Chapter 7

Roadside Markets has 8.82 percent coupon bonds outstanding that mature in 11.5 years. The bonds pay interest semiannually. What is the market price per bond if the face value is $1,000 and the yield to maturity is 6.9 percent?

$1,150.72

Oil Wells offers 5.75 percent coupon bonds with semiannual payments and a yield to maturity of 6.34 percent. The bonds mature in 8 years. What is the market price per bond if the face value is $1,000?

$963.42

Bond Rating Companies (3)

1. Moody's 2. Standard & Poor's 3. Fitch

Bond price = PV (________) + PV (_______)

1. coupons (annuity) 2. par (lump sum)

________-term bonds have more price risk than ________-term bonds.

1. long 2. short

Bond prices are affected by (2):

1. risk 2. interest rates

Genova Corporation has a four year 10% annual coupon bond. The price of the bond is $956.12. The Yield to Maturity is 11.43%. What is the current yield on this bond?

10.46% Current Yield = annual coupon/price Current Yield = $100/$956.12 Current Yield = 10.46%

Warren Corporation is interested in a three-year, 11% annual coupon bond. A broker quotes a price of $930.35. What is the yield to Maturity?

14% N = 3 I/YR = ? PV = $930.35 PMT = 110 ($1,000 x 11%) FV = $1,000 I/YR = 14%

Lochmere Corporation is evaluating a taxable bond at 7% and a municipal bond at 5.75%. What is the break-even tax rate?

18%

You own a bond that pays $62 in interest annually. The face value is $1,000 and the current market price is $1,034.14. The bond matures in 10 years. What is the yield to maturity?

5.74%

Franklin Corporation has an opportunity to purchase bonds at a rate of 11%. They are in the 34% tax bracket. What is the after tax yield on these bonds?

7.26%

Redesigned Computers has 6.2 percent coupon bonds outstanding with a current market price of $604. The yield to maturity is 14.4 percent and the face value is $1,000. Interest is paid annually. How many years is it until these bonds mature?

8.84 years

Kaiser Industries has bonds on the market making annual payments, with 12 years to maturity, a par value of $1,000, and a current price of $1,142.60. At this price, the bonds yield 7.2 percent. What is the coupon rate?

9.01%

Municipal bonds are taxable for federal, state and local taxes. (T/F)

False

Current Yield is the bond's annual coupon divided by its yield to maturity. (T/F)

False Current Yield is the bond's annual coupon divided by its price.

YIELD = ________.

INTEREST/YEAR

USE COUPON RATE TO COMPUTE ----> ________.

PAYMENT

A bond which can be converted into stock at a predetermined ratio is _______.

convertible

Allison just received the semiannual payment of $35 on a bond she owns. Which term refers to this payment? -Face value -Yield -Coupon -Discount

coupon

The interest rate paid to investors during the life of the bond & is set when the issuer first sells the securities into the market is ______.

coupon rate

Bonds are a form of ______ for a company.

debt

If YTM > coupon then the bond sells at a ______.

discount

When short-term rates are higher than long-term rates, we say it is __________________.

downward sloping

Bert owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. What is the $1,000 called?

face value

Bonds are referred to as fixed- _______ securities.

income

A bond which is below investment grade is ______.

junk

A bond's principal is repaid on the ____ date.

maturity

The term structure of interest rates tells us what _________ interest rate are on default-free, pure discount bonds of all maturities.

nominal

If YTM < coupon then bond sells at a ______.

premium

Yield to maturity = __________.

rate of return

A bond which coupon payments are fixed and original principal paid at maturity is __________.

vanilla

The term structure of interest rates includes all of the following basic components, except: -Interest Rate Risk -Weighted Average Cost of Capital -Rate of Inflation -Real Rate of Interest

weighted average cost of capital

The bond market requires a return of 9.8 percent on the 5-year bonds issued by JW Industries. The 9.8 percent is referred to as the:

yield to maturity

A bond which pays no explicit interest but instead sells at a deep discount is ______.

zero coupon