Chapter 8

Regatta, Inc., has six-year bonds outstanding that pay a 8.25 percent coupon rate. Investors buying the bond today can expect to earn a yield to maturity of 6.875 percent. What should the company's bonds be priced at today? Assume annual coupon payments A. $1,066 B. $972 C. $1,014 D. $923

A. $1,066

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.) A. 17% B. 9% C. 18% D. 10%

A. 17%

The market price of a 10-year, $1,000 bond is $1,158.91. Interest on this bond is paid semiannually and the YTM is 14%. What is the bond's annual coupon rate? (Round your answer to the nearest percent.) A. 17% B. 12% C. 10% D. 14%

A. 17%

Nathan Akpan is planning to invest in a seven-year bond that pays annual coupons at a rate of 7 percent. It is currently selling at $927.23. What is the current market yield on such bonds? (Round to the closest answer.) A. 8.4% B. 10.4% C. 5% D. 7.5%

A. 8.4%

If a bond's coupon rate is equal to the market rate of interest, then the bond will sell: A. at a price equal to its face value. B. at a price greater than its face value. C. at a price less than its face value. D. none of the above is true.

A. at a price equal to its face value.

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

A. have less interest rate risk than longer-term bonds.

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.) A. $982 B. $1,048 C. $965 D. $1,099

B. $1,048

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.) A. 9% B. 11% C. 12% D. 8%

B. 11%

Yield to maturity: Jane Almeda is interested in a 10-year bond issued by Roberts Corp. that pays a coupon of 10 percent annually. The current price of this bond is $1,174.45. What is the yield that Jane would earn by buying it at this price and holding it to maturity? (Round to the closest answer.) A. 7% B. 7.5% C. 8% D. 8.5%

B. 7.5%

Bonds sell at a discount when the market rate of interest is: A. less than the bond's coupon rate. B. greater than the bond's coupon rate. C. equal to the bond's coupon rate. D. none of the above is true.

B. greater than the bond's coupon rate.

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

B. the bond's face value.

Shawna Carter wants to invest her recent bonus in a four-year bond that pays a coupon of 11 percent semiannually. The bonds are selling at $962.13 today. If she buys this bond and holds it to maturity, what would be her yield? (Round to the closest answer.) A. 12.5% B. 11.5% C. 12.2% D. 11.8%

C. 12.2%

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.) A. 11% B. 12% C. 13% D. 14%

C. 13%

A bond will sell at a premium when its coupon interest rate: A. varies more than the market interest rate on similar bonds. B. equals the market interest rate on similar bonds. C. exceeds the market interest rate on similar bonds. D. is lower than the market interest rate on similar bonds.

C. exceeds the market interest rate on similar bonds.

Triumph Corp. issued five-year bonds that pay a coupon of 6.375 percent annually. The current market rate for similar bonds is 8.5 percent. How much will you be willing to pay for Triumph's bond today? (Do not round intermediate computations. Round your final answer to the nearest dollar.) A. $1,137 B. $897 C. $1,023 D. $916

D. $916

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 will yield 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.) A. $1,044 B. $970 C. $1,102 D. $938

D. $938

Suppose an investor earned a semiannual yield of 6.4 percent on a bond paying coupons twice a year. What is the effective annual yield (EAY) on this investment? (Round to two decimal places.) A. 12.80% B. 6.40% C. 6.50% D. 13.21%

D. 13.21%

What is true of zero coupon bonds? A. Zero coupon bonds have no coupon payments over its life and only offer a single payment at maturity B. Zero coupon bonds sell well below their face value (at a deep discount) because they offer no coupons C. The most frequent and regular issuer of zero coupon securities is the U.S. Treasury Department D. All of the above are true

D. All of the above are true

Which of the following statements is true of convertible bonds? A. The typical issue of convertible bonds allows the holder of the bond to convert it to preferred stock. B. The most significant disadvantage to a corporation of issuing convertible bonds is that they increase the cash that the firm must use to make interest payments. C. The typical conversion ratio is set so that the firm's stock price must appreciate 5% or less before it is profitable for the holder to convert the bond to stock. D. Firms that issue convertible bonds can do so at a lower interest rate.

D. Firms that issue convertible bonds can do so at a lower interest rate.

As interest rates fall, the prices of bonds decline. T/F?

False

Bonds with a call provision pay lower yields than comparable noncallable bonds. T/F?

False

Higher coupon bonds have greater interest rate risk. T/F?

False

Most secondary market transactions for corporate bonds take place on the New York Stock Exchange. T/F?

False

The yield to maturity of a bond never changes. T/F?

False

Upward-sloping yield curves often occur before the beginning of recession. T/F?

False

Zero coupon bonds sell well above their par value because they offer no coupons. T/F?

False

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

The issuers of AAA rated bonds should have the lowest borrowing cost because their default risk premium is lower than issuers with weaker credit ratings.

All other things being equal, a given change in the interest rates will have a greater impact on the price of a low-coupon bond than a higher-coupon bond with the same maturity. T/F?

True

Convertible bonds can be converted into shares of common stock at some predetermined ratio at the discretion of the bondholder. T/F?

True

Corporate bonds have a thin market relative to market for corporate stocks. T/F?

True

The default risk premium is based on the probability that a bond issuer will not fulfill all of a bond's contractual provisions. T/F?

True

The face or par value for most corporate bonds is equal to $1,000, and it is the principal amount owed to bondholders at maturity. T/F?

True

The risk that the lender may not receive payments as promised is called default risk. T/F?

True

The value, or price, of any asset is the present value of its future cash flows

True

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. T/F?

True

U.S. Treasury securities are the best proxy measure for the risk-free rate. T/F?

True

Vanilla bonds have coupon payments that are fixed for the life of the bond, with the principal being repaid at maturity. T/F?

True