Finance 3716 ch 7

A Treasury bond is quoted as 102:19 asked and 102:17 bid. What is the bid-ask spread in dollars on a $1,000 face value bond?

$0.625 Bid-ask spread = 102:19 102:17 = 2/32 of 1% of $1,000 = .000625 $1,000 = $.625

A bond with a 9 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.

$1,000; $45

A Treasury bond is quoted at a price of 105:21. What is the market price of this bond if the face value is $1,000?

$1,056.56 105:21 = 105 and 21/32% = 1.0565625; Market price = 1.0565625 $1,000 = $1,056.56

A zero coupon bond with a face value of $1,000 is issued with an initial price of $387.50. The bond matures in 30 years. What is the implicit interest, in dollars, for the first year of the bond's life?

$12.44 ; r = 3.2106 percent; Implicit interest = $399.94 $387.50 = $12.44

The semiannual, 12-year bonds of Tracey United are selling at par and have an effective annual yield of 4.6529 percent. What is the amount of each interest payment if the face value of the bonds is $1,000?

$23 r = .046; Because the bond is selling at par, the APR and the coupon rate are equal. Thus, the semiannual interest payment =; Semiannual interest payment = $23.00.

You plan on depositing $10,000 a year in real terms into your investment account for the next four years. The relevant nominal discount rate is 7.5 percent and the inflation rate is 4.2 percent. What are these deposits worth in today's dollars?

$37,023.49

Atlas Movers is issuing $1,000 face value zero coupon bonds at a quoted price of 38.70. What is the amount you would pay to purchase one of these bonds?

$387 Market price = .3870 x $1,000 = $387.00

You purchased an investment which will pay you $15,000, in real dollars, a year for the next three years. The nominal discount rate is 8 percent and the inflation rate is 3.6 percent. What is the present value of these payments?

$41,431.91

Today, you want to sell a zero coupon bond you currently own. The bond matures in 9 years. How much will you receive for your bond if the market yield to maturity is currently 8.88 percent? Ignore any accrued interest.

$465.02

A corporate bond is quoted at a current price of 103.68. What is the market price if the face value is $5,000?

$5,184 Market price = 1.0368 x $5,000 = $5,184.00

The Goodie Barn has a 7 percent coupon bond outstanding that matures in 13.5 years. The bond pays interest semiannually. What is the market price per bond if the face value is $1,000 and the yield to maturity is 14.78 percent?

$550.40

The bonds offered by Glenwood Studios are callable in 4 years at a quoted price of 106. What is the amount of the call premium on a $1,000 par value bond?

$60 Call premium = (1.06 x $1,000) $1,000 = $60

You are purchasing a 30-year, zero coupon bond. The yield to maturity is 9.1 percent and the face value is $1,000. What is the current market price?

$73.33

Westover Ridge offers a 9 percent coupon bond with semiannual payments and a yield to maturity of 11.68 percent. The bonds mature in 16 years. What is the market price per bond if the face value is $1,000?

$807.86

The yield to maturity on a bond is currently 6.48 percent. The real rate of return is 2.87 percent. What is the rate of inflation?

3.51 percent

Steubenville Liquidators wants to raise $6.2 million to expand their business. To accomplish this, they plan to sell 20-year, $1,000 face value, zero-coupon bonds. The bonds will be priced to yield 9.5 percent. What is the minimum number of bonds they must sell to raise the $6.2 million they need?

38,078

A Treasury bond is quoted at a price of 104:18 with a 4.75 percent coupon. The bond pays interest semiannually. What is the current yield on one of these bonds?

4.54 percent Current yield = (.0475 $1,000) / (104 and 18/32 percent of $1,000) = $47.50 / $1,045.625 = 4.54 percent

Which of the following are normal features of a corporate bond? I. quarterly interest payments II. interest-only loan III. level coupon IV. $1,000 par value

II, III, and IV

Milner's Tools has a 9-year, 7 percent annual coupon bond outstanding with a $1,000 par value. Carter's Tools has a 10-year, 6 percent annual coupon bond with a $1,000 par value. Both bonds currently have a yield to maturity of 6.5 percent. Which of the following statements is correct if the market yield increases to 6.75 percent?

