finance ch 6

A firm issues two-year bonds with a coupon rate of 6.7%, paid semiannually. The credit spread for this firmʹs two-year debt is 0.8%. New two-year Treasury notes are being issued at par with a coupon rate of 3.1%. What should the price of the firmʹs outstanding two-year bonds be per $100 of face value?

D) $105.34 D) Calculate the PV of the bond with FV = $100, YTM = 1.95%, PMT = 3.35, and N = 4 which = $105.34 .

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 ________.

D) $1057.23 D) Calculate the clean price right after second coupon payment using FV = $1,000. YTM = 5.0%, PMT = 60, and N = 3; clean price = $1027.23 ; accrued interest six months after last coupon is $30; dirty price = $1027.23 + $30 = $1057.23 .

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 ________.

D) $379 D) FV = 1000 I = 10.2 PMT = 0 N = 10 Compute PV = FV (1 + i)N = 1000 (1 + 10.200 )10 = 378.60

A risk-free, zero-coupon bond with a face value of $10,000 has 15 years to maturity. If the YTM is 6.1%, which of the following would be closest to the price this bond will trade at?

D) $4114 D) Price = (Face value) / (1 + YTM)N. Price = ($10,000 ) / (1 + 6.1%)15 = $4114

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?

D) 10%

The above table shows the price per $100-face value bond of several risk-free, zero-coupon bonds. What is the yield to maturity of the two year, zero-coupon, risk-free bond shown?

D) 2.85% D) Calculate the discount rate that equates $100 to $94.53 in two years. 1 + YTMn = (Face value / price)1/n. YTMn = 2.85%

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 ________.

D) 5.77% D) FV = 1000 PV = -431 PMT = 0 N = 15 Compute I = 5.7714 %.

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 ?

D) 9.51% D) Using FV = $1000 , periods to maturity = 5, PMT = 55.00 , and PV = $846.11 , calculate discount rate = 9.5089% per period.

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 ________.

D) 9.9% D) FV = $5000 PMT = $205 ($410/2) N = 16 (8 × 2) PV = -$4541.53 Compute I = 4.9426 × 2 = 9.8852 %.

The price (expressed as a percentage of the face value) of a one-year, zero-coupon corporate bond with a BBB rating is closest to ________.

D) 93.90 D) Assuming face value of the coupon is $100, P = $100 / (1 + 6.5 / 100) = 93.90

The price (expressed as a percentage of the face value) of a one-year, zero-coupon corporate bond with a AAA rating is closest to ________.

D) 94.61 D) Assuming face value of the coupon is $100, P = $100 / (1 + 5.7 / 100) = 94.61

A bond is currently trading below par. Which of the following must be true about that bond?

D) B or C above

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?

D) The price of the bond will rise by $293.50 . D) Using FV = $5000 periods to maturity = 20, PMT = $142.50 , and discount rate = 6.4/2%, calculate PV = $4744.3939 ; Using FV = $5000 , periods to maturity = 20, PMT = $142.50 , and discount rate = 5.6/2% , calculate PV = $5037.8909 ; difference = $5037.8909 - $4744.3939 = $293.4969 .

Which of the following best illustrates why a bond is a type of loan?

D) 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 statements regarding bonds and their terms is FALSE?

D) When prices are quoted in the bond market, they are conventionally quoted in increments of $1,000.

Which of the following bonds will be most sensitive to a change in interest rates?

D) 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

If the yield to maturity of all of the following bonds is 6%, which will trade at the greatest premium per $100 face value?

D) a bond with a $1,000 face value, five years to maturity and 6.3% annual coupon payments

Which of the following risk-free, zero-coupon bonds could be bought for the lowest price?

D) one with a face value of $1,000, a YTM of 5.9%, and 20 years to maturity A) Price = $1,000 / (1 + 4.8%)5 = $791 B) Price = $1,000 / (1 + 3.2%)8 = $777 C) Price = $1,000 / (1 + 6.8%)10 = $518 D) Price = $1,000 / (1 + 5.9%)20 = $318 (lowest price)

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.

FALSE

Prior to its maturity date, the price of a zero-coupon bond is its face value.

FALSE

The coupon value of a bond is the face value of the bond.

FALSE

The credit spread of a bond shrinks if it is perceived that the probability of the issuer defaulting increases.

