Chapter 8

Keys Corporation's 5-year bonds yield 7.00%, and 5-year T-bonds yield 5.95%. The only difference between the two bonds, which are both extremely marketable and liquid is the chance of bankruptcy. . What is the default risk premium (DRP) on Keys' bonds?

1.05%

Five years ago, Shirley Harper bought a 10-year bond that pays 8 percent semiannually for $981.10. Today, she sold it for $1,067.22. What is the realized yield on her investment? (Round to the nearest percent.)

10%

Jorge Cabrera paid $980 for a 15-year bond 10 years ago. The bond pays a coupon of 10 percent semiannually. Today, the bond is priced at $1,054.36. If he sells the bond today, what will be his realized yield? (Round to the nearest percent.)

11%

Shawna Carter wants to invest her recent bonus in a four-year bond that pays a coupon of 11 percent semiannually. The bonds are selling at $962.13 today. If she buys this bond and holds it to maturity, what would be her yield? (Round to the closest answer.)

12.2%

Alice Trang is planning to buy a six-year bond that pays a coupon of 10 percent semiannually. Given the current price of $878.21, what is the yield to maturity on these bonds? (Round to the closest answer.)

13%

University Corp. issued five-year bonds that pay a coupon of 6.5 percent semiannually. The current market rate for similar bonds is 5.5 percent. How much will you be willing to pay for the bond today? Do not round intermediate calculations. Round your answer to the nearest dollar.

$1,043

Kevin Rogers is interested in buying a five-year bond that pays a coupon of 10 percent on a semiannual basis. The current market rate for similar bonds is 8.8 percent. What should be the current price of this bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

$1,048

Regatta, Inc., has six-year bonds outstanding that pay an 8.25 percent coupon rate. Investors buying the bond today can expect to earn a yield to maturity of 6.875 percent. How much will you be willing to pay for Regatta's bond today? Assume annual coupon payments. (Do not round intermediate computations. Round your final answer to the nearest dollar.)

$1,066

Giant Electronics is issuing 20-year bonds that will pay coupons semiannually. The coupon rate on this bond is 7.8 percent. If the market rate for such bonds is 7 percent, what will the bonds sell for today? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

$1,085

A client has expressed interest in a ten-year zero coupon bonds with a face value of $1,000. His opportunity cost is 7 percent. Assuming annual compounding, what would be the current market price of these bonds? Round to the nearest dollar.

$508

The U.S. Treasury has issued 10-year zero coupon bonds with a face value of $1,000. Assume that the bond compounds interest semiannually. What will be the current market price of these bonds if the yield to maturity for similar investments in the market is 6.75 percent? (Round your answer to the nearest dollar.)

$515

Shana Norris wants to buy five-year zero coupon bonds with a face value of $1,000. Her yield to maturity is 8.5 percent. Assuming annual compounding, what would be the current market price of these bonds? (Round your answer to the nearest dollar.)

$665

Highland Corp., a U.S. company, has a five-year bond whose yield to maturity is 6.5 percent. The bond has no coupon payments. What is the price of this zero coupon bond? (Assume semi-annual compounding for these zero-coupon bonds.)

$725.27

Briar Corp is issuing a 10-year bond with a coupon rate of 7 percent. The interest rate for similar bonds is currently 9 percent. Assuming annual payments, what is the present value of the bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

$872

Kevin Oh is planning to sell a bond that he owns. This bond has four years to maturity and pays a coupon of 10 percent on a semiannual basis. Similar bonds in the current market have a yield to maturity of 12 percent. What will be the price that he will get for his bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

$938

Which of the following statements is true? Regarding corporate bonds

- The largest investors in corporate bonds are institutional investors such as life insurance companies and pension funds. - The market for corporate bonds is thin compared to the market for corporate stocks. - Prices in the corporate bond market tend to be more volatile than prices of securities sold in markets with greater trading volumes.

Which of the following statements is true? Regarding

- The lower the transaction the transaction costs are, the greater a security's marketability - The interest rate, or yield, on a security varies with its degree of marketability. - U.S. Treasury bills have the largest and most active secondary market and are considered to be the most marketable of all debt securities.

Which of the following statements is true of zero coupon bonds?

- Zero coupon bonds have no coupon payments over its life and only offer a single payment at maturity. - Zero coupon bonds sell well below their face value (at a deep discount) because they offer no coupons. - The most frequent and regular issuer of zero coupon securities is the U.S. Treasury Department.

Which one of the following statements is true of a bond's yield to maturity?

