Finance Chapter 8

A bond with a coupon rate of 6 percent that pays interest semiannually and is priced at par will have a market price of ____ and interest payments in the amount of ____ each

$1,000; $30

What is the value of a 20-year, zero-coupon bond with a face value of $1,000 when the market required rate of return is 9.6 percent, compounded semiannually?

$153.50 $1,000/[1+(.096/2)]^20x2

Which one of these bonds is the most interest-rate sensitive?

10-year zero coupon bond

Aspens is preparing a bond offering with a coupon rate of 5.5 percent. The bonds will be repaid in 10 years. The company plans to issue the bonds at par value and pay interest semiannually. Which one of the following statements is correct?

At issuance, the bond's yield to maturity is 5.5 percent.

Chocolate and More offers a bond with a coupon rate of 6 percent, semiannual payments, and a yield to maturity of 7.73 percent. The bonds mature in 9 years. What is the market price of a $1,000 face value bond?

Bond price = [(.06 / 2) × $1,000] × [(1 - {1 / [1 + (.0773 / 2)]9 × 2}) / (.0773 / 2)] + $1,000 / [1 + (.0773 / 2)]9 × 2 = $889.29

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

Coupon

The annual interest paid by a bond divided by the bond's face value is called the:

Coupon rate

A bond with a face value of $1,000 that sells for less than $1,000 in the market is called a _____ bond

Discount

The market price of a bond increase when the:

Discount rate decreases

The yield to maturity:

Equals both the current yield and the coupon rate for par value bonds

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

Fisher effect

The ____ premium is that portion of a nominal interest rate or bond yield that represents compensation for expected future loss in purchasing power.

Inflation

The ____ premuim is that portion of the bond yield that represents compensation for potential difficulties that might be encountered should the bond holder wish to sell the bond prior to maturity

Liquidity

A corporate bond is currently quoted at 101.633. What is the market price of a bond with a $1,000 face value?

Market price = 101.633% ×$1,000 = $1,016.33

If its yield to maturity is less than its coupon rate, a bond will sell at a ____, and increases in market interest rates will:

Premium; decrease this premium

A 12-year, 5 percent coupon bond pays interest annually. The bond has a face value of $1,000. What is the percentage change in the price of this bond if the market yield rises to 6 percent from the current level of 5.5 percent?

Price = (.05 ×$1,000) ×({1 - [1 / (1 + .055)12]} / .055) + $1,000 / (1 + .055)12 = $956.91 Price = (.05 ×$1,000) ×({1 - [1 / (1 + .06)12]} / .06) + $1,000 / (1 + .06)12 = $916.16 Percentage change in price = ($916.16 - 956.91) / $956.91 = -.0426, or -4.26%

A bond has a coupon rate of 8.2 percent, a $1,000 par value, matures in 11.5 years, has a yield to maturity of 7.67 percent, and pays interest annually. What is the current yield?

Price = (.082 × $1,000) × ({1 - [1 / (1 + .0767)11.5]} / .0767) + $1,000 / (1 + .0767)11.5 = $1,039.56 Current yield = (.082 × $1,000) / $1,039.56 = .0789, or 7.89%

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

Yield to maturity

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

a discount; greater than

Rosina purchased a 15-year bond at par value when it was initially issued. The bond has a coupon rate of 7 percent and matures 13 years from now. If the current market rate for this type and quality of bond is 7.5 percent, then Rosina should expect:

to realize a capital loss if she sold the bond at today's market price