FALSE

Treasury bonds have original maturities from one to ten years, while Treasury notes have original maturities of more than ten years.

FALSE

How can the financial calculator be used to calculate the price of a coupon bond from its yield to maturity?

Most popular financial calculators can help compute the price of a coupon bond in several ways. Two such ways may be using ʹtime value of money (TVM) keys and cash flow (CF) keys.

What issues should one be careful of when calculating the bond price from its yield to maturity using the cash flow (CF) keys of a financial calculator?

There are two issues that one has to be careful about when using the CF keys in computing the price of coupon bonds from its yield to maturity. Since the coupon payments are generally identical over the life of the bond, it might be prudent to use the frequency key while entering this cash flow. That is the first pitfall to be aware of as the frequency to be entered into the calculator has to be reduced by one to account for the last coupon payment that gets added to the return of principal. Similarly, the last cash flow has to be the sum of principal and the last coupon payment.

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?

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 can a zero-coupon bond be selling at par to its face value?

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.

How are the cash flows of a coupon bond different from an amortizing loan?

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.

What care, if any, should be taken regarding the sign of the cash flows while drawing the timeline and associated cash flows of a coupon bond?

A typical coupon bond will have the first cash flow in the opposite direction as compared to all the rest of the cash flows over its life. The first cash corresponds to the issuer borrowing the money, while all the rest of the cash flows are payments by the issuer to the bondholder either in the form of interest or principal

How are the cash flows of a zero-coupon bond different from those of a coupon bond?

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.

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) $1063 A) FV = $1000 I = 3.65 (7.3/2) PMT = $41 N = 20 (10 × 2) Compute PV = 1063.10

Luther Industries needs to raise $25 million to fund a new office complex. The company plans on issuing ten-year bonds with a face value of $1,000 and a coupon rate of 7.5% (annual payments). The following table summarizes the YTM for similar ten-year corporate bonds of various credit ratings: Assuming that Lutherʹs bonds are rated AAA, their price will be closest to ________.

A) $1064 A) FV = $1,000 PMT = $75 N = 10 I = 6.60 Compute PV = $1064.40

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?

A) $8494.26 A) Using FV = $10,000 , periods to maturity = 10, PMT = 305.00 , and periodic discount rate = 5.0% per period, calculate PV = $8494.26 .

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?

A) $883.91 A) FV = 1000 PMT = 30.5 N = 16 I = 4.05 Solve for PV

A firm issues 5-year bonds with a coupon rate of 4.7%, paid semiannually. The credit spread for this firmʹs 5-year debt is 1.2%. New 5-year Treasury notes are being issued at par with a coupon rate of 5.1%. What should the price of the firmʹs outstanding 5-year bonds be if their face value is $1,000?

A) $932.28 A) Calculate the PV of the bond with FV = $1,000, YTM = 3.150 %, PMT = 23.50 , and N = 10, which = $932.28 .

The credit spread of the BBB corporate bond is closest to ________.

A) 0.8% A) 5.8% - 5.0% (BBB Yield - risk-free yield) = 0.8%

The credit spread of the B corporate bond is closest to ________.

A) 1.4% A) 6.1% - 4.7% (B Yield - risk-free yield) = 1.4%

A risk-free, zero-coupon bond with a $5000 face value has 15 years to maturity. The bond currently trades at $3750 . What is the yield to maturity of this bond?

A) 1.936% A) YTM = (Face Value / Price)1/n - 1; YTM = ($5000 / $3750 )1/15 - 1 = 1.936%

Luther Industries needs to raise $25 million to fund a new office complex. The company plans on issuing ten-year bonds with a face value of $1,000 and a coupon rate of 5.6% (annual payments). The following table summarizes the YTM for similar ten-year corporate bonds of various credit ratings: Assuming that Lutherʹs bonds receive a AA rating, the number of bonds that Luther must issue to raise the needed $25 million is closest to ________.

A) 27,848 A) FV = $1,000 PMT = $56.00 N = 10 I = 7.06% Compute PV Total number of bonds = $25,000,000 / $897.74 = 27,848

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%?

A) 4.888% A) Using FV = $10,000 , periods to maturity = 16, and discount rate = 3.25%, calculate PMT = $244.4000 ; annual coupon payment = $244.4000 × 2 = $488.8000 ; coupon rate = 4.888 %.

The yield to maturity for the three -year zero-coupon bond is closest to ________.

