Chapter 6 FIN3403
A bond is currently trading below par. Which of the following must be true about that bond? a)The bond's yield to maturity is less than its coupon rate. b)The bond is a zero-coupon bond. c)The bond's yield to maturity is greater than its coupon rate. d)The bond is a zero-coupon bond or The bond's yield to maturity is greater than its coupon rate
The bond is a zero-coupon bond or the bond's yield to maturity is greater than its coupon rate
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 b)a ten-year bond with a $4,000 face value whose yield to maturity is 6.0% and coupon rate is 5.9% APR paid semiannually c)a 15-year bond with a $10,000 face value whose yield to maturity is 8.0% and coupon rate is 7.8% APR paid semiannually d)a two-year bond with a $50,000 face value whose yield to maturity is 5.2% and coupon rate is 5.2% APR paid monthly
a) a five-year bond with a $2000 face value whose yield to maturity is 7% and coupon rate is 7.2% APR paid semiannually premium means Coupon rate is greater than YTM
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 b)$850 c)$1276 d)$1488
a)$1063 FV=1000 p/y=2 i/y=7.3 PMT=41 N=20 CPT PV=1063.1 or all numbers same except p/y=1 and i/y=3.65=(7.3/2)
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: Rating: AAA AA A BBB BB YTM: 6.6% 6.8% 6.9% 7.3% 7.8% Assuming that Luther's bonds are rated AAA, their price will be closest to ________. a)$1064 b)$1277 c)$1490 d)$852
a)$1064 FV=1000 PMT=75 N=10 i/y=6.6 CPT PV=1064.4
A firm issues 5-year bonds with a coupon rate of 4.7%, paid semiannually. The credit spread for this firm's 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 firm's outstanding 5-year bonds be if their face value is $1,000? a)$932.28 b)$12.00 c)$1305.19 d)$745.82
a)$932.28 FV=1000 PMT=23.5 N=10 i/y=3.15-> (1.2/2 +5.1/2)=3.15% CPT PV=$932.28
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% b)0.968% c)62.500% d)75.000%
a)1.936% YTM=(Face Value/Price)^1/n -1 (5000/3750)^1/15 -1=1.936%
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% b)5.87% c)6.84% d)3.91%
a)4.888% FV=10,000 N=16 PV=9006.6568 i/y=3.25 CPT PMT=244.4 244.4=10,000 x ?/2 solve for ?=4.888% or Annual coupon payment=244.4x2=488.8 coupon rate=4.888%
What is the coupon payment of a 25-year $1000 bond with a 4.5% coupon rate with quarterly payments? a)$3.75 b)$11.25 c)$22.50 d)$45.00
b)$11.25 1000x0.045/4= 11.25
What is the coupon payment of a 15-year $10,000 bond with a 9% coupon rate with semiannual payments? a)$150.00 b)$450 c)$900.00 d)$1800.00
b)$450 10,000x0.09/2= $450
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? a)The price of the bond will fall by $18.93. b)The price of the bond will fall by $15.78. c)The price of the bond will rise by $15.78. d)The price of the bond will not change.
b)The price of the bond will fall by $15.78 FV=1000 N=16 PMT=31 p/y=2 i/y=8.3 CPT PV=$878.9937 change i/y=8.6 CPT PV=$863.2186 878.9937-863.2168= $15.7769 or 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 and discount rate=4.3% calculate PV=863.2168 Then take difference as shown above
Which of the following statements regarding bonds and their terms is FALSE? a)One advantage of quoting the yield to maturity rather than the price is that the yield is independent of the face value of the bond. b)Unlike the case of bonds that pay coupons, for zero-coupon bonds, there is no formula to solve for the yield to maturity. c)Because we can convert any bond price into a yield, and vice versa, bond prices and yields are often used interchangeably. d)The internal rate of return (IRR) of a bond is given a special name, the yield to maturity (YTM).
