Fin Chapter 6

How are the cash flows of a coupon bond different from an amortizing loan?

A coupon bond pays interest over the life of the bond and returns the principle at the end of the term. Thus the cash flows are smaller over the life of the bond with a lump-sum payment at the end. In contrast, an amortizing loan has identical cash flows over its life with a part of the cash flow going towards interest and the balance as return of principle.

How are the cash flows of a zero-coupon bond different from those of a coupon bond?

A zero-coupon bond has only two cash flows over its life. The first one is associated with the issues borrowing the money and the second when the issuer returns the principle. A coupon bond, on the other hand, has several cash flows over its life. The first cash flow of both these types of bonds, zero-coupon and coupon bond are similar as they denote the issuer borrowing the money. However, for a coupon bond the subsequent cash flows over its life correspond to the interest payment promised by the issuer with a final payment equal to the return of principal.

Maturity (years): 1 2 3 4 5 Price: $97.25 $94.53 $91.83 $89.23 $87.53 The above table shows the price per $100-face value bond of several risk-free, zero-coupon bonds. What is the yield to maturity of the two year, zero-coupon, risk-free bond shown? A. 1.43% B. 5.71% C. 0.05% D. 2.85%

D. 2.85%

The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 10 years. The bond certificate indicates that the stated coupon rate for this bond is 8.2% and that coupon payments are to be made semiannually. Assuming the appropriate YTM on the Sisyphean bond is 7..3%, then the price that this bond trades for will be closest to... A. $1063 B. $850 C. $1276 D. $1488

A. $1063

What must be the price of a $10,000 bond with a .1% coupon rate, semiannual coupons, and five years to maturity if it has a yield to maturity of 10% APR? A. $8494.26 B. $10,193.11 C. 11,891.97 D. $6795.41

A. $8494.26

A risk-free, zero-coupon bond with a $5000 face value has 15 years to maturity. The bond currently trades at $3750. What is the Yield to Maturity of this bond? A. 1.936% B. 0.968% C. 62.500% D. 75.00%

A. 1.936%

What is the coupon rate of an eight year, $10,000 bond wth semiannual coupons and a price of $9,006.6568, if it has a yield to maturity of 6.5%? A. 4.888% B. 5.87% C. 6.84% D. 3.91%

A. 4.888%

Why is the yield to maturity of a zero-coupon, risk free bond that matures at the end of a given period the risk-free interest rate for that period? A. Since such a bond provides a risk free return over that period, the Law of One Price guarantees that the risk free interest rate equals the yield to maturity B. Since a bond's price will converge on its face value as the bond approaches the maturity date, the Law of One Price dictates that the risk free interest rate will reflect this convergence C. Since interest rates will rise and fall in response to the movement in bond prices D. Since there is, by definition, no risk in investing in such bonds, the return from such bonds is the best that can be expected from any investment over the period

A. Since such a bond provides a risk free return over that period, the Law of One Prices guarantees that the risk free interest rate equals the yield to maturity

A bond certification includes... A. The terns of the bond B. The individual to whom payments will be made C. the yield to maturity of the bond D. The price of the bond

A. The terms of the bond

0 1 2 3 59 60 +---+--------+---------+ ......------+---------+- $57.50 $57.5 $57.5 $57.5 $5057.5 A corporation issues a bond that generates the above cash flows. If the periods are of 3-month intervals, which of the following best describes that bond? A. a 15-year bond with a notional value of $5000 and a coupon rate of 4.6% paid quarterly B. a 15-year bond with a notional value of $5000 and a coupon rate of 1.2% paid annually C. a 30-year bond with a notional value of $5000 and a coupon rate of 3.5% paid semiannually D. a 60-year bond with a notional value of $5000 and a coupon rate of 4.6% paid quarterly.