A) 5.40% A) Yield = (100/price)(1/n) - 1 = (100/85.40 )(1/3) - 1 = 0.054 or 5.40%

Luther Industries needs to raise $25 million to fund a new office complex. The company plans on issuing ten-year bonds with a face value of $1,000 and a coupon rate of 7.0% (annual payments). The following table summarizes the YTM for similar ten-year corporate bonds of various credit ratings: What rating must Luther receive on these bonds if they want the bonds to be issued at par?

A) A A) FV = $1,000 PMT = $70 N = 10 I = 7.00% (yield for A rating) Compute PV = $1,000.00.

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?

A) 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.

A corporation issues a bond that generates the above cash flows. If the periods are of 3 -month intervals, which of the following best describes that bond?

A) a 15-year bond with a notional value of $5000 and a coupon rate of 4.6% paid quarterly

Which of the following bonds is trading at a premium?

A) 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 will be least sensitive to a change in interest rates?

A) 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

A bond certificate includes ________.

A) the terms of the bond

What is the coupon payment of a 25-year $1000 bond with a 4.5% coupon rate with quarterly payments?

B) $11.25 B) $1000 × 0.045 / 4 = $11.25

Shown above is information from FINRA regarding one of Bank of Americaʹs bonds. How much would the holder of such a bond earn each coupon payment for each $100 in face value if coupons are paid semiannually?

B) $2.15 B) 100 × 4.300% = $4.30; $4.30 / 2 = $2.15

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?

B) $222.5 B) Coupon payment = (coupon rate × face value)/number of coupons per year = (0.089 × 5000 ) / 2 = $222.5

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 ________.

B) $34.27

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?

B) $400 B) The expected difference in this bondʹs price will be $400 since the bond pays semiannual coupon of $400 .

What is the coupon payment of a 15-year $10,000 bond with a 9% coupon rate with semiannual payments?

B) $450 B) $10,000 × 0.09/2 = $450

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 ________.

B) $816 B) FV = 1000 I = 5.55 (11.1/2) PMT = $40 ($80/2) N = 20 (10 × 2) Compute PV = 815.54

The current zero-coupon yield curve for risk-free bonds is shown above. What is the price of a zero-coupon, four-year, risk-free bond of $100?

B) $87.99 B) Price = (Face value) / (1 + YTM)N; Price = ($100) / (1 + 3.25%)4 = $87.99.

Luther Industries needs to raise $25 million to fund a new office complex. The company plans on issuing ten-year bonds with a face value of $1,000 and a coupon rate of 6.0% (annual payments). The following table summarizes the YTM for similar ten-year corporate bonds of various credit ratings: Assuming that Lutherʹs bonds receive a AA rating, the price of the bonds will be closest to ________.

B) $941 B) FV = $1,000 PMT = $60.00 N = 10 I = 6.83 Compute PV = $941

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?

B) $969.21 B) FV = $1,000, PV = -959.71 , n = 20, i = 2.15%, solve for PMT. PMT = $19.00 , so coupon rate per 6 month period = 1.90%. Accrued interest for three months = $19.00 /2= $9.50 , so dirty price = $959.71 + $9.50 = $969.21 .

The above table shows the yields to maturity on a number of two-year, zero-coupon securities. What is the credit spread on a two-year, zero-coupon corporate bond with a B rating?

B) 2.0%

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 ?

B) 5.26% B) Using FV = $5000 , periods to maturity = 16, PMT = 110.00 , and PV = $4724 , calculate discount rate = 2.6275% per period; 2.6275 × 2 = 5.255%.

Suppose that when these bonds were issued, Luther received a price of $972.42 for each bond. What is the likely rating that Lutherʹs bonds received?

B) BBB B) FV = $1,000 PMT = $70 N = 10 PV = -$972.42 Compute I = 7.4% which is the BBB rating yield.

Which of the following statements regarding bonds and their terms is FALSE?

B) By convention, the coupon rate is expressed as an effective annual rate

Which of the following statements regarding bonds and their terms is FALSE?

B) Prior to its maturity date, the price of a zero-coupon bond is always greater than its face value.

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?

B) The price of the bond will fall by $15.78 . B) Using FV = $1000 , periods to maturity = 16, PMT = 31.00 , and discount rate = 4.15%, calculate PV = $878.9937 ; Using FV = $1000 , periods to maturity = 16, PMT = 31.00 , and discount rate = 4.30%, calculate PV = $863.2168 ; difference = $878.9937 - $863.2168 = $15.7769 .

