Chapter Practice #5 Chapter 7

A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond?

Callable

Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected?

Default risk

Rosita paid a total of $1,189, including accrued interest, to purchase a bond that has 7 of its initial 20 years left until maturity. This price is referred to as the:

Dirty price

A bond is quoted at a price of $1,011. This price is referred to as the:

clean price

The interest rate risk premium is the:

compensation investors demand for accepting interest rate risk.

Interest rates that include an inflation premium are referred to as:

nominal rates.

The items included in an indenture that limit certain actions of the issuer in order to protect a bondholder's interests are referred to as the:

protective covenants.

The pure time value of money is known as the:

term structure of interest rates.

You purchase a bond with an invoice price of $1,119. The bond has a coupon rate of 6.25 percent, a face value of $1,000, and there are four months to the next semiannual coupon date. What is the clean price of this bond?

$1,108.58 Accrued interest= (0.0625)(1000)(1/2)(2/6) Accrued interest= 10.42 Clean price= 1119-10.42 = 1108.58

The semiannual, 8-year bonds of Alto Music are selling at par and have an effective annual yield of 8.6285 percent. What is the amount of each interest payment if the face value of the bonds is $1,000?

$42.25

A Treasury bond is quoted at a price of 101.4621. What is the market price of this bond if the face value is $5,000?

$5,073.11 Explanation: Price = 1.014621(5000) = 5073.11

The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as:

.05/(1 − t*) = .07.

World Travel has 7 percent, semiannual, coupon bonds outstanding with a current market price of $1,023.46, a par value of $1,000, and a yield to maturity of 6.72 percent. How many years is it until these bonds mature?

12.53 years I/Y= 6.72/2 PV= -1023.46 PMT= 35 FV= 1000 N= 25.052/2 = 12.53

Redesigned Computers has 6.5 percent coupon bonds outstanding with a current market price of $548. The yield to maturity is 13.2 percent and the face value is $1,000. Interest is paid annually. How many years is it until these bonds mature?

17.84 years I/Y=13.2 PV= -548 PMT= 65 FV= 1000 N=17.84

A 3.25 percent Treasury bond is quoted at a price of 99.04. The bond pays interest semiannually. What is the current yield?

3.28% Current yield= 0.0325/0.9904 =3.28%

A $1,000 face value bond has a coupon rate of 7 percent, a market price of $989.40, and 10 years left to maturity. Interest is paid semiannually. If the inflation rate is 2.2 percent, what is the yield to maturity when expressed in real terms?

4.84 percent N=20 PV= -989.40 PMT= 35 FV= 1000 I/Y= 3.575(2) = 7.15% r= 1.0715/1.022-1 r= 0.0484

New Homes has a bond issue with a coupon rate of 5.5 percent that matures in 8.5 years. The bonds have a par value of $1,000 and a market price of $1,022. Interest is paid semiannually. What is the yield to maturity?

5.18 percent Explanation: N= 17 PV= -1022 PMT= 27.50 FV= 1000 I/Y= 2.588 2(2.588) = 5.18

The 7 percent bonds issued by Modern Kitchens pay interest semiannually, mature in eight years, and have a $1,000 face value. Currently, the bonds sell for $987. What is the yield to maturity?

7.22 percent Explanation: N=16 PV=-987 PMT=35 FV= 1000 I/Y= 3.608 YTM= 2(3.608) = 7.22

Do-Well bonds have a face value of $1,000 and are currently quoted at 86.725. The bonds have coupon rate of 6.5 percent. What is the current yield on these bonds?

7.49% Current yield = [0.065(1000)]/[.86725(1000)] Current yield = 7.49%

Bonner Metals wants to issue new 20-year bonds. The company currently has 8.5 percent bonds on the market that sell for $994, make semiannual payments, and mature in 7 years. What should the coupon rate be on the new bonds if the firm wants to sell them at par?

8.62 percent N=14 PV= -994 PMT= 42.50 FV= 1000 I/Y= 4.308 YMT= 2(4.308%) = 8.62%

Which one of the following is the price at which a dealer will sell a bond?

Asked price

A bond that is payable to whomever has physical possession of the bond is said to be in:

Bearer form

Jason's Paints just issued 20-year, 7.25 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms?

Debenture

A sinking fund is managed by a trustee for which one of the following purposes?

Early bond redemption

A newly issued bond has a coupon rate of 7 percent and semiannual interest payments. The bonds are currently priced at par. The effective annual rate provided by these bonds must be:

Greater than 7%

Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity?

Liquidity

Which bond would you generally expect to have the highest yield?

Long-term, taxable junk bond

The Fisher effect is defined as the relationship between which of the following variables?

Real rates, inflation rates, and nominal rates

The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the:

Spread

Callable bonds generally:

have a sinking fund provision.

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.

a discount; less than

A note is generally defined as:

an unsecured bond with an initial maturity of 10 years or less.

Bonds issued by the U.S. government:

are considered to be free of default risk.

Protective covenants:

are primarily designed to protect bondholders.

U. S. Treasury bonds:

are quoted as a percentage of par.

A Treasury yield curve plots Treasury interest rates relative to:

time to maturity.