BUS Chapter 6

Variance Logistics wants to issue 20-year, zero-coupon bonds that yield 6.2 percent. What price should it charge for these bonds if the face value is $1,000? Assume semiannual compounding. $562.03 $543.03 $294.89 $288.15 $326.45

$294.89 N = 40 I/Y = 3.1 PMT = 0 FV = 1,000.00 PV = -294.89

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? $86.29 $42.25 $85.00 $43.15 $41.50

$42.25 EAY = .086285 = (1 + r/2)^2 − 1 r = .0845, or 8.45% Because the bond is selling at par, the APR and the coupon rate are equal. Semiannual interest payment = [.0845($1,000)]/2 Semiannual interest payment = $42.25

The 5.3 percent bond of Dominic Cyle Parts has a face value of $1,000, a maturity of 12 years, semiannual interest payments, and a yield to maturity of 6.12 percent. What is the current market price of the bond? $959.33 $931.01 $1,072.13 $912.40 $945.08

$931.01 N = 24 I/Y = 3.06 PMT = 26.5 FV = 1,000.00 PV = -931.01

A U.S. Treasury bond pays 2.80 percent interest. You are in the 27 percent marginal tax bracket. What is your after tax yield on this bond? 2.14 percent 2.22 percent 2.04 percent 1.97 percent 2.89 percent

2.04 percent after tax yield = .0280 x (1 - .27) = .0204, or 2.04 percent

AB Builders has 15-year bonds outstanding with a face value of $1,000 and a market price of $974. The bonds pay interest annually and have a yield to maturity of 4.03 percent. What is the coupon rate? 3.95 percent 3.75 percent 4.20 percent 4.25 percent 3.80 percent

3.80 percent PV = $974 = PMT × {1 − [1 / (1 + .0403)^15]} / .0403 + $1,000 / (1 + .0403)^15 PMT = $37.96 Coupon rate = $37.96 / $1,000 = .0380, or 3.80 percent

A $1,000 face value bond is currently quoted at 100.8. The bond pays semiannual payments of $22.50 each and matures in six years. What is the coupon rate? 2.25 percent 4.46 percent 2.85 percent 4.50 percent 2.72 percent

4.50 percent coupon rate = ($22.50 x 2) / $1,000 = .0450, or 4.50 percent

New Markets has $1,000 face value bonds outstanding that pay interest semiannually, mature in 20 years, and have a 5.8 percent coupon. The current price is quoted at 103.25. What is the yield to maturity? 11.19 percent 5.27 percent 11.05 percent 5.53 percent 5.38 percent

5.53 percent N = 40 PV = -1,032.50 PMT = 29 FV = 1,000.00 I/Y = 2.765 (2.765 x 2, because it pays interest SEMI-annually)

A 15-year, annual coupon bond is priced at $984.56. The bond has a $1,000 face value and a yield to maturity of 6.5 percent. What is the coupon rate? 6.34 percent 3.17 percent 6.38 percent 6.74 percent 2.50 percent

6.34 percent N = 15 I/Y = 6.5 PV = -984.56 FV = 1,000.00 PMT = 63.36 (63.36 / 1,000 = .0634, or 6.34 percent)

The 6.3 percent, semi-annual coupon bonds of PE Engineers mature in 13 years and have a price quote of 99.2. These bonds have a current yield of ________ percent, a yield to maturity of ________ percent, and an effective annual yield of ________ percent. 6.12; 6.36; 6.42 6.23; 6.36; 6.42 6.35; 6.39; 6.49 6.23; 6.20; 6.16 6.35; 6.32; 6.29

6.35; 6.39; 6.49 Current yield = (.063 × $1,000) / (.992 ×$1,000) Current yield = .0635, or 6.35 percent PV = $992 = (.063 × $1,000 / 2) × {(1 − {1 / [1 + (r / 2)]^26}) / (r/ 2)} + $1,000 / [1 + (r / 2)]^26 r = .0639, or 6.39 percent EAR = [1 + (.0639 / 2)]^2 − 1 EAR = .0649, or 6.49 percent

The $1,000 face value bonds of Universe International have coupon of 6.8 percent and pay interest semiannually. Currently, the bonds are quoted at 103.5 and mature in 16 years. What is the yield to maturity? 6.24 percent 6.45 percent 5.75 percent 6.92 percent 12.89 percent

6.45 percent N = 32 PV = -1,035.00 PMT = 34 FV = 1,000.00 I/Y = 3.223 (3.223 x 2, because interest is SEMI-annually)

If your nominal rate of return is 8.68 percent and your real rate of return is 2.05 percent, what is the inflation rate? 16.77 percent 6.50 percent 5.32 percent 6.29 percent 6.63 percent

6.50 percent (1 + .0868) = (1 + .0205)(1 + h) h = .06496, or 6.50 percent

GN Supply wants to issue new 10-year, $1,000 face value bonds at par. The company currently has 6.35 percent coupon bonds on the market that sell for $983.20, make semiannual interest payments, and mature in 10 years. What coupon rate should the company set on its new bonds? 6.37 percent 6.47 percent 6.58 percent 6.38 percent 6.50 percent

6.58 percent PV = $983.20 = [(.0635 × $1,000) / 2] × {(1 - {1 / [1 + (r / 2)]^20}) / (r / 2)} + $1,000 / [1 + (r / 2)]^20 r = .0658, or 6.58 percent The coupon rate must equal the current market rate of 6.58 percent if the bonds are to be sold at par.