A. a 15 year bond with a notional value of $5000 and a coupon rate of 4.6% paid quarterly

What is the coupon payment of a 25-year $1000 bond with a 4.5% coupon rate with quarterly payments? A. $3.75 B. $11.25 C. $22.50 D. $45.00

B. $11.25 ($1000 * 0.045 / 4 = $11.25)

Shown above is information regarding one of Bank of America's bonds. How much would the holder of such a bond earn each coupon payment for each $100 in face value if coupons are paid semiannually? A. $1.49 B. $2.15 C. $2.32 D. $4.30

B. $2.15

The Sisyphean Company has a bond with a face value of $5,000 that matures in 10 years. The bond certificate indicates that the stated coupon rate for the bond is 8.9% and that the coupon payments are to be made semiannually. How much will each semiannual coupon payment be? A. $445.00 B. $222.50 C. $667.50 D. $890.00

B. $222.50

Consider a zero-coupon bond with $100 face value and 15 years to maturity. If the YTM is 7.4%, this bond will trade at a price closet to... A. $41.13 B.$34.27 C.$47.98 D.$54.83

B. $34.27

What is the coupon payment of a 15 year $10,000 bond with a 9% coupon rate with semiannual payments? A. $150.00 B. $450 C. $900.00 D. $180.00

B. $450 ($10,000 * 0.09 / 2 = $450)

Th Sisyphean company has a bond outstanding with a face value of $1000 that reaches maturity in 10 years. The bond certificate indicates that the stated coupon rate for this bond is 8.0% and that the coupon payments are to be made semiannually. Assuming the appropriate YTM on this bond is 11.1%, then the price that this bond trades for will be closest to... A. $652 B. $816 C. $979 D. $1142

B. $816

The current zero-coupon yield curve for risk-free bonds is shown above. What is the price of a zero-coupon, four-year, risk-free bond for $100? (graph not pictured) A. $85.64 B. $87.99 C. $92.15 D. $96.67

B. $87.99

What is the yield to maturity of an 8-year, $5,000 bond with a 4.4% coupon rate and semiannual coupons if this bond is currently trading for a price of $4,723.70? A. 6.31% B. 5.26% C. 7.36% D. 2.63%

B. 5.26%

A corporate bond makes payments of $9.67 every month for 10 years with a final payment of $2009.67. Which of the following best describes this bond? A. A 10 year payment bond with a face value of $2,000 and a coupon rate of 4.8% with monthly payments B. a 10 year bond with a face value of $2,000 and a coupon rate of 5.8% with monthly payments C. a 10 year bond with a face value of $2,009.67 and a coupon rate of 4.8% with monthly payments D. a 10 year bond with a face value of $2,009.67 and a coupon rate of 5.8% with monthly payments

B. A 10 year bond with a face value of $2,000 and a coupon rate of 5.8% with monthly payments

Which of the following statements regarding bonds and their terms is false? A. Bonds are securities sold by the governments and corporations to raise money from investors today in exchange for a promised future payment. B. By convention, the coupon rate is expressed as an effective annual rate. C. Bonds typically make two types of payments to their holders D. The time remaining until the repayment date is known as the terms of the bond.

B. By convention, the coupon rate is expressed as an effective annual rate

Which of the following statements regarding bonds and their terms is FALSE? A. The amount of each coupon payment is determined by the coupon rate of the bond B. Prior to its maturity date, the price of a zero-coupon bond is always greater than its face value C. The zero-coupon bond has no periodic interest payments D. Treasury bills are U.S. Government bonds with a maturity of up to one year.

B. Prior to its maturity date, the price of a zero-coupon bond is always greater than its face value

A $1,000 bond with a coupon rate of 6.2% paid semiannually has 8 years to maturity and a yield to maturity of 8.3%, what will happen to the price of the bond? A. The price of the bond will fall by $18.93. B. The price of the bond will fall by $15.78 C. The price of the bond will rise by $15.78 D. The price of the bond will not change

B. The price of the bond will fall by $15.78

Which of the following statements regarding bonds and their terms is FALSE A. The internal rate of return of an investment in a zero-coupon bond is the rate of return that investors will earn on their money if they buy a default free bond at its current price and hold it to maturity. B. The yield to maturity of a bond is the discount rate that sets the future value of the promised bond payments equal to the current market price of the bond. C. Financial professionals also use the term spot interest rates to refer to the default-free zero-coupon yields. D. When we calculate a bond's yield to maturity by solving the formula, price of an n-period bond = [coupon/(1+YTM)^1] + [Coupon/(1 +YTM)^2] +..... [(coupon +face)/(1 +YTM)^n], the yield we compute will be a rate per coupon interval.

B. The yield to maturity of a bond is the discount rate that sets the future value of the promised bond payments equal to the current market price of the bond.

