Chapter 12

7. What is the yield to maturity for the data in problem 6? Assume there are 10 years left to maturity. It is a $1,000 par value bond.

9.96% Use Calculator. CPT. I/Y. & Multiply by 2.

Current yield is the annual interest divided by the current price of the bond.

True

Short-term rates are more volatile than long-term rates

True

How do you find current yield?

annual interest payment/price of bond. Regular calculator. You don't need a bunch of information in the problem to compute current yield.

9. What is the current yield in problem 8? Why is it slightly higher than the yield to maturity?

$100/$1,090.90 = 9.17% It is higher than yield to maturity because it does not take into consideration the fact that the bond price will decline from $1,090.90 to $1,000 over the next 20 years. This factor lowers the yield to maturity.

3. Given the facts in problem 2, what would be the price if interest rates go down to 8 percent? (Once again, do a semiannual analysis.)

$1086.46 Use Calculator. CPT. PV.

1. Given a 10-year bond that sold for $1,000 with a 13 percent coupon rate, what would be the price of the bond if interest rates in the marketplace on similar bonds are now 10 percent? Interest is paid semiannually. Assume a 10-year time period.

$1186.93 Use Calculator. CPT. PV.

2. Given a 15-year bond that sold for $1,000 with a 9 percent coupon rate, what would be the price of the bond if interest rates in the marketplace on similar bonds are now 12 percent? Interest is paid semiannually. Assume a 15-year time period.

$793.53 Use Calculator. CPT. PV.

11. What is the approximate yield to maturity of a 14 percent coupon rate, $1,000 par value bond priced at $1,160 if it has 16 years to maturity?

11.76% Use Calculator. CPT. I/Y. & then multiply by 2.

8. What is the yield to maturity for a 10 percent coupon rate bond priced at $1,090.90? Assume there are 20 years left to maturity. It is a $1,000 par value bond.

9.01% Use Calculator. CPT. I/Y. & then multiply by 2.

6. What is the current yield of an 8 percent coupon rate bond priced at $877.60?

9.12% 80/877.60

What formula measure would an investor use to calculate the yield on a 20-year bond with 10 years to maturity, if he or she only intends to hold the bond for 5 years? A. Anticipated realized yield B. Yield to call C. Current yield D. Yield to maturity E. Any one of the above will measure the yield

A. Anticipated realized yield

6. What effect, if any, will a decrease in interest rates have on bond values? A. Bond values will increase B. Bond values will decrease C. Bond values may increase or decrease, depending on the maturity, quality, and coupon rate D. None of the above

A. Bond values will increase

What will happen to the market value of a bond if interest rates increase? A. The market value will decrease B. The market value will increase C. The market value will increase or decrease, depending on the general economic climate D. The market value should remain level

A. The market value will decrease

The term structure of interest rates refers to: A. the relationships between interest rates and term to maturity. B. the idea that any long-term rate is the average of expected future short-term rates. C. a general expectation of higher future interest rates. D. the idea that the terms of the bond may change as time to maturity changes. E. More than one of the above are true

A. the relationship between interest rates and term maturity.

Short-term interest rates have _________ volatility in comparison to long-term interest rates. A. Much less B. More C. Equal D. Slightly less

B. More

7. The upward slope of the yield curve is caused by investors' recognition of the relative difficulty of converting long-term securities to cash. This is the: A. expectations hypothesis. B. liquidity preference theory. C. market segmentation theory. D. More than one of the above

B. liquidity preference theory.

The value of a bond at any given time is the sum of: A. the future interest payments and the par value. B. the present value of future interest payments and the present value of the par value. C. the future value of the interest payments and the future value of the par value. D. the present value of future interest payments and the market value. E. the present value of future interest payments and the future value of the par value.

B. the present value of future interest payments and the present value of the par value.

A 15-year, 7% coupon rate bond is selling for $771.82. What is the current yield of the bond? A. 22.8% B. 7.0% C. 9.1% D. 10.0% E. 30.7%

C. 9.1% 70/$771.82

The total return an investor would receive from income plus capital appreciation, assuming a bond is held to maturity, is called the: A. call premium. B. current yield. C. yield to maturity. D. capital gains yield. E. More than one of the above

C. yield to maturity

8. The market segmentation theory focuses on: A. the impact of institutional investors on the yield curve. B. the maturity preferences of banks and those of life insurance companies. C. phases of the business cycle. D. All of the above

D. All of the above

9. A down-sloping yield curve indicates: A. investors' anticipation of lower interest rates. B. investors' anticipation of lower inflation. C. that institutional investors are selling long-term bonds. D. More than one of the above

D. More than one of the above.

A basis point is one-tenth of l%.

False

A descending term structure reflects the view that rates will increase in the future.

False

The price of a bond represents simply the future value of interest payments.

False

An ascending term structure reflects the view that rates will increase in the future.

True

Current yield does not take the maturity date into consideration.

True

The anticipated realized yield represents the return over the holding period

True

The expectations hypothesis is that any long-term rate is an average of the expectations of future short-term rate over the applicable time horizon.

True

The price of a lower coupon rate bond is more sensitive to interest rate changes than higher coupon rate bonds.

True

The term structure of interest rates depicts the relationship between maturity and interest rates

True

Yield to maturity considers annual interest, difference between current price and maturity value, and years to maturity.

True

How do you find yield to maturity?

Use Financial Calculator. CPT. I/Y & then multiply it by 2. PV is negative.

How do you find the price of the bond?

Use Financial Calculator. CPT. PV.

10. A 15-year, 7 percent coupon rate bond is selling for $839.27. a. What is the current yield? c. Why is the current yield higher/lower than the yield to maturity?

a. $70/ $839.27=8.34% c. Current yield: 8.97%. The current yield is lower than the yield to maturity because current yield does not take into consideration the fact that the bond price will inccrease from $839.27 to $1000 over the next 15 years. The factor raises the yield to maturity.

12. a. Using the facts given in problem 11, what would be the yield to call if the call can be made in four years at a price of $1,080? b. Explain why the answer is lower in part a than in problem 11. c. Given a call value of $1,080 in four years, is it likely that the bond price would actually get to $1,160?

a. 10.64% b. Because the bond is callable at $1,080 in four years, the investor must consider the $80 loss in value over four years from $1,160 to $1,080 ($20 per year). This substantially reduces yield. c. No. The threat of the call will likely keep the price closer to $1,080 (though with four years to call, a littler higher value than $1,080 may be possible if the yield on the bond is well above market rates).