The Carter's bond will decrease in value by 1.80 percent

A newly issued bond has 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:

greater than 6 percent but less than 7 percent

A deferred call provision refers to the:

prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date

Parts of the indenture limiting certain actions that might be taken during the term of the loan to protect the interests of the lender are called:

protective covenants

A zero coupon bond:

provides a deductible interest expense to the issuer on an annual basis

A $1,000 Treasury bond has an asked quote of 100:07 and a bid quote of 100:05. One bond:

provides the dealer a profit of $0.625

The increase in buying power you realize as a result of owning a bond is referred to as the _____ rate of return.

real

A bond for which the registrar of the issuer records ownership and for which payments are made directly to the owner of record is said to be in:

registered form

An account managed by a bond trustee for early bond redemption payments is called a:

sinking fund

A put bond is a bond that can be:

submitted to the issuer for redemption prior to maturity

Two of the primary differences between the yields on a corporate bond and a Treasury bond with identical maturity dates are related to:

taxes and potential default

The pure time value of money is known as the:

term structure of interest rates

A put provision in a bond indenture allows:

the bondholder to force the issuer to buy back the bond at a specified price prior to maturity

The total interest paid on a zero-coupon bond is equal to:

the face value minus the issue price

The liquidity premium is compensation to investors for:

the lack of an active market wherein a bond can be sold for its actual value

Municipal bonds:

are generally callable

Investors generally tend to buy:

convertible bonds for their potential price appreciation

The relationship between nominal rates, real rates, and inflation is known as the:

Fisher effect

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

coupon

The annual coupon divided by the face value of a bond is called the:

coupon rate

The collar of a floating-rate bond refers to the minimum and maximum:

coupon rates

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

current yield

A U.S. Treasury bond that is quoted at 100:05 is selling:

for about $1.56 over face value

A floating-rate bond:

generally has a put provision

Treasury bonds are:

generally issued as semi-annual coupon bonds

Norwegian Adventures offers a 6.5 percent coupon bond with annual payments. The yield to maturity is 6.71 percent and the maturity date is 7 years from today. What is the market price of this bond if the face value is $1,000?

$988.57

One basis point is equal to:

.01 percent

The break-even tax rate between a taxable corporate bond yielding 6.5 percent and a comparable nontaxable municipal bond yielding 4 percent can be expressed as:

.065 (1 t*) = .04.

The Fisher formula is expressed as:

1 + R = (1 + r) (1 + h)

Baker's Men's Wear has a 5.5 percent, semiannual coupon bond outstanding with a current market price of $978.90. The bond has a par value of $1,000 and a yield to maturity of 5.76 percent. How many years is it until this bond matures?

11.10 years

Tri-County Hauling has bonds outstanding that pay a 6 percent coupon, have a 5.47 percent yield to maturity, and a face value of $1,000. The current rate of inflation is 3.2 percent. What is the real rate of return on these bonds?

2.20 percent

A 15-year, 6 percent coupon bond pays interest annually. The bond has a face value of $1,000. What is the change in the price of this bond if the market yield to maturity rises to 6.5 percent from the current rate of 6.25 percent?

2.37 percent decrease

A bond that pays interest annually yields a 6.875 percent rate of return. The inflation rate for the same period is 4.35 percent. What is the real rate of return on this bond?

2.42 percent

Barkstone Candies bonds have a face value of $1,000 and a current market price of $1,047.20. The bonds have a 6 percent coupon rate. What is the current yield on these bonds?

5.73 percent

A corporate bond is quoted at a price of 96.48 and carries a 5.75 percent coupon. The bond pays interest semiannually. What is the current yield on one of these bonds?