Which of the following statements regarding bonds and their terms is FALSE? A. One advantage of quoting the yield to maturity rather than the price is that the yield is independent of the face value of the bond. B. Unlike the case of bonds that pay coupons, for zero-coupon bonds, there is no formula to solve for the yield to maturity. C. Because we can convert ay bond price into a yield, and vice versa, bond prices and yields are often used interchangeably. D. The internal rate of return (IRR) of a bond is given a special name, the yield to maturity (YTM)

B. Unlike the case of bonds that pay coupons, for zero-coupon bonds, there is no formula to solve for the yield to maturity.

The Sisyphean Company has a bond woth a face value of $1000 that reaches maturity in 5 years. The bond certificate indicates that the stated coupon rate for this bond is 8.1% and that the coupon payments are to be made semiannually. Assuming the appropriate YTM on this bond is 10.6%, then this bond will trade at... A. a premium B. a discount C. par D. none of the above

B. a discount

Shown above is information from FINRA regarding one of Caterpillar Financial Service's bonds. How much would the holder of such a bond earn each coupon payment for each $100 in face value if coupons are paid annually? A. $1.38 B. $3.95 C. $4.00 D. $4.36

C. $4.00

An investor holds a Ford bond with a face value of $5,000, a coupon rate of 8.5% and a semiannual payments that matures on January 15, 2029. How much will the investor receive on January 15, 2029? A. $2606.25 B. $5000.00 C. $5212.50 D. $5425.00

C. $5212.50

A risk-free, zero-coupon bond has 15 years to maturity. Which of the following is closest to the price per $100 of a face value bond that will trade at if the YTM is 6.1% A. $663.78 B. $774.42 C. $553.15 D. $885.05

C. $553.15

What must be the price of a $1,000 bond with a 5.8% coupon rate, annual coupons, and 20years to maturity if YTM is 7.8% APR? A. $960.82 B. $1120.95 C. $800.68 D. $640.54

C. $800.68

The current zero-coupon yield curve for risk free bonds is shown above. What is the risk-free interest rate on a 4-year maturity? (graph not pictured) A. 3.00% B. 3.15% C.3.25% D. 6.34%

C. 3.25%

What is the yield to maturity of a one-year, risk-free, zero-coupon bond with a $10,000 face value and a price of $9400 when released? A. 3.919% B. 6.000% C. 6.383% D. 0.009%

C. 6.383%

What is the yield to maturity of a ten-year, $10,000 bond with a 5.4% coupon rate and semiannual coupons if this bond is currently trading for a price of $9,207.93? A. 7.79% B. 9.08% C. 6.49% D. 3.24%

C. 6.49%

The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 5years. The bond certificate indicates that the stated coupon rate for this bond is 10.0% and that the coupon payments are to be made semiannually. Assuming the appropriate YTM on this bond is 7.5%, then this bond will trade at... A. Par B. A dismount C. A premium D. None of the above

C. A premium

How much are investors in zero-coupon bonds compensated for making such an investment? A. such bonds are purchased at their face value and sold at a premium on a later date B. Such bonds make regular interest payments C. Such bonds are purchased at a discount, below their face value D. Such bonds have a lower face value as compared to other bonds of similar term,

C. Such bonds are purchased at a discount, below their face value

Which of the following statements regarding bonds and their terms is FALSE? A. The bond certificate typically specifies that the coupons will be paid periodically until the maturity date of the bond B.The bond certificate indicates the amounts and dates of all payments to be made C. The only cash payments the investor will receive from a zero-coupon bond are the interest payments that are paid up until the maturity date D. The face value of a bond is repaid at maturity.

C. The only cash payment the investor will receive from a zero-coupon bond are the interest payments that are paid up until the maturity date.

A university issues a bond with a face value of $5000 and a coupon rate of 4.41% that matures on July 15, 2018. The holder of such a bond receives coupon payments of $110.25. How frequently are coupon payments made in this case? A. monthly B. quarterly C. Semiannually D annually

C. semiannually

A risk free, zero-coupon bond with a face value of $10,000 has 15 years to maturity. If the YTM is 6.1%, which of the following would be closest to the price this bond will trade at? A. $4937 B. $5760 C. $6582 D. $4114

D. $4114

Which of the following best shows the timeline from cash flows for a 5 year bond with a face value of $2,000, a coupon rate of 5.0% and semiannual payments? A)0 1 2 3 4 5 +-----+-----+-----+-----+-----+ $100 $100 $100 $100 $2100 B)0 1 2 3 9 10 +-----+-----+-----+--- . . . -----+-----+ $25 $25 $25 $25 $25 C) 0 1 2 3 9 10 +-----+-----+-----+--- . . . -----+-----+ $50 $50 $50 $50 $50 D) 0 1 2 3 9 10 +-----+-----+-----+--- . . . -----+-----+ $50 $50 $50 $50 $2050