Which of the following statements regarding bonds and their terms is FALSE?

B) Unlike the case of bonds that pay coupons, for zero-coupon bonds, there is no formula to solve for the yield to maturity.

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?

B) a 10-year bond with a face value of $2,000 and a coupon rate of 5.8% with monthly payments B) $9.67 × 12 / (2,009.67 - 9.67) = 5.802%

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 ________.

B) a discount B) As the coupon rate of 8.1% is less than the YTM of 10.6% on the bonds, so they will trade at a discount.

The above information is for a corporate bond issued by the Markel Corporation. What sort of bond is this?

B) an investment grade bond

What is the dirty price of a bond?

B) the bondʹs actual cash price

A mining company needs to raise $100 million in order to begin open -pit mining of a coal seam. The company will fund this by issuing 30-year bonds with a face value of $1,000 and a coupon rate of 6.5%, paid annually. The above table shows the yield to maturity for similar 30-year corporate bonds of different ratings. If the companyʹs bonds are rated A, what will be their selling price?

C) $1054.48 C) Calculate the PV of the bond with FV = $1,000, YTM = 6.1%, PMT = 65.00 , and N = 30, which = $1054.48

Shown above is information from FINRA regarding one of Caterpillar Financial Servicesʹ bonds. How much would the holder of such a bond earn each coupon payment for each $100 in face value if coupons are paid annually?

C) $4.00 C) $97.05 × 4% = $4.00

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?

C) $5212.50 C) $5000 + $5000 × 0.085 /2 = $5212.5

A risk-free, zero-coupon bond has 15 years to maturity. Which of the following is closest to the price per $1000 of face value that the bond will trade at if the YTM is 6.1%?

C) $553.15 C) Price = (Face value) / (1 + YTM)N. Price = ($1000 ) / (1 + 6.1%)10 = $553.15

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?

C) $800.68 C) Using FV = $1000 , periods to maturity = 20, PMT = $58.00 , and discount rate = 7.8% per period, calculate PV = $800.68

The above table shows the yields to maturity on a number of three-year, zero-coupon securities. What is the price per $100 of the face value of a three-year, zero-coupon corporate bond with a BBB rating?

C) $82.55 C) Calculate the PV of the bond with FV = $100, YTM = 6.6%, and N = 3, which = $82.55 .

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?

C) -8.13% C) The new price would be $918.73 . ($918.73 - $1000)/1000 = -8.13%

Luther Industries needs to raise $25 million to fund a new office complex. The company plans on issuing ten-year bonds with a face value of $1,000 and a coupon rate of 7.3% (annual payments). The following table summarizes the YTM for similar ten-year corporate bonds of various credit ratings: Assuming that Lutherʹs bonds receive a AAA rating, the number of bonds that Luther must issue to raise the needed $25 million is closest to ________.

C) 23,724 C) FV = $1,000 PMT = $73.00 N = 10 I = 6.55 Compute PV = $1053.79 . Total number of bonds = $25,000,000 / $1053.79 = 23,723.89 .

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?

C) 4.00%

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?

C) 6%

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?

C) 6.383% C) Calculate the discount rate that equates $10,000 to $9400 in one year. 1 + YTMn = (Face value / price)1/n. YTMn = 6.383%

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 ?

C) 6.49% C) Using FV = $10,000 , periods to maturity = 20, PMT = 270.00 , and PV = $9207.93 , calculate discount rate = 3.2445% per period; 3.2445 × 2 = 6.489%.

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 ________.

C) 6.56% C) FV = $1000 PMT = $42.50 ($85 / 2) N = 10 (5 × 2) PV = -$1081.73 Compute I = 3.2783 × 2 = 6.5565 %.

Consolidated Insurance wants to raise $35 million in order to build a new headquarters. The company will fund this by issuing 10-year bonds with a face value of $1,000 and a coupon rate of 6.3%, paid semiannually. The above table shows the yield to maturity for similar 10-year corporate bonds of different ratings. Which of the following is closest to how many more bonds Consolidated Insurance would have to sell to raise this money if their bonds received an A rating rather than an AA rating?

