FINA Chapter 8

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 $1,113 $890 $1,023

$665

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 $990 $1,066 $945

$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.) $1,044 $970 $938 $1,102

$938

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? 5.95%. 2.00%. 1.00%. 1.05%.

1.05%.

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.) 9% 8% 11% 12%

11%

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% 11% 12% 14%

13%

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.) 9% 10% 17% 18%

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. 12%. 3.63%. 10%. 6%.

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.) 3.25% 5.7% 6.7% 6.2%

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.) 10%. 7.65% 8.51% 9.5%.

7.65%

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.) 14.40% 16.92% 8.68% 7.67%

8.68%

Which of the following classes of securities is likely to have the lowest corporate borrowing cost? AAA rated bonds. A rated bonds. BB rated bonds. C rated bonds. All of the above will have the same corporate borrowing cost.

AAA rated bonds.

Which of the following statements is true? 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. All of the above are true.

All of the above are true.

Which of the following statements is true? The lower 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. All of the above are true.

All of the above are true.

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 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. All of the above are true.

All of the above are true.

Which of the following statements is true? Interest rate risk decreases as maturity increases. All other things being equal, short-term bonds are riskier than long-term bonds. Long-term bonds have lower price volatility than short-term bonds of similar risk. As interest rates decline, the prices of bonds rise and as interest rates rise, the prices of bonds decline.

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? Long-term bonds have more price volatility than short-term bonds of similar risk. Interest rate changes and bond prices are inversely related. As interest rates increase, bond prices increase. Interest rate risk is the risk that bond prices will change as interest rates change.

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. Federal laws typically allow insurance companies and pension funds to purchase non-investment grade bonds. All else equal, the higher a bond's rating the higher the coupon rate. Investment grade bonds are those rated single B and higher.

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? Prices in the corporate bond market tend to be more volatile than the markets for stocks or money market securities. The largest investors in corporate bonds are life insurance companies and pension funds. The market for corporate bonds is thin compared to the market for corporate stocks. Corporate bonds are more marketable than the securities that have higher daily trading volumes.

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? The bond's coupon rate is calculated as the annual coupon payment divided by the bond's face value. They have fixed coupon payments. The face value, or par value, for most corporate bonds is $1,000. Coupon payments are usually made quarterly.

Coupon payments are usually made quarterly.

Bond contracts include specific terms, including all of the following EXCEPT the time period during which the bond will be making interest payments. the price at which the bond will be sold in the bond market. the date on which the bond principal will be repaid. the amount of interest (or coupon) payments received each period.

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. to sell at a profit under all circumstances. to sell the security above its par value. None of the above.

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

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.) $965 $1,048 $982 $1,099

$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.) $923 $972 $1,014 $1,066

$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.) $923 $1,037 $1,085 $861

$1,085

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 $860 $604 $684

$515

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. For a given change in interest rates, the prices of short-term bonds will change more drastically than the prices of long-term bonds. For a given change in interest rates, the prices of higher-coupon bonds will change more drastically than the prices of lower-coupon bonds. Bond prices are directly related to interest rate movements.

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? If market interest rates rise, a 10-year bond will fall in value more than a 1-year bond. For a given change in market interest rates, the prices of higher-coupon bonds change more than the prices of lower-coupon bonds. If market interest rates rise, bond prices will rise. If market interest rates rise, a 1-year bond will fall in value more than a 10-year bond.

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

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. They are always convertible to common stock. They typically sell at a premium over par when they are first issued. They typically sell for a higher price than similar coupon bonds.

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

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. all of the above need to be done.

all of the above need to be done.

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. at a price greater than its face value. at a price less than its face value. none of the above is true.

at a price equal to its face value.

In regard to interest rate risk, short-term bonds: have less interest rate risk than longer-term bonds. and longer-term bonds have no interest rate risk because their coupon interest rates are fixed. and longer-term bonds have the same amount of interest rate risk because their coupon interest rates are fixed. have more interest rate risk than longer-term bonds.

have less interest rate risk than longer-term bonds.

A corporate bond's coupon rate is the annual coupon payment divided by: the bond's current price. the bond's face value. $100. the bond's maturity period.

the bond's face value.

The bonds that has no coupon payments but promise a single payment at maturity is: callable bonds. convertible bonds. vanilla bonds. zerocoupon bonds.

zerocoupon bonds.