FINA 3313 CH. 7 (Part I)
How much should you pay for a $1,000 bond with 10% coupon, annual payments, and 5 years to maturity if the interest rate is 12%?
$927.90 price=100(1/.12-1/.1291.12)^5)+1000/(1.12)^5 = 360.47 + 567.43 = 927.90
Two years ago bonds were issued with 10 years until maturity, selling at par, and a 7% coupon. If interest rates for that grade of bond are currently 8.25%, what will be the market price of these bonds?
$928.84
If you purchase a 3-yr, 9% coupon bond for $950, how much could it be sold for 2 years later if interest rates have remained stable?
$981.56
What is the yield to maturity for a bond paying $100 annually that has 6 years until maturity and sells for $1,000?
10.0% 1,000=100[1/i-1/i(1+i)^6]+1000/(1+i)^6 i=10% since the bond sells at par value
An investor buys a 5-year, 9% coupon bond for $975, holds it for 1 year, an then sells the bond for $985. What was the investor's rate of return?
10.26% (90+10)/975=10.26%
What is the rate of return for an investor who pays $1,054.47 for a 3-year bond with a 7% coupon and sells the bond 1 year later for $1,037.19?
5.00% rate of return=(70-17.28)/1054.47 = 52.72/1054.47 = 5%
An investor buys a 10-year, 7% coupon bond for $1,050, holds it for 1 year, and then sells it for $1,040. What was the investor's rate of return?
5.71% (70-10)/1050=5.71%
If a bond offers an investor 11% in nominal return during a year in which the rate of inflation was 4%, then the investor's real return was:
6.73% 1+real return=1.11/1.04 real return=6.73%
What is the total return to an investor who buys a bond for $1,100 when the bond has a 9% coupon rate and 5 years remaining until maturity, then sells the bond after 1 year for $1,085?
6.82% (90-15)/1.100=6.82%
What is the coupon rate for a bond with 3 years until maturity, a price of $1,053.46, and a yield to maturity of 6%?
8% 1,053.46=PMT[1/.06-1/.06(1.06)^3]+1,000/(1.06)^3 213.86=2.673PMT 80=PMT 80/1000=8% coupon rate
What is the current yield of a bond with a 6% coupon, 4 years until maturity, and a price of $750?
8.0% $60/750=8%
How much would an investor need to receive in nominal returns if he desires a real return of 4% and the rate of inflation is 5%?
9.20% 1.04=1+nominal return/1.05 9.2=nominal return
What is the yield to maturity of a bond with the following characteristics? Coupon rate is 8% with semiannual payments, current price is $960, 3 years until maturity.
9.57% 960 = 40[1/i-1/i(1+i)^6] + 1000/(1+i)^6 i = 4.7826 YTM=2i=9.57%
The existence of an upward-sloping yield curve suggests that:
interest rates will be increasing in the future
If a bond is priced at par value, then:
its coupon rate equals its yield to maturity
The purpose of a floating-rate bond is to:
offer rates adjusted to current market conditions
When an investor purchases a $1,000 par value bond that was quoted at 97.16, the investor:
pays 97.5% of face value for the bond
Capital losses will automatically be the case for bond investors who buy:
premium bonds
A bond with 10 years until maturity, an 8% coupon, and an 8% yield to maturity increased in price to $1,107.83 yesterday. What apparently happened to interest rates?
rates decreased by 1.5%
When market interest rates exceed a bond's coupon rate the bond will:
sell for less than par value
When the yield curve is upward-sloping, then:
short-maturity bonds yield less than long-maturity bonds
An investor holds two bonds, one with 5 years until maturity and the other with 20 years until maturity. Which of the following is more likely if interest rates suddenly increase by 2%?
the 20-year bond will decrease more in price
Which of the following is likely to be correct for a CCC-rated bond, compared to a BBB-rated bond?