Global Exporters wants to raise $31.3 million to expand its business. To accomplish this, it plans to sell 15-year, $1,000 face value, zero coupon bonds. The bonds will be priced to yield 5.75 percent. What is the minimum number of bonds it must sell to raise the money it needs? Assume semiannual compounding. 80,411 73,225 74,907 69,800 86,029

73,225 Bond price = $1,000/(1 + .0575/2)^(15)(2) Bond price = $427.272 Number of bonds = $31,300,000/$427.272 Number of bonds = 73,255

A 25-year, annual coupon bond is priced at $1,105.63. The bond has a $1,000 face value and a yield to maturity of 7.28 percent. What is the coupon rate? 8.35 percent 8.21 percent 4.10 percent 8.54 percent 7.28 percent

8.21 percent N = 25 I/Y = 7.28 PV = -1,105.63 FV = 1,000.00 PMT = 82.09 Coupon rate = $82.09 / $1,000 = .0821, or 8.21 percent

Which one of the following is correct concerning bonds and bondholders? A bondholder is a partial owner of a corporation. A bond can be sold privately and never offered to the public. A bondholder can never force a company into bankruptcy. The interest paid on a bond is not tax deductible as a business expense. A bondholder has the right to vote on key corporate decisions.

A bond can be sold privately and never offered to the public.

Which one of the following statements is true? The yield to maturity on a premium bond exceeds the bond's coupon rate. A discount bond has a coupon rate that is less than the bond's yield to maturity. A premium bond has a current yield that exceeds the bond's coupon rate. The current yield on a par value bond will exceed the bond's yield to maturity. The current yield on a premium bond is equal to the bond's coupon rate.

A discount bond has a coupon rate that is less than the bond's yield to maturity.

Which one of the following is correct concerning bond prices? All else equal, a 12% bond will sell at a higher price than a 10% bond. Movements in bond prices are directly related to movements in the market rate of interest. The price of a short-term bond is more sensitive to interest rate changes than the price of a long-term bond. The price of a zero-coupon bond is less sensitive to interest rate changes than the price of a coupon bond. Bond prices tend to fluctuate more the less time to maturity.

All else equal, a 12% bond will sell at a higher price than a 10% bond.

Which of the following is (are) correct concerning the yield-to-maturity (YTM)? I. The YTM is greater than the coupon rate for a discount bond. II. The YTM is less than the coupon rate when the coupon rate is 7% and the market rate is 6%. III. The YTM is equal to the coupon rate when a bond sells at par value. IV. The YTM is greater than the coupon rate for a bond selling at a premium. II and IV only I and III only II and III only I, II, and III only II, III, and IV only

I, II, and III only

Which one of the following statements concerning sinking funds is correct? Sinking funds may be used to purchase bonds in the open market. Sinking funds can be used only to call bonds. Bond issuers must fund a sinking fund at the time the bonds are issued. Sinking funds must include at least one "balloon payment." Sinking funds must be funded annually, starting on the issue date.

Sinking funds may be used to purchase bonds in the open market.

Margaret wants to compute the present value of a six year semi-annual 8% coupon bond that has a 9% yield-to-maturity. Which one of the following is correct? The amount of each interest payment is $80. The bond is selling at a premium. The number of interest payments is twelve. The present value is assumed to be $1,000. The current price of the bond will be greater than the par value.

The number of interest payments is twelve.

If inflation is expected to steadily decrease in the future, the term structure of interest rates will most likely be: flat. humped. downward sloping. upward sloping. double-humped.

downward sloping.

Municipal bonds are: risk-free. issued by federal, state, and local governmental bodies. generally purchased by tax-exempt investors. generally callable. zero coupon bonds.

generally callable.

When a bond's yield to maturity is less than the bond's coupon rate, the bond: is selling at a premium. is priced at par. has reached its maturity date. had to be recently issued. is selling at a discount.

is selling at a premium.

A call provision grants the bond issuer the: right to contact each bondholder to determine if he or she would like to extend the term of his or her bonds. right to repurchase the bonds on the open market prior to maturity. option of repurchasing the bonds prior to maturity at a prespecified price. option to exchange the bonds for equity securities. right to automatically extend the bond's maturity date.

option of repurchasing the bonds prior to maturity at a prespecified price.

The primary purpose of protective covenants is to help: bondholders whose bonds are called. reduce interest rate risk. convert bearer bonds into registered form. protect bondholders from issuer actions. the issuer in case of default.

protect bondholders from issuer actions.