Ch 07- Assignment - Bonds and Their Valuation

If you were to calculate the yield on a security with a 10-year US Treasury security, the yield will be equal to ____.

6.20%

Suppose you read an article about the Golden Gate Bridge and Highway District bonds. It includes the following information: Bridge Bonds Series A Dated 7-15-2005 4.375% Due 7-15-2055 @100.00 What is the issuing date of this bond?

7-15-2005

If Badger Corp. issued new bonds today, what coupon rate must the bonds have to be issued at par?

7.93%

If interest rates are expected to remain constant, what is the best estimate of the remaining life left for Badger Corp.'s bonds?

8 years

Given your computation and conclusions, which of the following statements is true?

When the coupon rate is greater than Jackson's required return, the bond should trade at a premium.

Now, consider the situation in which Jackson wants to earn a return of 13.75%, but the bond being considered for purchase offers a coupon rate of 15.75%. Again, assume that the bond pays semiannual interest payments and has three years to maturity. If you round the bond's intrinsic value to the nearest whole dollar, then its intrinsic value of ______ (rounded to the nearest whole dollar) is _____ its par value, so that the bond is _______.

$1048; greater than; trading at a premium

If Chapman Inc. wants to issue new 30-year bonds today, what coupon rate would the bonds have to pay to be issued at par?

$12.58

The following bond list is from the business section of a newspaper on January 1, 2016. Notice that each bond shown matures on January 1 in 5, 10, or 30 years. Each bond shown pays a semiannual coupon and the coupon rate is in the column labeled Coupon. The Last Price and Last Yield columns indicate each bond's price and YTM at the end of trading. EST Spread indicates the bond's spread above the relevant US Treasury benchmark, given as a percentage. UST indicates which US Treasury security maturity is the relevant benchmark for each bond. EST Volume shows the number of bonds traded during the day. Prices are stated relative to a par value of $100. Fill in the nominal YTM for Pickman Inc.'s bonds. (Note: Do not round your intermediate calculations.)

$8.92%

The following bond list is from the business section of a financial newspaper on January 1, 2016. Assume that each bond shown matures on January 1 in 5, 10, or 30 years. Each bond shown pays a semiannual coupon and the coupon rate is in the column labeled Coupon. The Last Price and Last Yield columns indicate each bond's price and YTM at the end of trading. EST Spread indicates the bond's spread above the relevant US Treasury benchmark, expressed as a percentage. UST indicates which US Treasury security maturity is the relevant benchmark for each bond. EST Volume shows the number of bonds traded during the day. Notice also that prices are stated relative to a par value of $100. Assume all bonds have the same default premium. Fill in the value of Virtucon Co.'s bonds.

$90.98

Assume that a $1,000,000 par value, semiannual coupon US Treasury note with three years to maturity has a coupon rate of 6%. The yield to maturity (YTM) of the bond is 9.90%. Using this information and ignoring the other costs involved, calculate the value of the Treasury note:

$900,865.54

Suppose you read an article about the Golden Gate Bridge and Highway District bonds. It includes the following information: Bridge Bonds Series A Dated 7-15-2005 4.375% Due 7-15-2055 @100.00 What is the coupon interest rate of this bond?

4.375%

If interest rates are expected to remain constant, what is the best estimate of the remaining life left for Demed Inc.'s bonds?

18 years

If Demed Inc. issued new bonds today, what coupon rate must the bonds have to be issued at par?

8.24%

Assume that a $1,000,000 par value, semiannual coupon US Treasury note with five years to maturity has a coupon rate of 6%. The yield to maturity (YTM) of the bond is 9.90%. Using this information and ignoring the other costs involved, calculate the value of the Treasury note:

849,059.88

Complete the following table by identifying the appropriate corresponding variables used in the equation. A ________ , _________ B_________, 1,000 C, Semiannual , __________

Bond's semiannual coupon payment; $78.75; Bond's par value; 4.5000%

Based on your understanding of bond ratings and bond-rating criteria, which of the following statements is true?

An indenture is a legal document that details the rights of bondholders. If the indenture includes a sinking funds provision, the bond will have less default risk.

Which feature of a bond contract allows the issuer to redeem a bond issue immediately in its entirety at an amount greater than par value prior to maturity?

Call provision

Innovative Energy LLC is a start-up company that just raised $100,000 to conduct a third-party feasibility study on its business model. The company agreed to treat the $100,000 investment as debt at 10% interest rate; however, the investor has the right to exchange the debt for common stock during the company's next financing round. Which of the following terms best describes the $100,000 investment?