D) 0 1 2 3 9 10 +-----+-----+-----+--- . . . -----+-----+ $50 $50 $50 $50 $2050

Consider a zero-coupon bond with face value and 15years left until maturity. If the bond is currently trading for $431, then the yield to maturity on this bond is closest to... A. 2.89% B. 56.90% C. 43.10% D. 5.77%

D. 5.77%

A bond has five years to maturity, a $1,000 face value, and a 5.5% coupon rate with annual coupons. What is its yield to maturity if it is currently trading at $846.11? A. 11.41% B. 13.31% C. 7.61% D. 9.51%

D. 9.51%

Which of the following risk free, zero coupon bonds could be bought for the lowest price? A. one with a face value of $1,000, a YTM of 4.8% and 5 years to maturity B. one with a face value of $1,000, a YTM of 3.2%, and 8 years to maturity C. One with a face value of $1,000, a YTM of 6.8%, and 10 years to maturity D. one with a face value of $1000, a YTM of 5.9% and 20 years to maturity

D. One with a face value of $1,000, a YTM of 5.9%, and 20 years to maturity

A $5,000 bond with a coupon rate of 5.7% paid semiannually has ten years to maturity and a yield to maturity of 6.4%. If interest rates fall and the yield to maturity decrease by 0.8%, what will happen to the price of the bond? A. The price of the bond will fall by $293.50 B. The price of the bond will fall by $352.20 C. The price of the bond will rise by $410.90 D. The price of the bond will rise by $293.50

D. The price of the bond will rise by $293.50

Which of the following best illustrates why a bond is a type of loan? A. The issuers of a bond make regular payments to bondholders B. When a company issues a bond, the buyer of that bond becomes an owner of the issuing company C. Funds raised are used to finance long-term projects D. When an investor buys a bond from an issuer, the investor is giving money to issuer, with the assurance that it will be repaid at a date in the future

D. When an investor buys a bond from an issuer, the investor is giving money to the issuer, with the assurance that it will be repaid at a date in the future.

Which of the following statements regarding bonds and their terms is false? A. Zero-coupon bonds are also called pure discount bonds. B. The internal rate of return of an investment opportunity is the discount rate at which the net present value of the investment opportunity is equal to zero. C. The yield to maturity for a zero-coupon bond is the return you will earn as an investor from holding the bond to maturity and receiving the promised face value payment. D. When prices are quoted in the bond market, they are conventionally quoted in increments of $1,000.

D. When prices are quoted in the bond market they are conventionally quoted in increments of $1,000.

Which of the following is true about the face value of a bond? A. It is the notional amount we use to compute coupon payments B. It is the amount that is repaid at maturity C. It is usually denominated in standard increments, such as $1,000 D. all of the above

D. all of the above

Consider a zero-coupon bond with a $1,000 face value and 10 years left until maturity. If the YTM of this bond is 10.2%, then the price of this bond is closest to... A.$1,000 B.$454.32 C.$530.04 D.$379

D.$379

Bond traders generally quote bond yields rather than bond prices, since yield to maturity depends on the face value of the bond.

FALSE

Treasury bonds have original maturities from one to ten years, while Treasury notes have original maturities of more than ten years.

FALSE

Prior to its maturity date the price of a zero coupon bond is its face value. True or False

False

The coupon value of a bond is the face value of the bond. True or false

False

A bond is said to mature on the date when the issuer repays its notional value. True or false

True

The only cash payment an investor in a zero-coupon bond receives is the face value of the bond on its maturity date. True or False

True

Under what situation can a zero-coupon bond be selling at a premium?

Unlike a coupon bond, a zero-coupon bond does not have a periodic cash flow with one lump sum payment of the face value at its maturity. Consequently, a zero-coupon bond will be always selling at a price less than its face value. If it does then the time value of money concepts will be violated, which never happens.

Under which situation can a zero-coupon bond be selling at par to its face value?

Unlike a coupon bond, a zero-coupon bond does not have a periodic cash flow with one lump-sum payment of the fave value at its maturity. Consequently, a zero-coupon bond will always be selling at a price less than its face value and can never sell at par with its face value. If it does then the time value of money concepts will be violated, which never happens.