fin3403 ch6 hw
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?
$105.34 Find PV FV = 100 I = (3.1+.8)/2 Pmt = 3.35 (100*.067)/2 N = 4 PV = ? PV = 105.34
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: AAA- 6.60% YTM AA- 6.80% YTM A- 6.9% YTM BBB- 7.3% YTM BB- 7.8% YTM Assuming that Luther's bonds are rated AAA, their price will be closest to ________.
$1064 Find PV FV = 1000 Pmt = 75 (1000*.075) N = 10 I = 6.6% PV = ? PV = 1064
What is the coupon payment of a 25-year $1000 bond with a 4.5% coupon rate with quarterly payments?
$11.25 =face value*coupon rate/# of pmts $1000*0.045/4 = 11.25
What is the coupon payment of a 15-year $10,000 bond with a 9% coupon rate with semiannual payments?
$450 $10,000*.09/2 = $450
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%?
$553.15 Price = face value/(1 + YTM)^N Price = 1000/(1.061)^10 = $553.15
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? Treasury- 5.2% yield AAA Corporate- 5.4% yield BBB Corporate- 6.6% yield B Corporate- 6.9% yield
$82.55 Find PV FV = 100 I = 6.6% N = 3 PV = ? 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?
-8.13% Find PV FV = 1000 N = 16 I = 8.1%/2 Pmt = 33.5 (1000*.067/2) PV = ? PV = $918.73 =(918.73-1000)/1000 =-8.13%
Which of the following is true about the face value of a bond?
-It is the notional amount we use to compute coupon payments -It is the amount that is repaid at maturity -It is usually denominated in standard increments, such as $1000
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?
1.936% YTM = (Face Value/Price)^1/n - 1 YTM = (5000/3750)^1/15 - 1 = 1.936%
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?
5.26% Calculate I FV = 5000 N = 16 Pmt = 110 (5000*.044/2) PV = 4723.70 I = ? I = 2.6275*2 = 5.26%
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?
6.383% 1 + YTMn = (face value/price)^1/n 10000/9400 = 1.6383 1.06383 = 1 + YTMn YTMn = 6.383%
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? AAA Corporate- 6.2% yield AA Corporate- 6.4% yield A Corporate- 6.7% yield BBB Corporate- 7.0% yield BB Corporate- 7.5% yield
781 bonds Find PV for AA rating FV = 1000 I = 6.4%/2 Pmt = 31.5 (1000*.063/2) N = 20 PV = ? PV = 992.70 Number of bonds = 35,000,000/992.70 = 35,257.49 bonds Find PV for A rating FV = 1000 I = 6.7%/2 Pmt = 31.5 N = 20 PV = ? PV = 971.19 Number of bonds = 35,000,000/971.19 = 36,038.43 bonds Difference= 36,038.43-35257.49 = 781 bonds
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?
9.51% Find I FV = 1000 N = 5 Pmt = 55 (1000*.055) PV = $846.11 I = ? I = 9.51%
Which of the following statements is true of bond prices?
A rise in interest rates causes bond prices to fall
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
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? AAA Corporate- 5.7% yield AA Corporate- 5.8% yield A Corporate- 6% yield BBB Corporate- 6.6% yield BB Corporate- 6.9% yield
BBB Calculate I FV = 1000 Pmt = 62 (1000*.062) PV = 962.63 N = 15 I =? I = 6.6 Which security is 6.6% yield, BBB is.
A bond is currently trading below par. Which of the following must be true about that bond?
The bond is a zero-coupon bond or the bond's yield to maturity is greater than its coupon 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?
The price of the bond will fall by $15.78. Calculate PV FV = 1000 N = 16 (8*2) Pmt = 31 (1000*.062/2) I = 8.3%/2 PV = ? PV = $878.9937 Calculate PV with rise in rate FV = 1000 N = 16 Pmt = 31 I = 8.6%/2 PV = ? PV = $863.2168 Difference = 878.9937 - 863.2168 = 15.78
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 10-year bond with a face value of $2,000 and a coupon rate of 5.8% with monthly payments Face value = 2009.67 -9.67 = 2000 $9.67*12 / (2,009.67-9.67) = 5.802%
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
a bond with $1000 face value, five years to maturity and 6.3% annual coupon payments A) PV = 10,070.20/100 = 100.70 B) 5.2%< 6%, so won't trade at premium C) 5.5%<6% so won't trade at premium D) PV = 1012.64/10 = 101.26 101.26 > 100.70
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 discount As the coupon rate of 8.1% is less than the YTM of 10.6% on the bonds, so they will trade at a discount.
Which of the following bonds is trading at a premium?
a five-year bond with a $2000 face value whose YTM is 7.0% and coupon rate is 7.2% APR paid semiannually find where coupon rate is greater than YTM 7.2% > 7%
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 premium As the coupon rate of 10.0% is more than the YTM of 7.5% on the bonds, so the bonds will trade at a premium.
Which of the following risk-free, zero-coupon bonds could be bought for the lowest price?
one with a face value of $1,000, a YTM of 5.9%, and 20 years to maturity Price = face value / (1 + YTM)^N Price = 1000/(1.048)^5 = $791 Price = 1000/(1.032)^8 = $777.24 Price = 1000/(1.068)^10 = $517.95 Price = 1000/(1.059)^20 = $317.74, this one is the lowest price
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?
semiannually 5000*.0441/?=110.25 220.5/?=110.25 220.5/110.25 = 2 2 pmts/yr so semiannually