5.96 percent Current yield = (.0575 $1,000) / (.9648 $1,000) = 5.96 percent

A Treasury bond is quoted at a price of 100:07 with a current yield of 6.4858 percent. What is the coupon rate?

6.50 percent .064858 =Annual dividend / (100 and 7 /32 percent of $1,000) = Annual dividend / ($1,002.1875); Annual dividend = $64.9999; Coupon rate = $64.9999 / $1,000 = 6.50 percent

Which one of the following bonds has the greatest interest rate risk?

7-year; 4 percent coupon

The bonds issued by Jordache Jewelers bear a 7.5 percent coupon, payable semiannually. The bonds mature in 13 years and have a $1,000 face value. Currently, the bonds sell at par. What is the yield to maturity?

7.50 percent

The outstanding bonds of Jacksen Global Freight carry an 8 percent coupon and have a current market price of $1,054. The bonds have a face value of $1,000. What is the current yield on these bonds?

7.59 percent

The outstanding bonds of Frank's Welding provide a real rate of return of 2.87 percent. The current rate of inflation is 4.64 percent. What is the nominal rate of return on these bonds?

7.64 percent (1 + .0287) (1 + .0464) -1 = .07643 = 7.64 percent

Culpepper Supply has a bond issue outstanding that pays a 7.5 percent coupon and matures in 14 years. The bonds have a par value of $1,000 and a market price of $942.90. Interest is paid semiannually. What is the yield to maturity?

8.19 percent

Wesley-Townsend bonds have an 8.25 percent coupon and pay interest annually. The face value is $1,000 and the current market price is $1,004.60 per bond. The bonds mature in 17.5 years. What is the yield to maturity?

8.20 percent

Beach Combers International has 5.75 percent coupon bonds outstanding with a current market price of $689.40. The yield to maturity is 11.20 percent and the face value is $1,000. Interest is paid semiannually. How many years is it until these bonds mature?

9.33 years

The zero coupon bonds of Cold Pak Transport have a market price of $460.23, a face value of $1,000, and a yield to maturity of 8.42 percent. How many years is it until these bonds mature?

9.60 years

Which one of the following statements is correct concerning bond classifications?

A callable bond can be repurchased by the issuer prior to the initial maturity date

Which one of the following statements concerning bond ratings is correct?

A crossover bond is rated differently by various rating agencies

Which of the following statements concerning bonds are correct? I. Bonds receive more favorable tax treatment than equity securities. II. Firms increase their risk of financial failure by issuing bonds. III. The repayment of the bond principle is tax-deductible. IV. Bondholders have a residual claim on the bond issuer.

I and II

Which of the following items are generally included in a bond indenture? I. call provision II. amount of the bond issue III. security description IV. protective covenants

I, II, III, and IV

Which of the following statements are correct concerning the term structure of interest rates? I. The outlook for future inflation influences the shape of the term structure of interest rates. II. The term structure of interest rates includes only the real rate of return and the inflation premium. III. The interest rate risk premium is included in the term structure of interest rates. IV. The term structure of interest rates can be downsloping.

I, III, and IV

Interest rate risk increases as the: I. time to maturity decreases. II. time to maturity increases. III. coupon rate decreases. IV. coupon rate increases.

II and III

Which of the following are negative covenants that might be found in a bond indenture? I. The company shall maintain a current ratio of 1.5 or better. II. The company must limit the amount of dividends it pays according to the stated formula. III. The company cannot lease any major assets without approval by the lender. IV. The company must maintain the loan collateral in good working order.

II and III

Blue Water Designs is preparing a bond offering with a 7 percent coupon rate and a face value of $1,000. The bonds will be repaid in 5 years. The company plans to issue the bonds at par value and pay interest semiannually. Given this, which one of the following statements is correct?

