FIN401 Exam 2 (Chapter 7)

coupon

the interest payments paid to the bondholder

$1,000; $35 : Because the bond is selling at par, its price is equal to the face value of $1,000. Since the bond pays coupon seminually, coupon = $1,000 * 7% / 2 = $35

A bond with a 7 percent coupon that pays interest semi-annually and is priced at par will have a market price of _____ and interest payments in the amount of _____ each.

a discount; higher than

All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon rate.

decreases; decreases.

All else constant, as the market price of a bond increases the current yield _____ and the yield to maturity _____

I, III, and IV only

American Fortunes is preparing a bond offering with an 8 percent coupon rate. The bonds will be repaid in 10 years. The company plans to issue the bonds at par value and pay interest semiannually. Given this, which of the following statements are correct? I. The initial selling price of each bond will be $1,000. II. After the bonds have been outstanding for 1 year, you should use 9 as the number of compounding periods when calculating the market value of the bond. III. Each interest payment per bond will be $40. IV. The yield to maturity when the bonds are first issued is 8 percent.

Bond prices decrease

As interest rates increase

Present value decreases

As interest rates increase

Bond Pricing Theorm

Bonds of similar risk(and Maturity) will be priced to yield about the same return, regardless of the coupon rate. If you know the price of one bond, you can estimate its YTM and use that to find the price of the second bond.

Experience more Price risk

Long-term bonds with low coupon rates

9.30% Cacluate YTM on current bond and they will be equal

Pembroke Co. wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 10% coupon bonds on the market that sells for $1,063, makes semiannual payments and matures in 20 years. What coupon rate should the company set on its new bonds if it wants them to sell at par?

Experience more reinvestment rate risk

Short-term bonds with high coupon rates

Lower than 6.5% YTM= 3.88% Effective annual rate= 3.92% ((1+0.0194)^2))-1

Suppose that the bond with a 6.5% coupon rate and semiannual coupons, has a face value of $1000, 3 years to maturity and is selling for $1073.44 (asked Price). Without calculation, will the yield by more or less than 6.5% Calculate the YTM? What is the effective annual yield on this bond?

current yield

The annual coupon payment of a bond divided by its market price is called the:

greater than 6 percent but less than 7 percent

The newly issued bonds of the Wynslow Corp. offer a 6 percent coupon with semiannual interest payments. The bonds are currently priced at par value. The effective annual rate provided by these bonds must be:

face value

The principal amount of a bond that is repaid at the end of the loan term is called the bond's:

Par value (face value)

The principle amount of a bond that is repaid at the maturity of the bond

yield to maturity

The rate of return required by investors in the market for owning a bond is called the:

coupon

The stated interest payment, in dollars, made on a bond each period is called the bond's:

to realize a capital loss if you sold the bond at the market price today.

You own a bond that has a 7 percent coupon and matures in 12 years. You purchased this bond at par value when it was originally issued. If the current market rate for this type and quality of bond is 7.5 percent, then you would expect:

coupon rate

annual interest payment as a percentage of face value

YTM< coupon rate

par value is greater than the bond price, selling at a premium

YTM> coupon rate

par value is less than the bond price, selling at a discount

YTM=coupon rate

par value=bond price