the CCC bond will offer a higher promised yield to maturity
Which of the following statements is correct for 10% coupon bond that has a current yield of 7%?
the bond's maturity value is lower than the bond's price
The current yield tends to overstate a bond's total return when the bond sells for a premium because:
the bond's price will decline each year
The current yield tends to understate a bond's total return when the bond sells for a discount because:
the bond's price will increase each year
What causes bonds to sell for a premium compared to face value?
the bonds have a higher than market coupon rate
What happens to the coupon rate of a bond that pays $80 annually in interest if interest rates change from 9% to 10%?
the coupon rate remains at 8%
Where does a "convertible bond" get its name?
the option of converting into share of common stock
What happens when a bond's expected cash flows are discounted at a rate lower than the bond's coupon rate?
the price of the bond increases
rebalanced
the process of periodically adjusting the makeup on a bond portfolio due to interest rate changed so the portfolio remains immunized against adverse effects of changes in interest raes
What is the relationship between an investment's rate of return and its yield to maturity for an investor that does not hold a bond until maturity?
there is no predetermined relationship
T/F A bond's payment at the maturity is referred to as its face value.
true
T/F A treasury bond's bid price will be lower than the ask price.
true
T/F Asked yields can be guaranteed only to investors who buy a bond and hold it until maturity.
true
T/F Bond ratings measure the bond's credit risk.
true
T/F Bonds rated BBB or about by Standard & Poor's are called investment grade.
true
T/F Credit risk implies that the promised yield to maturity on the bond is higher than the expected yield.
true
T/F Current yield overstates the return of premium bonds since investors who buy a bond at a premium face a capital loss over the life of the bond.
true
T/F Even when the yield curve is upward-sloping, investors might rationally stay away from long-term bonds.
true
T/F When the market interest rate exceeds the coupon rate, bonds sell of less than face value to provide enough compensation to investors.
true
T/F Zero-coupon bonds are issued at prices below face value, and the investor's return comes from the difference between the purchase price and the payment of face value at maturity.
true
By how much did the price of a $1,000 par-value bond decrease if The Wall Street Journal shows a change of -13 from the previous day?
$0.88 12/32 x 10 = $3.75
How much would an investor expect to pay for a $1,000 par value bond with a 9% annual coupon that matures in 5 years if the interest rate is 7%?
$1,082.00 PV=90[1/.07-1/.07(1.07)^5] + 1000/(1.07)^5 = 369.02 + 712.98 = 1,082
If an investor purchases a 3%, 2-year TIPS and the CPI increases 3% over each of the next 2 years, how much does the investor receive at maturity?
$1,092.73 1,030 x (1.03)^2 = 1,092.73
What price will be paid for a U.S. Treasury bond with an ask price of 135:20?
$1,356.25 135:20=135(20/32)x1,000
By how much did the price of a $1,000 par-value bond increase if The Wall Street Journal shoes a change of +6 from the previous day?
$1.875 6/32 x 10 = 1.875
What is the amount of the annual coupon payment for a bond that has 6 years until maturity, sells for $1,050, and has a yield to maturity of 9.37%?
$105 1050=PMT[1/.0937-1/.0937(1.0937)^6]+1000/(1.0937)^6 PMT = 104.97 --> 105
By how much will a bond increase in price over the next year if it currently sells for $925, has 5 years until maturity, and an annual coupon rate of 7%?
$12.55 925 = 70[1/i-1/i(1+i)^4]+1000/(1+i)^4 i = 8.924% then, solving for price with N=4, price=$937.55, a gain of $12.55
How much would an investor lose if she purchased a 30-year-zero-coupon bond with a $1,000 par value and 10% yield to maturity, only to see market interest rates increase to 12% 1 year later? (hint: how much would the price change from a year earlier?)
$19.93 Price=1,000/(1.10)^30=57.31 new price=1,000/(1.12)^29=37.38 difference=19.93
If you purchase a 5-year, zero-coupon bond for $500, how much could it be sold for 3 years later if interest rates have remained stable?
