FIN 3716 CH 6
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
The price (expressed as a percentage of the face value) of a one-year, zero-coupon corporate bond with a BBB (6.5%) rating is closest to ________. A) 112.68 B) 131.46 C) 75.12 D) 93.90
D) 93.90
The price (expressed as a percentage of the face value) of a one-year, zero-coupon corporate bond with a AAA (5.7%) rating is closest to ________. A) 113.53 B) 132.45 C) 75.69 D) 94.61
D) 94.61
Which of the following is true about the face value of a bond? A) It is the notional amount we use to compute coupon payments. B) It is the amount that is repaid at maturity. C) It is usually denominated in standard increments, such as $1,000. D) All of the above are true.
D) All of the above are true.
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) B or C above
D) B or C above
Which of the following risk-free, zero-coupon bonds could be bought for the lowest price? A) one with a face value of $1,000, a YTM of 4.8%, and 5 years to maturity B) one with a face value of $1,000, a YTM of 3.2%, and 8 years to maturity C) one with a face value of $1,000, a YTM of 6.8%, and 10 years to maturity D) one with a face value of $1,000, a YTM of 5.9%, and 20 years to maturity
D) one with a face value of $1,000, a YTM of 5.9%, and 20 years to maturity
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
Explanation: B) $10,000 × 0.09/2 = $450
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
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: Rating AAA AA A BBB BB YTM 6.70% 6.80% 7.00% 7.40% 8.00% 22) What rating must Luther receive on these bonds if they want the bonds to be issued at par? A) A B) B C) BBB D) AA
A) A
How are the cash flows of a coupon bond different from an amortizing loan?
Answer: 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.
Before it matures, the price of any bond is always less than its face value.
Answer: FALSE
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?
Answer: 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.
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 ________. A) $41.13 B) $34.27 C) $47.98 D) $54.83
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 bond's price immediately before and immediately after the next coupon payment? A) $800 B) $400 C) $1200 D) $200
B) $400
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 ________. A) $652 B) $816 C) $979 D) $1142
B) $816
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? A) $85.64 B) $87.99 C) $92.15 D) $96.67
B) $87.99
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? A) $978.71 B) $969.21 C) $997.71
B) $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? A) 2.4% B) 2.0% C) 2.8% D) 1.6%
B) 2.0% (7.2-5.2)
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? A) 6.31% B) 5.26% C) 7.36% D) 2.63%
B) 5.26%
Which of the following statements regarding bonds and their terms is FALSE? A) The amount of each coupon payment is determined by the coupon rate of the bond. B) Prior to its maturity date, the price of a zero-coupon bond is always greater than its face value. C) The zero-coupon bond has no periodic interest payments. D) Treasury bills are U.S. government bonds with a maturity of up to one year.
B) Prior to its maturity date, the price of a zero-coupon bond is always greater than its face value.
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
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? A) $960.82 B) 1120.95 C) $800.68 D) $640.54
C) $800.68
Why are the interest rates of U.S. Treasury securities less than the interest rates of equivalent corporate bonds? A) The U.S. government has a high credit spread. B) There is significant risk that the U.S. government will default. C) U.S. Treasury securities are widely regarded to be risk-free. D) U.S. Treasury securities yield inflation adjusted interest rates.
C) U.S. Treasury securities are widely regarded to be risk-free.
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
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?
Answer: 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.
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. 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%
A bond is said to mature on the date when the issuer repays its notional value.
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
A bond certificate includes ________. A) the terms of the bond B) the individual to whom payments will be made C) the yield to maturity of the bond D) the price of the bond
A) the terms of the bond
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.
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
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 6.60% 6.80% 6.90% 7.30% 7.80% Assuming that Luther's bonds are rated AAA, their price will be closest to ________. A) $1064 B) $1277 C) $1490 D) $852
A) $1064
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 B) $10,193.11 C) $11,891.97 D) $6795.41
A) $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 B) $1060.69 C) $1237.47 D) $1,000.00
A) $883.91
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
The credit spread of the BBB corporate bond is closest to ________. A) 0.8% B) 1.10% C) 1.60% D) 0.40%
A) 0.8%
The credit spread of the B corporate bond is closest to ________. A) 1.4% B) 1.70% C) 2.80% D) 0.70%
A) 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% B) 0.968% C) 62.500% D) 75.000%
A) 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: Rating AAA AA A BBB BB YTM 6.86% 7.06% 7.16% 7.56% 8.06% Assuming that Luther's 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 B) 33,417 C) 38,987 D) 22,278
A) 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% B) 5.87% C) 6.84% D) 3.91%
A) 4.888%
The following table summarizes prices of various default-free zero-coupon bonds (expressed as a percentage of face value): Maturity (years) 1 2 3 4 5 Price (per $100 face value) 94.52 89.68 85.40 81.65 78.35 The yield to maturity for the three-year zero-coupon bond is closest to ________. A) 5.40% B) 2.70% C) 10.80% D) 0.15%
A) 5.40% Yield = (100/price)(1/n) - 1
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. B) Since a bonds price will converge on its face value as the bond approaches the maturity date, the Law of One Price dictates that the risk-free interest rate will reflect this convergence. C) Since interest rates will rise and fall in response to the movement in bond prices. D) Since there is, by definition, no risk in investing in such bonds, the return from such bonds is the best that can be expected from any investment over the 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.