- the yield to maturity of a bond is the discount rate that makes the present value of the coupon and the principal payments equal to the price of the bond - it is the annual yield that the investor earns if the bond is held to maturity, and all the coupon and principal payments are made as promised - a bond's yield to maturity changes daily as interest rates increase or decrease

In calculating the current price of a bond paying semiannual coupons, one needs to

- use double the number of years for the number of payments made. - use the semiannual coupon. - use the semiannual rate as the discount rate.

Suppose an investor earned a semiannual yield of 6.4 percent on a bond paying coupons twice a year. What is the effective annual yield (EAY) on this investment? (Round to two decimal places.)

13.21%

Rachel McGovern bought a 10-year bond for $921.77 seven years ago. The bond pays a coupon of 15 percent semiannually. Today, the bond is priced at $961.22. If she sold the bond today, what would be her realized yield? (Round to the nearest percent.)

17%

Three years ago, Joe bought a 5-year, 10% coupon paid semiannually bond for $1000. Currently, with interest rates having risen sharply, the bond is selling for $800 and you decide to sell it off. If you had re-invested the semi-annual coupons as you received them, what would your realized yield be over the 3-year holding period? Round to two decimal places.

3.63%

John Wong purchased a five-year bond today at $1,034.66. The bond pays 6.5 percent semiannually. What will be his yield to maturity? (Round to the closest answer.)

5.7%

Mary just bought a 20-year bond with an 8% coupon rate (paid semi-annually) and $1000 par value for $1050. She is expecting an effective annual yield (EAY) of: (Round to two decimal places.)

7.65%

Jenny LePlaz is looking to invest in a five-year bond that pays annual coupons of 6.25 percent and currently sells at $912.34. What is the current market yield on such bonds? (Round to the closest answer.)

8.5%

Generic Inc. issued bonds in 1988 that will mature 16 years from the date of issue. The bond pays a 14.375 percent coupon and the interest is paid semiannually. Its current price is $1,508.72. What is the effective annual yield on the bonds? (Round your answer to two decimal places.)

8.68%

Which of the following classes of securities is likely to have the lowest corporate borrowing cost?

AAA rated bonds

Which of the following statements is true? Regarding interest

As interest rates decline, the prices of bonds rise and as interest rates rise, the prices of bonds decline.

Which one of the following statements is NOT true? Regarding bonds

As interest rates increase, bond prices increase.

Which of the following statements is true?

Because investors are risk averse, they require a premium to purchase a security that exposes them to default risk.

Which one of the following statements is NOT true?

Corporate bonds are more marketable than the securities that have higher daily trading volumes.

Which one of the following statements about vanilla bonds is NOT true?

Coupon payments are usually made quarterly.

Bonds with a call provision pay lower yields than comparable noncallable bonds.

F

Higher coupon bonds have greater interest rate risk.

F

Prices in the corporate bond market tend to be less volatile than prices of securities sold in markets with greater trading volumes.

F

When interest rates change, the prices of lower-coupon bonds change less than the prices of higher-coupon bonds.

F

Which of the following theorems explains the relationship between interest rates and bond prices?

For a given change in interest rates, the prices of long-term bonds will change more drastically than the prices of short-term bonds.

Which of the following statements is true? Regarding market interest rates

If market interest rates rise, a 10-year bond will fall in value more than a 1-year bond.

All other things being equal, a given change in the interest rates will have a greater impact on the price of a low-coupon bond than a higher-coupon bond with the same maturity.

T

If a corporate bond's rating changes from AAA to AA, it means that its default risk has gone up.

T

Interest rate risk is the risk that bond prices will fluctuate as interest rate changes.

T

The default risk premium is based on the probability that a bond issuer will not fulfill all of a bond's contractual provisions.

T

Which of the following statements is most true about zero coupon bonds?

They typically sell at a deep discount below par when they are first issued.

A corporate bond's coupon rate is the annual coupon payment divided by:

the bond's face value

If a bond's coupon rate is equal to the market rate of interest, then the bond will sell:

at a price equal to its face value

Bonds sell at a discount when the market rate of interest is:

greater than the bond's coupon rate

In regard to interest rate risk, short-term bonds:

have less interest rate risk than longer-term bonds.

One reason why firms issue convertible bonds is that, the bonds can be sold for:

higher prices with lower interest rates

Bonds sell at a premium when the market rate of interest is:

less than the bond's coupon rate

Bond contracts include specific terms, including all of the following EXCEPT

the price at which the bond will be sold in the bond market.

Marketability is the ability of an investor

to sell a security quickly, at a low transaction cost, and at a price close to its fair market value.

The discount rate that makes the present value of a bond's coupons and principal payment equal to its price is the:

yield to maturity

The bonds that has no coupon payments but promise a single payment at maturity is:

zero coupon bonds