b)Unlike the case of bonds that pay coupons, for zero coupon bonds, there is no formula to solve for the yield to maturity
Which of the following statements is true of bond prices? a)A fall in bond prices causes interest rates to fall. b)A fall in interest rates causes a fall in bond prices. c)A rise in interest rates causes bond prices to fall. d)Bond prices and interest rates are not connected.
c) A rise in interest rates causes bond prices to fall
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 ________. a)par b)a discount c)a premium d)None of these
c) a premium As the coupon rate of 10% is more than the YTM of 7.5% on the bonds, so the bonds will trade at a premium
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? a)$2606.25 b)$5000.00 c)$5212.50 d)$5425.00
c)$5212.50 5000+5000(0.0852/2)=5212.5
A risk-free, zero-coupon bond has 10 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%? a)$663.78 b)$774.42 c)$553.15 d)$885.05
c)$553.15 Price=(Face Value)/(1+YTM)^N (1000)/(1.061)^10= $553.15
Security: Treasury AAA Corporate BBB Corporate B Corporate Yield %: 5.2 5.4 6.6 6.9 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? a)$99.06 b)$115.57 c)$82.55 d)$66.04
c)$82.55 FV=100 PMT=0 i/y=6.6 N=3 CPT PV=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? a)-6.50% b)-9.75% c)-8.13% d)-11.38%
c)-8.13% FV=1000 i/y=4.05 N=16 PMT=33.5 CPT PV=918.73 (918.73-1000)/1000= -8.13%
Security: AAA Corporate AA corporate A Corporate BBB Corporate BB Corporate Yield %: 5.7 5.8 6.0 6.6 6.9 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? a)AA b)A c)BBB d)BB
c)BBB FV=1000 PMT=62 N=15 PV=-962.63 CPT i/y=6.6%
Which of the following statements regarding bonds and their terms is FALSE? a)The bond certificate typically specifies that the coupons will be paid periodically until the maturity date of the bond. b)The bond certificate indicates the amounts and dates of all payments to be made. 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. d)The face value of a bond is repaid at maturity.
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
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? a)monthly b)quarterly c)semiannually d)annually
c)semiannually 5000x.0441/?=110.25 solve for ?=2 so it is semiannual payments
If the yield to maturity of all of the following bonds is 6%, which will trade at the greatest premium per $100 face value? a)a bond with a $10,000 face value, four years to maturity and 6.2% semiannual coupon payments b)a bond with a $500 face value, seven years to maturity and 5.2% annual coupon payments c)a bond with a $5,000 face value, seven years to maturity and 5.5% annual coupon payments d)a bond with a $1,000 face value, five years to maturity and 6.3% annual coupon payments
d) a bond with a $1000 face value, five years to maturity and 6.3% annual coupon payments It isn't B or C because those are discounts. Calculate PV of A and C
A firm issues two-year bonds with a coupon rate of 6.7%, paid semiannually. The credit spread for this firm's 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 firm's outstanding two-year bonds be per $100 of face value? a)$126.40 b)$147.47 c)$84.27 d)$105.34
d)$105.34 FV=100 PMT=3.35 N=4 i/y=1.95% (3.1/2 +0.8/2)=1.55+.4=1.95 CPT PV=$105.34 i/y unsure if that's how you compute that value
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 ________. a)$1000 b)$454.32 c)$530.04 d)$379
d)$379 FV=1000 p/y=1 i/y=10.2 PMT=0 N=10 CPT PV=378.6 or FV=1000 I=10.2 PMT=0 N=10 PV=FV/(1+i)^N =1000/(1.102)^10 =378.6
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? a)11.41% b)13.31% c)7.61% d)9.51%
d)9.51% FV=1000 PMT=55 PV=846.11 N=5 CPT I/Y= 9.51%
Which of the following best illustrates why a bond is a type of loan? a)The issuers of bonds make regular payments to bondholders. b)When a company issues a bond, the buyer of that bond becomes an owner of the issuing company. c)Funds raised are used to finance long-term projects. 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.
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