0 1 2 3 59 60 +-- -- -+- -- -- +-- -- -+- -- . . . -- -- -+- -- -- + $57.5 $57.5 $57.5 $57.5 $5057.5 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 B) a 15-year bond with a notional value of $5000 and a coupon rate of 1.2% paid annually C) a 30-year bond with a notional value of $5000 and a coupon rate of 3.5% paid semiannually D) a 60-year bond with a notional value of $5000 and a coupon rate of 4.6% paid quarterly
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 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 $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 B) a 15-year bond with a $5,000 face value whose yield to maturity is 7.4% and coupon rate is 6.2% APR paid annually C) a 20-year bond with a $3,000 face value whose yield to maturity is 6.0% and coupon rate is 5.4% APR paid semiannually 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
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
How are the cash flows of a zero-coupon bond different from those of a coupon bond?
Answer: 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.
How can the financial calculator be used to calculate the price of a coupon bond from its yield to maturity?
Answer: Most popular financial calculators can help compute the price of a coupon bond in several ways. Two such ways may be using '"time 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?
Answer: 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 can a zero-coupon bond be selling at par to its face value?
Answer: 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.
Under what situation can a zero-coupon bond be selling at a premium?
Answer: 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.
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 Explanation: B) $1000 × 0.045 / 4 = $11.25
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? A) $445.0 B) $222.5 C) $667.5 D) $890.0
B) $222.5
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: Rating AAA AA A BBB BB YTM 6.63% 6.83% 6.93% 7.33% 7.83% Assuming that Luther's bonds receive a AA rating, the price of the bonds will be closest to ________. A) $1129 B) $941 C) $1318 D) $753
B) $941
Which of the following statements regarding bonds and their terms is FALSE? A) Bonds are securities sold by governments and corporations to raise money from investors today in exchange for a promised future payment. B) By convention, the coupon rate is expressed as an effective annual rate. C) Bonds typically make two types of payments to their holders. D) The time remaining until the repayment date is known as the term of the bond.
B) By convention, the coupon rate is expressed as an effective annual rate.
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.
Which of the following statements regarding bonds and their terms is FALSE? A) The internal rate of return (IRR) of an investment in a zero-coupon bond is the rate of return that investors will earn on their money if they buy a default-free bond at its current price and hold it to maturity. 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. C) Financial professionals also use the term spot interest rates to refer to the default-free zero-coupon yields. D) When we calculate a bond's yield to maturity by solving the formula,
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 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 ________. A) a premium B) a discount C) par D) none of the above
B) a discount
A corporate bond which receives a BBB rating from Standard & Poor's is considered ________. A) a junk bond B) an investment grade bond C) a defaulted bond D) a high-yield bond
B) an investment grade bond
The above information is for a corporate bond issued by the Markel Corporation. What sort of bond is this? A) a high-risk bond B) an investment grade bond C) a speculative bond D) a high-yield bond
B) an investment grade bond
What is the dirty price of a bond? A) the bond's price based only on the bond's yield B) the bond's actual cash price C) the bond's price based only on coupon payments D) the bond's price less an adjustment for changes in interest rates
B) the bond's actual cash price
Maturity (years) 1 2 3 4 5 Price $97.25 $94.53 $91.83 $89.23 $87.53 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? A) 1.43% B) 5.71% C) 0.05% D) 2.85%
D) 2.85%
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 company's bonds are rated A, (6.1%) what will be their selling price? A) $1265.37 B) $1476.27 C) $1054.48 D) $843.58
C) $1054.48
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) $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%? A) $663.78 B) $774.42 C) $553.15 D) $885.05
C) $553.15
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%
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: Rating AAA AA A BBB BB YTM 6.55% 6.75% 6.85% 7.25% 7.75% Assuming that Luther's bonds receive a AAA rating, the number of bonds that Luther must issue to raise the needed $25 million is closest to ________. A) 28,469 B) 33,213 C) 23,724 D) 18,979
C) 23,724
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? A) 3.00% B) 3.15% C) 3.25% D) 6.34%
C) 3.25%
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? A) 3.20% B) 2.40% C) 4.00% D) 2.00%
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? A) 3% B) 5% C) 6% D) 7%
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? A) 3.191% B) 6.000% C) 6.383% D) 0.009%
C) 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? A) 7.79% B) 9.08% C) 6.49% D) 3.24%
C) 6.49%
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? A) 7.79% B) 9.08% C) 6.49% D) 3.24%
C) 6.49%
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 ________. A) 5.2% B) 7.87% C) 6.56% D) 9.18%
C) 6.56%
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 ________. A) 2.89% B) 56.90% C) 43.10% D) 5.77%
D) 5.77%
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? A) 937 bonds B) 1093 bonds C) 781 bonds D) 625 bonds
C) 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? A) 6.72% B) 5.04% C) 8.40% D) 4.20%
C) 8.40%
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.
