FINANCE - CH 6
Such bonds are purchased at a discount, below their face value.
How are investors in zero-coupon bonds compensated for making such an investment?
A coupon bond pays interest over the life of the bond and returns the principal 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 toward interest and the balance as return of principal.
How are the cash flows of a coupon bond different from an amortizing loan?
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 principal. 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 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.
How are the cash flows of a zero-coupon bond different from those of a coupon bond?
a bond with a $1,000 face value, five years to maturity and 6.3% annual coupon payments
If the yield to maturity of all of the following bonds is 6%, which will trade at the greatest premium per $100 face value?
false
Prior to its maturity date, the price of a zero-coupon bond is its face value.
$816
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 8.0% and that the coupon payments are to be made semiannually. Assuming the appropriate YTM on the Sisyphean bond is 11.1%, then the price that this bond trades for will be closest to ________.
$1063
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 the 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 premium
The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 5 years. 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 the Sisyphean bond is 7.5%, then this bond will trade at ________.
a discount
The Sisyphean Company has a bond outstanding with 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 the Sisyphean bond is 10.6%, then this bond will trade at ________.
6.56%
The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in five years. The bond certificate indicates that the stated coupon rate for this bond is 8.5% and that the coupon payments are to be made semiannually. Assuming that this bond trades for $1081.73 , then the YTM for this bond is closest to ________.
$222.50
The Sisyphean Company has a bond outstanding with a face value of $5000 that matures in 10 years. The bond certificate indicates that the stated coupon rate for this bond is 8.9% and that the coupon payments are to be made semiannually. How much will each semiannual coupon payment be?
9.9%
The Sisyphean Company has a bond outstanding with a face value of $5000 that reaches maturity in 8 years. The bond certificate indicates that the stated coupon rate for this bond is 8.2% and that the coupon payments are to be made semiannually. Assuming that this bond trades for $4541.53 , then the YTM for this bond is closest to ________.
false
The credit spread of a bond shrinks if it is perceived that the probability of the issuer defaulting increases.
true
The only cash payment an investor in a zero-coupon bond receives is the face value of the bond on its maturity date.
false
Treasury bonds have original maturities from one to ten years, while Treasury notes have original maturities of more than ten years.
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 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 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.
Under what situation can a zero-coupon bond be selling at par to its face value?
Typically, while drawing the timeline for bond cash flows, the price calculated is the price on the date of coupon payment. Even on this date there would be a pre-coupon payment price and a post-coupon payment price. The clean price, dirty price and the price calculated by the annuity and present value (PV) equations converge to a single price right after the coupon has detached from the bond and paid to the holder.
Under what situation should the clean price, dirty price, and the price calculated by the basic annuity and present value (PV) equations for a bond be equal?
$450
What is the coupon payment of a 15-year $10,000 bond with a 9% coupon rate with semiannual payments?
4.888%
What is the coupon rate of an eight-year, $10,000 bond with semiannual coupons and a price of $9006.6568 , if it has a yield to maturity of 6.5%?
the bond's actual cash price
What is the dirty price of a bond?
6.383%
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?
6.49%
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 $9207.93 ?
5.26%
What is the yield to maturity of a(n) eight-year, $5000 bond with a 4.4% coupon rate and semiannual coupons if this bond is currently trading for a price of $4723.70 ?
$8494.26
What must be the price of a $10,000 bond with a 6.1% coupon rate, semiannual coupons, and five years to maturity if it has a yield to maturity of 10% APR?
$800.68
What must be the price of a $1000 bond with a 5.8% coupon rate, annual coupons, and 20 years to maturity if YTM is 7.8% APR?
a five-year bond with a $2,000 face value whose yield to maturity is 7.0% and coupon rate is 7.2% APR paid semiannually
Which of the following bonds is trading at a premium?
a bond with a $1,000 face value trading at $1,000
Which of the following bonds is trading at par?
a ten-year bond with a $2,000 face value whose yield to maturity is 5.8% and coupon rate is 5.8% APR paid semiannually
Which of the following bonds will be least sensitive to a change in interest rates?
a 20-year bond with a $1,000 face value whose coupon rate is 5.8% APR paid semiannually
Which of the following bonds will be most sensitive to a change in interest rates if all bonds have the same initial yield to maturity?
a 30-year bond with a $1,000 face value whose yield to maturity is 5.5% and coupon rate is 6.4% APR paid annually
Which of the following bonds will be most sensitive to a change in interest rates?
all of the above are true
Which of the following is true about the face value of a bond?
a rise in interest rates causes bond prices to fall
Which of the following statements is true of bond prices?
