in the secondary markets occur?

Over-the-counter

For a typical corporate bond, which one of these applies to the calculation of the bond's yield to maturity? Assume the PMT is input as a positive amount

PV = -(current bond price)

What is a key reason why issuers call bonds?

Significant drop in the markets interest rates

Which of these statements correctly applies to the NYSE bond markets?

The NYSE operates the largest centralized U.S. bond market Corporate bonds are the primary source of bond trading volume of trading on the NYSE

Which one of these correctly defines equivalent taxable yield

The pretax rate needed on a taxable bond to produce the same aftertax rate on a muni bond

What is the definition of yield to maturity?

The rate that will be earned if a bond is purchased today and held until maturity

How does the yield to call differ from the yield to maturity for the same bond?

There are fewer time periods in the yield to call The price used in the yield to call usually exceeds the face value used in the yield to maturity

Which one of these explains why issuers call bonds?

To refinance debt at a lower rate