The final payment will be in the amount of $1,035

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

a discount; less than

All else constant, a coupon bond that is selling at a premium, must have:

a yield to maturity that is less than the coupon rate

Bonds issued by the U.S. government:

are considered to be free of default risk

Protective covenants:

are primarily designed to protect bondholders from future actions of the bond issuer

The price at which a dealer is willing to sell a security is called the:

asked price

A bond which is issued without recording of the owner's name and for which payments are made to whomever has physical possession of the bond is said to be in:

bearer form

The price a dealer is willing to pay for a security is called the:

bid price

The difference between the price which a dealer is willing to pay and the price at which the dealer is willing to sell is called the:

bid-ask spread

Which one of the following correctly describes the effect of an increase in a bond's yield to maturity?

bond's price decreases

An agreement giving the bond issuer the option to repurchase the bond at a specified price prior to maturity is the _____ provision.

call

The amount by which the call price exceeds the bond's par value is the:

call premium

A bond which currently cannot be called but is eligible for a call at a later date is referred to as a:

call-protected bond

A convertible bond:

can be exchanged for shares of common stock

The quoted price of a bond is referred to as the _____ price.

clean

The interest rate risk premium is the:

compensation investors demand for accepting interest rate risk

An unsecured debt of a firm with a maturity of 10 years or more is called a(n):

debenture

Assume that a fixed, semi-annual coupon bond is outstanding. An increase in market interest rates will:

decrease the market price of the bond

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

decreases; decreases

The _____ premium is that portion of a nominal interest rate or bond yield that represents compensation for the possibility of nonpayment by the bond issuer.

default risk

The "EST SPREAD" shown in The Wall Street Journal listing of corporate bonds represents the:

difference between the bond's yield and the yield of a particular Treasury issue

The price a buyer actually pays to purchase a bond is called the _____ price.

dirty

Today, February 21, you want to buy a bond with a quoted price of 100.42. The bond pays interest on September 1 and March 1. The price you will pay to purchase this bond is equal to the:

dirty price

The market price of an interest-bearing bond is equal to the present value of the:

face amount plus the present value of the coupon payments

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

face value

The taxability premium compensates investors when a bond:

has an unfavorable tax status

A "fallen angel" is a bond that:

has moved from being an investment-grade bond to being a junk bond

Callable bonds generally:

have a call price that decreases as the market rate of interest increases when the bond has a make-whole call provision

As the time to maturity increases, interest rate risk:

increases at a decreasing rate

A real rate is a nominal rate which has been adjusted for:

inflation

The Fisher Effect primarily emphasizes the effects of _____ risk on an investor's rate of return.

inflation

The _____ premium is that portion of a nominal interest rate or bond yield that represents compensation for expected future overall price appreciation.

inflation

"Cat" bonds are primarily designed to help:

insurance companies recover from natural disasters

You expect interest rates to decline and wish to capitalize on the anticipated changes in bond prices. To realize your maximum gain, all else constant, you should purchase _____ bonds.

long-term; zero coupon

A Treasury yield curve is defined as the plotting of the yields on Treasury securities relative to:

maturity

The specified date on which the principal amount of a bond is repaid is called the:

maturity

If you want to sell a bond issued by a smaller corporation, you:

may encounter difficulties in executing the trade

Interest rates that have not been adjusted for inflation are called _____ rates.

nominal

You are trying to determine the present value of two separate streams of cash flows. One stream is expressed in nominal values and the other stream is expressed in real values. You should discount the nominal cash flows using a _____ rate and discount the real cash flows using _____ rate.

nominal; an equivalent real

An unsecured debt of a firm with a maturity of less than 10 years is called a(n):

note

An indenture is:

the written agreement between the bond issuer and the bondholders which details the terms of the debt issue

You own a bond that has an 8 percent coupon and matures 8 years from now. 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 8.25 percent, then you would expect:

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

U.S. Treasury bonds are:

traded in the largest securities market in the world

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

yield to maturity

A bond that makes no coupon payments and is initially sold at a deep discount is called a _____ bond.

zero coupon