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 (6.6%)
How are investors in zero-coupon bonds compensated for making such an investment? A) Such bonds are purchased at their face value and sold at a premium on a later date. B) Such bonds make regular interest payments. C) Such bonds are purchased at a discount, below their face value. D) Such bonds have a lower face value as compared to other bonds of similar term.
C) Such bonds are purchased at a discount, below their face value.
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.
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? A) a ten-year bond with a $1,000 face value whose coupon rate is 5.8% APR paid semiannually B) a ten-year bond with a $1,000 face value whose coupon rate is 7.4% APR paid semiannually C) a 20-year bond with a $1,000 face value whose coupon rate is 5.8% APR paid semiannually D) a 20-year bond with a $1,000 face value whose coupon rate is 7.4% APR paid semiannually
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? A) a bond with a $2,000 face value trading at $1,987 B) a bond with a $1,000 face value trading at $999 C) a bond with a $1,000 face value trading at $1,000 D) a bond with a $2,000 face value trading at $2,012
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 ________. A) par B) a discount C) a premium D) none of the above
C) 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? A) monthly B) quarterly C) semiannually D) annually
C) semiannually
The following table summarizes prices of various default-free zero-coupon bonds (expressed as a percentage of face value): Maturity (years) 1 2 3 4 5 Price (per $100 face value) 94.52 89.68 85.40 81.65 78.35 Based upon the information provided in the table above, you can conclude ________. A) that the yield curve is flat B) nothing about the shape of the yield curve C) that the yield curve is downward sloping D) that the yield curve is upward sloping
C) that the yield curve is downward sloping
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%
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
A five-year bond with a $1,000 face value has a yield to maturity is 5.0% and it's coupon rate is 6.0% paid annually. The dirty price of this bond exactly 6 months after its second coupon payment is closest to ________. A) $1087.23 B) $1147.23 C) $1027.23 D) $1057.23
D) $1057.23
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? A) $4937 B) $5760 C) $6582 D) $4114
D) $4114
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? A) 0 1 2 3 4 5 +-- -- -+- -- -- +-- -- -+- -- -- +-- -- -+ $100 $100 $100 $100 $2100 B) 0 1 2 3 9 10 +-- -- -+- -- -- +-- -- -+- -- . . . -- -- -+- -- -- + $25 $25 $25 $25 $25 C) 0 1 2 3 9 10 +-- -- -+- -- -- +-- -- -+- -- . . . -- -- -+- -- -- + $50 $50 $50 $50 $50 D) 0 1 2 3 9 10 +-- -- -+- -- -- +-- -- -+- -- . . . -- -- -+- -- -- + $50 $50 $50 $50 $2050
D) 0 1 2 3 9 10 +-- -- -+- -- -- +-- -- -+- -- . . . -- -- -+- -- -- + $50 $50 $50 $50 $2050
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? A) 7% B) 6% C) 8% D) 10%
D) 10%
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 ________. A) 7.9% B) 11.9% C) 13.8% D) 9.9%
D) 9.9%
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? A) The price of the bond will fall by $293.50. B) The price of the bond will fall by $352.20. C) The price of the bond will rise by $410.90. D) The price of the bond will rise by $293.50.
D) The price of the bond will rise by $293.50.
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.
Which of the following statements regarding bonds and their terms is FALSE? A) Zero-coupon bonds are also called pure discount bonds. B) The internal rate of return (IRR) of an investment opportunity is the discount rate at which the net present value (NPV) of the investment opportunity is equal to zero. C) The yield to maturity for a zero-coupon bond is the return you will earn as an investor from holding the bond to maturity and receiving the promised face value payment. D) When prices are quoted in the bond market, they are conventionally quoted in increments of $1,000.
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? 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 B) a 15-year bond with a $5,000 face value whose yield to maturity is 7.4% and coupon rate is 6.2% APR paid annually C) a 20-year bond with a $3,000 face value whose yield to maturity is 6.0% and coupon rate is 5.4% APR paid semiannually 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
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? 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 $1,000 face value, five years to maturity and 6.3% annual coupon payments
Which of the following best describes a bond rated by Standard & Poor's and Moody as B? A) judged to be high quality by all standards B) considered to be medium grade obligations C) neither highly protected nor poorly secured D) generally lacks the characteristics of a desirable investment
D) generally lacks the characteristics of a desirable investment
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? A) a 10-year bond with a face value of $2,000 and a coupon rate of 4.8% with monthly payments B) a 10-year bond with a face value of $2,000 and a coupon rate of 5.8% with monthly payments C) a 10-year bond with a face value of $2,009.67 and a coupon rate of 4.8% with monthly payments D) a 10-year bond with a face value of $2,009.67 and a coupon rate of 5.8% with monthly payments
Explanation: B) $9.67 × 12 / (2,009.67 - 9.67) = 5.802%
Bond traders generally quote bond yields rather than bond prices, since yield to maturity depends on the face value of the bond.
FALSE
A bond will trade at a discount if its coupon rate is less than its yield to maturity
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.
