finance chp 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.)
$1,048 ENTER: N= 5x2=10 I/YR=8.8/2=4.4 PV=? PMT=(.10x1,000)/2=50 FV= 1,000 and find PV=$1,048
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.)
$1,066 ENTER: N= 6 I/YR= 6.875 PV=? PMT= (.0825x1,000) = 82.50 FV= 1,000 and find PV=$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.)
$1,085 ENTER: N= 20x2=40 I/YR=7/2=3.5 PV=? PMT= (.078x1,000)/2=39 FV= 1,000 and find PV=$1,085
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.)
$665 ENTER: N=5 I/YR=8.5/2=4.25 PV=? PMT=0 FV= 1,000 and find PV=$665
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.)
12.2% ENTER: N=4x2=8 I/YR=? PV=-962.13 PMT=(.11x1,000)/2=55 FV= 1,000 and find I/YR=6.11x2=12.22%
Convertible bonds can be converted into shares of preferred stock at twice of the ratio at the discretion of the common stockholders
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Investors buying callable bonds require the lower yields because call provisions work to the benefit of the bond investors and the detriment of the bond issuers.
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Most secondary market transactions for corporate bonds take place at New York Stock Exchange.
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State and federal laws typically require commercial banks, insurance companies, pension funds, other financial institutions, and government agencies to purchase bonds rated below the investment grade, called high-yield bonds.
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The largest investors in corporate bonds are individual investors
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The required rate of return, or discount rate, for a bond is the risk-free rate of interest rate equal to the yield of 3-month Treasury bills.
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The risk that the lender may not receive payments as promised is called interest rate risk.
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The yield to maturity of a bond is the discount rate that makes the future value of the coupon and principal payments equal to the price of the bond.
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The yield to maturity of a bond is the discount rate that makes the future value of the coupon and principal payments greater than the price of the bond
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The yields of corporate bonds are the best proxy measure for the risk-free rate.
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To compute a bond's price, one needs to calculate the future value of the bond's expected cash flows.
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Vanilla bonds have coupon payments that are variable during the life of the bond, with the principal being repaid at the beginning.
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Whenever a bond's coupon rate is greater than the market rate of interest on similar bonds (the bond's yield), the bond will sell at par value, and we call such bonds par-value bonds.
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Zero coupon bonds have no coupon payments over its life and all the accumulated coupons are paid at maturity. Group of answer choices
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the real rate of interest varies with the business cycle, with the highest rates seen at the end of a period of business recession and the lowest at the bottom of an expansion. Group of answer choices
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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.
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The required rate of return, or discount rate, for a bond is the market interest rate called the bond's yield to maturity.
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Allegion plc issues a 0.19 semi-annual coupon bond with 8 years of maturity. What is the bond's price if the yield to maturity (YTM) is 0.08? (Round to the closest answer.)
$1,641 ENTER: (N=16, I/Y=4, PV=?, PMT=95, FV=1000) => PV=$1640.88
Clorox Co issues a 0.02 annual coupon bond with 7 years of maturity. What is the bond's price if the yield to maturity (YTM) is 0.2? (Round to the closest answer.)
$351 ENTER: (N=7, I/Y=20, PV=?, PMT=20, FV=1000) => PV=$351.17
Discover Financial Services issues a 0.09 semi-annual coupon bond with 15 years of maturity. What is the bond's price if the yield to maturity (YTM) is 0.11? (Round to the closest answer.)
$855 ENTER: (N=30, I/Y=5.5, PV=?, PMT=45, FV=1000) and PV=$854.66
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.)
10% ENTER: N=5x2=10 I/YR=? PV=-981.10 PMT=(.08x1,000)/2=40 FV= 1,067.22 and find I/YR=4.78x2=9.56%
Schlumberger Ltd issues a 0.13 coupon bond with annual payments that has 6 years of maturity. What is the bond's yield to maturity (YTM) if the bond is currently priced at $1029 in the markets? (Round to the closest answer.)
12% ENTER: (N=6, I/Y=?, PV=-1029, PMT=130, FV=1000) and find I/Y=0.1229
Which one of the following statements is true?
A discount bond has a coupon rate that is less than the bond's yield to maturity
In calculating the current price of a bond paying semiannual coupons, one needs to
All of the answers are correct need to be done.
Which of the following statements is true about the general dividend valuation model?
It implies that the underlying value of a share of stock is determined by the market's expectations of the future dividends that the firm will generate.
Which of the following statements is NOT true about preferred stock?
Preferred dividends are tax deductible just like the interest on bonds.
Which of the following statement is incorrect?
The face or par value for most corporate bonds is equal to $100, and it is the principal amount owed to bondholders at the end of first year. Zero coupon bonds have no coupon payments over its life and all the accumulated coupons are paid at maturity. Zero coupon bonds sell well above their par value because they offer no coupons.