C) 781 bonds C) Calculate the PV of the bond with FV = $1,000, YTM = 3.2%, PMT = 31.50 , and N = 20, which = $992.70 ; thus, the number of bonds sold if AA rating = 35,257.49 bonds; Calculate the PV of the bond with FV = $1,000, YTM = 3.35%, PMT = 31.50 , and N = 20, which = 971.19 ; thus, the number of bonds sold if A rating = 36,038.43 bonds; hence, the difference = 781 bonds.

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?

C) 8.40%

Which of the following statements is true of bond prices?

C) A rise in interest rates causes bond prices to fall.

Lloyd Industries raised $28 million in order to upgrade its roller kiln furnace for the production of ceramic tiles. The company funded this by issuing 15-year bonds with a face value of $1,000 and a coupon rate of 6.2%, paid annually. The above table shows the yield to maturity for similar 15-year corporate bonds of different ratings issued at the same time. When Lloyd Industries issued their bonds, they received a price of $962.63. Which of the following is most likely to be the rating these bonds received?

C) BBB C) Calculate the YTM of the bond with FV = $1,000, PMT = 62, and N = 15, which = 6.6%; the table shows that the bonds received a BBB rating.

How are investors in zero-coupon bonds compensated for making such an investment?

C) Such bonds are purchased at a discount, below their face value.

Which of the following statements regarding bonds and their terms is FALSE?

C) 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.

Why are the interest rates of U.S. Treasury securities less than the interest rates of equivalent corporate bonds?

C) U.S. Treasury securities are widely regarded to be risk-free.

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?

C) a 20-year bond with a $1,000 face value whose coupon rate is 5.8% APR paid semiannually

Which of the following bonds is trading at par?

C) a bond with a $1,000 face value trading at $1,000

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 ________.

C) a premium C) As the coupon rate of 10.0% is more than the YTM of 7.5% on the bonds, so the bonds will trade at a premium.

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?

C) semiannually

The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semiannually. How much are each of the semiannual coupon payments? Assuming the appropriate YTM on the Sisyphean bond is 8.8%, then at what price should this bond trade for?

Coupon payments = (coupon rate × face value) / number of coupons per year = (.08 × $1,000) / 2 = $40 FV = 1,000 I = 4.4% (8.8/2) PMT = $40 ($80/2) N = 30 (15 × 2) Compute PV = $934.07

A bond is said to mature on the date when the issuer repays its notional value.

TRUE

Which of the following statements regarding bonds and their terms is FALSE?

B) 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.

The current zero-coupon yield curve for risk-free bonds is shown above. What is the risk-free interest rate on a 4-year maturity?

C) 3.25%

Based upon the information provided in the table above, you can conclude ________.

C) that the yield curve is downward sloping

Which of the following best shows the timeline for cash flows from a five-year bond with a face value of $2,000, a coupon rate of 5.0%, and semiannual payments?

D

Which of the following is true about the face value of a bond?

D) All of the above are true.

Which of the following best describes a bond rated by Standard & Poorʹs and Moody as B?

D) generally lacks the characteristics of a desirable investment

Assuming that this bond trades for $1,035.44, then the YTM for this bond is equal to ________.

FV = $1,000 PMT = 40 (80 / 2) N = 30 (15 × 2) PV = -$1,035.44 Compute I = 3.8 × 2 = 7.6 or 7.6%

What issues should one be careful of when calculating the bond price from its yield to maturity using the time value of money (TVM) keys of a financial calculator?

It is quite simple to transfer the bond cash flow timeline to a financial calculator. Care has to be taken when using the TVM keys in understanding that the last cash flow, i.e., the return of principal by the issuer, is automatically augmented by the last coupon payment and no special steps are needed for that.

A bond will trade at a discount if its coupon rate is less than its yield to maturity.

TRUE

Bonds with a high risk of default generally offer high yields.

TRUE

The only cash payment an investor in a zero-coupon bond receives is the face value of the bond on its maturity date.

TRUE

What care, if any, should be taken regarding the timing of the cash flows while drawing the timeline and associated cash flows of a coupon bond?

There are two issues that one has to be careful of in marking the timing of cash flows associated with a coupon bond. The first is to be cognizant of the periodicity of the coupon payment, as most coupons are not paid annually. The second is to make sure that the return of principal at the end of the life also has a last coupon payment associated with it.

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. If it does then the time value of money concepts will be violated, which never happens.