Convertible bond

As the name suggests, convertible bonds allow the owner the option to convert the bonds into a fixed number of shares of common stock. Which of the following best describes the difference between a convertible bond and a warrant?

Convertible bonds give the investor the option to exchange bonds for shares at a certain price, whereas warrants give the investor the option to buy shares at a certain price.

What type of bonds are these?

Corporate bonds

A bond investor is analyzing the following annual coupon bonds: Interest rates are assumed to remain constant over the next 10 years.

Curve A: Smith Curve b: Irwin Curve C: Johnson

Which bond is trading at a premium?

Demo Inc.

Based on your understanding of bond ratings and bond-rating criteria, which of the following statements is true?

During an economic recession and in a pessimistic environment, the yield spread between US government bonds and corporate bonds could be higher than during good economic times.

Consider the case of an investor, Nazim: Nazim wants to include putable bonds in his investment portfolio. Nazim is likely to put the bonds when:

He is in need of cash.

These bonds are collateralized securities with first claims in the event of bankruptcy.

Senior mortgage bonds

Based on the preceding information, which of the following statements are true? Check all that apply.

Irwin Corporation's bonds are selling at par. The current yield for Smith, LLC's bonds is greater than 9%.

In January 2009, American electronics retailer Circuit City Inc. closed all of its stores and sold all of its merchandise. This is an example of:

Liquidation

Which bond is trading at a premium?

Murphy & Co.

As the name suggests, convertible bonds allow the owner the option to convert the bonds into a fixed number of shares of common stock. Which of the following are most likely to have higher yields?

Nonconvertible bonds

Consider the case of an investor, Nazim: Nazim wants to include bonds in his investment portfolio, but he wants the option to sell the bond to the issuer at a specified price on a certain date before the maturity of the bond. Which of the following bond redemption features should he pick?

Putable bond

In December 2008, Hawaiian Telcom took action to strengthen its balance sheet by reducing debt. Although the company continued to operate, its creditors could not collect their debts or loan payments that were due prior to the legal action that the company took. However, on November 30, 2009, the company had $75 million in cash on hand.

Reorganization

In May 2009, General Motors started closing 2,600 of its retail outlets and finally filed for bankruptcy in June. It emerged from the bankruptcy protection by July 2009, after it received funding from the US government, the Canadian government, United Automobile Workers Union, and GM bondholders. This is an example of:

Reorganization

These bonds are considered the riskiest of all corporate bonds and thus offer the highest interest rates.

Subordinated debentures

These bonds have a claim on assets only after senior debt has been paid in full.

Subordinated debentures

Based on the graph, which of the following statements is true?

The 10-year bond has more interest rate risk.

Coupon payments are fixed, but the percentage return that investors receive varies based on market conditions. This percentage return is referred to as the bond's yield. Yield to maturity (YTM) is the rate of return expected from a bond held until its maturity date. However, the YTM equals the expected rate of return under certain assumptions. Which of the following is one of those assumptions?

The bond will not be called.

Coupon payments are fixed, but the percentage return that investors receive varies based on market conditions. This percentage return is referred to as the bond's yield. Yield to maturity (YTM) is the rate of return expected from a bond held until its maturity date. However, the YTM equals the expected rate of return under certain assumptions. Which of the following is one of those assumptions?

The probability of default is zero.

Issuers can gradually reduce the outstanding balance of a bond issue by using a sinking fund account into which they deposit a specified amount of money each year. To operationalize the sinking fund provision of an indenture, issuers can (1) purchase a portion of the debt in the open market or (2) call the bonds if they contain a call provision. Under what circumstances would a firm be more likely to buy the required number of bonds in the open market as opposed to using one of the other procedures?

When interest rates are higher than they were when the bonds were issued

Which of the following types of bonds have the least default risk?

Treasury bonds

True or False: Assuming all else is equal, long-term securities are exposed to higher interest rate risk than short-term securities.

True

Based on your understanding of bond ratings and bond-rating criteria, which of the following statements is true?

US government bonds usually have the lowest yields in the bond markets.

Based on the information given in the following statement, answer the questions that follow: In July 2009, Walmart sold 100 billion yen of five-year samurai bonds. Lead managers in the deal were Mizuho Securities, BNP Paribas, and Mitsubishi UFJ Securities. Who is the issuer of the bonds?

Walmart

When are issuers more likely to call an outstanding bond issue?

When interest rates are lower than they were when the bonds were issued

Consider the case of Badger Corp.: Badger Corp. has 9% annual coupon bonds that are callable and have 18 years left until maturity. The bonds have a par value of $1,000, and their current market price is $1,100.35. However, Badger Corp. may call the bonds in eight years at a call price of $1,060. What are the YTM and the yield to call (YTC) on Badger Corp.'s bonds?