By convention, the coupon rate is expressed as an effective annual rate.
Which of the following statements regarding bonds and their terms is FALSE?
Prior to its maturity date, the price of a zero-coupon bond is always greater than its face value.
Which of the following statements regarding bonds and their terms is FALSE?
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.
Which of the following statements regarding bonds and their terms is FALSE?
Unlike the case of bonds that pay coupons, for zero-coupon bonds, there is no formula to solve for the yield to maturity.
Which of the following statements regarding bonds and their terms is FALSE?
When prices are quoted in the bond market, they are conventionally quoted in increments of $1,000.
Which of the following statements regarding bonds and their terms is FALSE?
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.
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?
true
a bond is said to mature on the date when the issuer repays its notional value
The price of the bond will rise by $293.50.
A $5000 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 decreases by 0.8%, what will happen to the price of the bond?
$969.21
A 20-year bond with a $1,000 face value was issued with a yield to maturity of 4.3% and pays coupons semi-annually. After ten years, the yield to maturity is still 4.3% and the clean price of the bond is $959.71 . After three more months go by, what would you expect the dirty price to be?
$400
A bond has a $10,000 face value, ten years to maturity, and 8% semiannual coupon payments. What would be the expected difference in this bondʹs price immediately before and immediately after the next coupon payment?
9.51%
A bond has five years to maturity, a $1000 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 ?
B or C above
A bond is currently trading below par. Which of the following must be true about that bond?
true
A bond will trade at a discount if its coupon rate is less than its yield to maturity.
$883.91
A company issues a ten-year $1,000 face value bond at par with a coupon rate of 6.1% paid semiannually. The YTM at the beginning of the third year of the bond (8 years left to maturity) is 8.1%. What is the new price of the bond?
-8.13%
A company issues a ten-year $1,000 face value bond at par with a coupon rate of 6.7% paid semiannually. The YTM at the beginning of the third year of the bond (8 years left to maturity) is 8.1%. What was the percentage change in the price of the bond over the past two years?
10%
A company releases a five-year bond with a face value of $1000 and coupons paid semiannually. If market interest rates imply a YTM of 8%, which of the following coupon rates will cause the bond to be issued at a premium?
a 10-year bond with a face value of $2,000 and a coupon rate of 5.8% with monthly payments
A corporate bond makes payments of $9.67 every month for ten years with a final payment of $2009.67. Which of the following best describes this bond?
$1057.23
A five-year bond with a $1,000 face value has a yield to maturity is 5.0% and itʹs coupon rate is 6.0% paid annually. The dirty price of this bond exactly 6 months after its second coupon payment is closest to ________.
4.00%
A ten-year, zero-coupon bond with a yield to maturity of 4% has a face value of $1000 . An investor purchases the bond when it is initially traded, and then sells it four years later. What is the rate of return of this investment, assuming the yield to maturity does not change?
semiannually
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?
$5212.50
An investor holds a Ford bond with a face value of $5000 , a coupon rate of 8.5%, and semiannual payments that matures on January 15, 2029. How much will the investor receive on January 15, 2029?
8.40%
An investor purchases a 30-year, zero-coupon bond with a face value of $5000 and a yield to maturity of 8.4%. He sells this bond ten years later. What is the rate of return on his investment, assuming yield to maturity does not change?
false
Before it matures, the price of any bond is always less than its face value.
false
Bond traders generally quote bond yields rather than bond prices, since yield to maturity depends on the face value of the bond.
true
Bonds with a high risk of default generally offer high yields.
$34.27
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 closest to ________.
$379
Consider a zero-coupon bond with a $1000 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 ________.
5.77%
Consider a zero-coupon bond with a $1000 face value and 15 years left until maturity. If the bond is currently trading for $431 , then the yield to maturity on this bond is closest to ________.
The yield to maturity of a bond is the discount rate that sets the future value (FV) 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?
6%
A company releases a five-year bond with a face value of $1000 and coupons paid semiannually. If market interest rates imply a YTM of 6%, what should be the coupon rate offered if the bond is to trade at par?
The price of the bond will fall by $15.78.
A $1000 bond with a coupon rate of 6.2% paid semiannually has eight years to maturity and a yield to maturity of 8.3%. If interest rates rise and the yield to maturity increases to 8.6%, what will happen to the price of the bond?
the terms of the bond
A bond certificate includes ____________.
false
the coupon value of a bond is the face value of the bond
$11.25
what is the coupon payment of a 25 year $1000 bond with a 4.5% coupon rate with quarterly payments?
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 best illustrates why a bond is a type of loan?