$757.86 500=1000/(1+i)^5 14.87%=i 3yrs later: price=1000/(1.1487)^2=757.86
How much does the $1,000 to be received upon a bond's maturity in 4 years add to the bond's price if the appropriate discount rate is 6%?
$792.09 1,000/(1.06)^4=792.09
How much should you be prepared to pay for a 10-year bond with a 6% coupon, semiannual payments, and a semiannually compounded yield of 7.5%?
$895.78
How much should you be prepared to pay for a 10-year bond with a 6% coupon and a yield to maturity of 7.5%?
$897.04
If a 4-year bond with a 7% coupon and a 10% yield to maturity is currently worth $904.90, how much will it be worth 1 year from now if interest rates are constant?
$925.39 if 904.90= 70[1/.1-1/.1(1.1)^4]+1000/(1.1)^4 then 925.39= 70[1/.1-1/.1(1.1)^3]+1000/(1.1)^3
subordinated debentures
a bond having a claim on assets only after the senior debt has been paid in full in the event of liquidation
income bond
a bond that pays interest only if it is earned
premium bond
a bond that sells above its par value; occurs whenever the going rate of interest is below the coupon rate
indenture
a formal agreement between the issuer and the bondholders
junk bonds
a high-risk, high-yield bond
debenture
a long-term bond that is not secured by a mortgage on specific property
The coupon rate of a bond equals:
a percentage of its face value
What happens to the price of a 3-year bond (with par value of $1,000) with an 8% coupon when interest rates change fro 8 to 6%
a price increase of $53.47
Which of the following bonds would be likely to exhibit a greater degree of interest rate risk? a. a zero-coupon bond with 20 yrs until maturity b. a coupon-paying bond with 20 yrs until maturity c. a floating-rate bond with 20 yrs until maturity d. a zero-coupon bond with 30 yrs until maturity
a zero-coupon bond with 30 years until maturity
Which of the following is correct for a bond investor whose bond offers a 5% current yield and an 8% yield to maturity? a. the bond is selling at a discount to par value b. the bond has a high default premium c. the promised yield is not likely to materialize d. the bond must be a Treasury Inflation-Protected Security
a. the bond is selling at a discount to par value
Which of the following will NOT happen for an investor who owns TIPS during a period of inflation? a. the coupon payment will increase in real terms b. the maturity value will increase in nominal terms c. the investor's real rate of return is guaranteed d. payments will increase depending on the level of the CPI
a. the coupon payment will increase in real terms
If an investor purchases a bond when its current yield is higher than the coupon rate, then the bond's price will be expected to:
increase over time, reaching par value at maturity
Which of the following is correct for a bond currently selling at a premium to par? a. its current yield is higher than its coupon rate b. its current yield is lower than its coupon rate c. its yield to maturity is higher than its coupon rate d. its default risk is extremely low
b. its current yield is lower than its coupon rate
Which of the following factors will change when interest rates change? a. the expected cash flows from a bond b. the present value of a bond's payments c. the coupon payment of a bond d. the maturity value of a bond
b. the present value of a bond's payments
The yield curve depicts the current relationship between:
bond yields and maturity
A bond's yield to maturity takes into consideration:
both current yield and price changes of a bond
How does a bond dealer generate profits when trading bonds?
by maintaining bid prices lower than ask prices
Which of the following would NOT be associated with a zero-coupon bond? a. yield to maturity b. discount bond c. current yield d. interest-rate risk
c. current yield
Which of the following presents the correct relationship? As the coupon rate of a bond increases, the bond's: a. face value increases b. current price decreases c. interest payments increase d. maturity date is extended
c. interest payments increase
Periodic receipts of interest by the bondholder are known as:
coupon payments
Which of the following is fixed (e.g., cannot change) for the life of a given bond?