Which one of the following statements about bonds is NOT true?
The value, or price, of any asset is the future value of its cash flows.
Which of the following statement is correct?
There is a negative relation between changes in the level of interest rates and changes in the price of a bond. Bonds that sell at prices above par are called premium bonds. To compute a bond's price, one needs to calculate the present value of the bond's expected cash flows.
Which of the following statements is most true about zero coupon bonds?
They typically sell at a deep discount below par when they are first issued.
Which one of the following statements about zero coupon bonds is NOT true?
Zero coupon bonds make coupon payments but no principal payment at maturity.
If a bond's coupon rate is equal to the market rate of interest, then the bond will sell:
at a price equal to its face value
If a bond's coupon rate is greater than the market rate of interest, then the bond will sell: Group of answer choices
at a price greater than its face value.
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
As interest rates fall, the prices of bonds decline.
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Bonds that sell at prices below par are called premium bonds.
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Bonds with a call provision pay lower yields than comparable noncallable bonds.
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Bonds with a convertibility provision sells at lower prices than comparable nonconvertible bonds because convertibility does not benefit investors
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Zero coupon bonds sell well above their par value because they offer no coupons.
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Bonds sell at a discount when the market rate of interest is:
greater than the bond's coupon rate
If the expected return on an asset is less than its required return given on the Security Market Line, the stock is said to be.
overpriced
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.
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Bonds that sell at prices above par are called premium bonds.
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Convertible bonds can be converted into shares of common stock at some predetermined ratio at the discretion of the bondholder.
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Corporate bonds are long-term IOUs that represent claims against a firm's assets.
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Interest rate risk is the risk that bond prices will fluctuate as interest rate changes
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Long-term bonds carry substantially more interest rate risk than short-term bonds
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Most secondary market transactions for corporate bonds take place through dealers in the over-the-counter (OTC) market.
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State and federal laws typically require commercial banks, insurance companies, pension funds, other financial institutions, and government agencies to purchase securities rated only as investment grade.
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The constant-growth dividend model will provide invalid solutions when:
the growth rate of the stock exceeds the required rate of return for the stock.
Thermo Fisher Scientific issues a 0.12 annual coupon bond with 29 years of maturity. What is the bond's price if the yield to maturity (YTM) is 0.21? (Round to the closest answer.)
$573 ENTER: (N=29, I/Y=21, PV=?, PMT=120, FV=1000) => PV=$573.13
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.)
13% ENTER: N=6x2=12 I/YR=? PV=-878.21 PMT=(.10x1,000)/2=50 FV= 1,000 and find I/YR=6.49x2=12.98%
Public Service Enterprise Grp issues a 0.13 coupon bond with semi-annual payments that has 20 years of maturity. What is the bond's yield to maturity (YTM) if the bond is currently selling at $896 in the markets? (Round to the closest answer.)
15% (N=40, I/Y=?, PV=-896, PMT=65, FV=1000) and find I/R (multiplied by 2)=0.15
Gap Inc issues a 0.04 coupon bond with annual payments that has 11 years of maturity. What is the bond's yield to maturity (YTM) if the bond is currently priced at $950 in the markets? (Round to the closest answer.)
5% ENTER: (N=11, I/Y=?, PV=-950, PMT=40, FV=1000) and find I/Y=0.0459
Scripps Networks Interactive issues a 0.06 coupon bond with semi-annual payments that has 28 years of maturity. What is the bond's yield to maturity (YTM) if the bond is currently selling at $910 in the markets? (Round to the closest answer.
7% ENTER: (N=56, I/Y=?, PV=-910, PMT=30, FV=1000) and find I/R (multiplied by 2)=0.07
Which of the following statements is true?
As interest rates decline, the prices of bonds rise; and as interest rates rise, the prices of bonds decline. High-yield (junk) bonds are those rated BB and lower. A discount bond has a coupon rate that is less than the bond's yield to maturity.
The risk that the lender may not receive payments as promised is called default risk.
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The value, or price, of any asset, including bonds, is the present value of its future cash flows. Group of answer choices
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There is a negative relation between changes in the level of interest rates and changes in the price of a bond.
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U.S. Treasury securities are the best proxy measure for the risk-free rate.
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Vanilla bonds have coupon payments that are fixed for the life of the bond, with the principal being repaid at maturity. Group of answer choices
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Whenever a bond's coupon rate is lower than the market rate of interest on similar bonds, the bond will sell at a discount, and such bonds are called discount bonds.
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Zero coupon bonds have no coupon payments over its life and only offer a single payment at maturity.
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Zero coupon bonds sell well below their par value because they offer no coupons. Group of answer choices
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The face or par value for most corporate bonds is equal to $1,000, and it is the principal amount owed to bondholders at maturity.
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The most important investors in corporate bonds are big institutional investors such as life insurance companies, pension funds, and mutual funds.
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