YTM 7.93% YTC 7.83%

Consider the case of Demed Inc.: Demed Inc. has 9% annual coupon bonds that are callable and have 18 years left until maturity. The bonds have a par value of $1,000, and their current market price is $1,070.35. However, Demed Inc. may call the bonds in eight years at a call price of $1,060. What are the YTM and the yield to call (YTC) on Demed Inc.'s bonds?

YTM 8.24% YTC 8.32%

A bond contract feature that requires the issuer to retire a specified portion of the bond issue each year is called a _____.

an indenture

The contract that describes the terms of a borrowing arrangement between a firm that sells a bond issue and the investors who purchase the bonds is called ______.

an indenture

If a bond is selling for a price much lower than its par value, it is most likely that the bond is _____ bond.

an outstanding

A bond's ______ gives the issuer the right to call, or redeem, a bond at specific times and under specific conditions.

call provision

Which type of bonds offer a higher yield?

callable bonds

A bond's ______ allows a bondholder or preferred stockholder to convert their bond or preferred share, respectively, into a specified number or value of common shares.

convertibility provision

A bond's _____ refers to the interest payment or payments paid by a bond.

coupon payment

These bonds are not backed by any physical collateral. They are backed by the reputation and creditworthiness of the issuing company.

debentures

These bonds are traded in the bond markets based on investors' belief that the issuer will not default on the repayment. These bonds have no collateral and usually offer higher yields.

debentures

A bond issuer is said to be in _____ if it does not pay the interest or the principal in accordance with the terms of the indenture agreement or if it violates one or more of the issue's restrictive covenants.

default

A bond issuer is said to be in ______ if it does not pay the interest or the principal in accordance with the terms of the indenture agreement or if it violates one or more of the issue's restrictive covenants.

default

Based on your calculations and understanding of semiannual coupon bonds, complete the following statement: The T-note described in this problem is selling at a ______.

discount

The mathematics of bond valuation imply a predictable relationship between the bond's coupon rate, the bondholder's required return, the bond's par value, and its intrinsic value. These relationships can be summarized as follows: •When the bond's coupon rate is equal to the bondholder's required return, the bond's intrinsic value will equal its par value, and the bond will trade at par. •When the bond's coupon rate is greater than the bondholder's required return, the bond's intrinsic value will _______ its par value, and the bond will trade at a premium. •When the bond's coupon rate is less than the bondholder's required return, the bond's intrinsic value will be less than its par value, and the bond will trade at ______.

exceed; a discount

If the coupon interest rate is 4.375% for the first six months and changes to a rate equal to the 10-year Treasury bond rate plus 1.3% thereafter, the bond is called a _____ bond.

floating-rate

Nazim also recently bought bonds with a clause stating that interest will be paid only when the company has enough earnings to pay for it. Nazim has invested in _____.

income bond

Based on your calculations and understanding of semiannual coupon bonds, complete the following statement: Assuming that interest rates remain constant, the T-note's price is expected to _____.

increase

The contract that describes the terms of a borrowing arrangement between a firm that sells a bond issue and the investors who purchase the bonds is called the ___.

indenture

The contract that describes the terms of a borrowing arrangement between a firm that sells a bond issue and the investors who purchase the bonds is called the ____.

indenture

Nazim also recently bought bonds that have their interest rate tied to the consumer price index (CPI) so that he will be protected if inflation rates increase. Nazim has invested in _____.

indexed bonds

A bond's _____ refers to its face value and the amount of money that the issuing entity borrows and promises to repay on the maturity date.

par value

Nazim also recently bought bonds with a clause stating that interest will be paid based on the inflation rate. When the inflation rate increases, the interest on the bonds will also increase. Nazim has invested in ______.

purchasing power bonds

Based on this equation and the data, it is ______ to expect that Jackson's potential bond investment is currently exhibiting an intrinsic value greater than $1,000.

reasonable

Smith Incorporated's bonds have exhibited a substantial trading volume in the past few years. Its bonds would be referred to as a _____.

seasoned issue

These bonds are backed by real estate holdings and equipment, and if a company goes bankrupt, the collateral can be sold off to compensate for the default. These bonds, more so than other collateralized securities, have prior claims over assets.

senior mortgage bonds

Remember, a bond's coupon rate partially determines the interest-based return that a bond ______ pay, and a bondholder's required return reflects the return that a bondholder ______ to receive from a given investment.

will would like

If the price of the bond is initially discounted and offers no coupon payments, the bond is called a bond.

zero coupon