coupon rate
Which of the following identifies the distinction between a U.S. Treasury bond and a Treasury note? a. bonds make coupon payments; notes do not b. bills have default risk; bonds do not c. bonds are priced in 32s;notes are not d. bonds initially have more than 10 years until maturity; notes have fewer than 10 years initially.
d. bonds initially have more than 10 years until maturity; notes have fewer than 10 years initially
Which of the following will reduce the yield to maturity from what the investor calculated at the time of purchase? a. increasing interest rates; bonds held to maturity b. decreasing interest rates; bonds held to maturity c. stable interest rates; bonds sold before maturity d. increasing interest rates; bonds sold before maturity
d. increasing interest rates; bonds sold before maturity
Which of the following is correct concerning real interest rates? a. real interest rates are constant b. real interest rates must be positive c. real interest rates must be less than nominal interest rates d. real interest rates, if positive, indicate increased purchasing power
d. real interest rates, if positive, indicate increased purchasing power
Which of the following is correct when a bond investor's rate of return for a particular period equals the bond's coupon rate? a. the bond increased in price during the period b. the bond decreased in price during the period c. the coupon payment increased during the period d. the bond price remained unchanged during the period
d. the bond price remained unchanged during the period
Assume that a bond has been owned by four different investors during its 20-year history. Which of the following is NOT likely to have been shared by these different owners? a. coupon rates b. cash flows c. par value d. yield to matuirty
d. yield to maturity
U.S. Treasury bond yields do not contain a:
default premium
The current yield of a bond can be calculated by:
dividing the annual coupon payments by the price.
Which of the following is correct for a bond priced at $1,100 that has 10 years remaining until maturity, and a 10% coupon, with semiannual payments?
each payment of interest equals $50
Many investors may be drawn to municipal bonds because of the bonds':
exemption from federal taxes
A bond's par value can also be called its:
face value
T/F A bond's rate of return is equal to its coupon payment divided by the price paid for the bond.
false
T/F A long-term investor would more likely be interested in current yield than internal rate of return.
false
T/F It is impossible for an investor to insure against the risk of bond default.
false
T/F It would be realistic to read an asked price listed as 100:16 and a big price of 100:18.
false
T/F Speculative-grade bonds have default risk; investment grade bonds do not.
false
T/F TIPS are unlike most bonds in that their cash flows increase when the national unemployment rate increases.
false
T/F The current yield measures the bond's total rate of return.
false
T/F Indexed bonds were completely unknown in the US until 1997 when the US Treasury began to issue inflation-indexed bonds known as Treasury Inflation-Protected Securities, or TIPS/
false (indexed bonds were not completely unknown in the US before 1997. For example, in 1780 American Revolution soldiers were compensated with indexed bonds that paid the value of "five bushels of corn, 68 pounds, and four-sevenths par of a pound of beef, ten pounds of sheep's wool, and sixteen pounds of sole leather.")
The present value of a bond is positively related with:
greater default risk
When riskier corporations issue bonds that include a default premium, the promised yield will sometimes be:
greater than the actual yield
Investors who own bonds having lower credit ratings should expect:
higher default possibilities
If the coupon rate is lower than current interest rates, then the yield to maturity will be:
higher than the coupon rate
T/F Bonds selling at a premium price offer a higher current yield (which overstates the true return) than bonds selling at par value.
true (a bond that is priced above its face value is said to sell at a premium. investors who buy a bond at a premium face a capital loss over the life of the bond, so the return on these bonds is always less than the bond's current yield. A bond priced below face value sells at a discount. Investors in discount bonds face a capital gain over the life of the bond; the return on these bonds is greater than the current yield: Because it focuses only on current income and ignores prospective price increases or decreases, the current yield does not measure the bond's total rate of return. It overstates the return of premium bonds and understates that of discount bonds.)
The discount rate that makes the present value of a bond's payments equal to its price is termed the:
yield to maturity
