MGF 301 Chapter 6
Which one of the following individuals is most apt to purchase a municipal bond? a) Minimum-wage employee b) Retired individual with minimal current income c) Recent college graduate d) Tax-exempt organization e) Highly compensated business owner
e) Highly compensated business owner
The 6.75 percent, $1,000 face value bonds of Mahalo Pineapples are currently selling at $989.50. These bonds have 12 years left until maturity. What is the current yield?
Current yield = (.0675 × $1,000) ÷ $989.50 Current yield = .0682, or 6.82%
Bond ratings classify bonds based on: Multiple Choice a) liquidity, market, and default risk. b) liquidity, interest rate, and default risk. c) default risk only. d) interest rate, inflation rate, and default risk. e) default and liquidity risks.
c) default risk only.
A bond that pays interest semiannually has a price of $1,055.02 and a semiannual coupon payment of $27.25. If the par value is $1,000, what is the current yield?
Current yield = ($27.25 × 2)/$1,055.02 = .0517, or 5.17%
What is the price of a $1,000 face value bond if the quoted price is 102.1?
$1,021.00 102.1 is seen as percent so multiply by 1000
Whatever, Incorporated, has a bond outstanding with a coupon rate of 5.74 percent and semiannual payments. The yield to maturity is 6.1 percent and the bond matures in 20 years. What is the market price if the bond has a par value of $1,000?
$958.73
A $1,000 face value bond is currently quoted at 100.8. The bond pays semiannual payments of $28.75 each and matures in six years. What is the coupon rate?
5.75%
A bond with a current yield of 6.71 percent is quoted at 96.445. What is the coupon rate of the bond?
Annual coupon = .0671 × ($96.445 × 10) = $64.71 Coupon rate = $64.71/$1,000 = .0647, or 6.47% Note: The par value is irrelevant.
The lowest rating a bond can receive from Standard and Poor's and still be classified as an investment-quality bond is: Multiple Choice BB. B. Ba. BBB. A.
BBB.
Today, you are buying a $1,000 face value bond at an invoice price of $987. The bond has a coupon rate of 6 percent and pays interest semiannually. There are two months until the next coupon date. What is the clean price of this bond?
Clean price = $987 − [(.06 × $1,000) ÷ 2 × 4/6 ] Clean price = $967
You purchase a bond with a coupon rate of 6.15 percent, semiannual coupons, and a clean price of $998.40. If the next coupon payment is due in two months, what is the invoice price?
Invoice price = $998.40 + [(.0615 × $1,000) ÷ 2] × 4/6 = $1,018.90
Navarro, Incorporated, plans to issue new zero coupon bonds with a par value of $1,000 to fund a new project. The bonds will have a YTM of 5.79 percent and mature in 30 years. If we assume semiannual compounding, at what price will the bonds sell?
PV = $1,000/(1 + .0579/2) ^ 60 PV = $180.44
Which one of the following types of bonds should an investor purchase if he or she is primarily concerned about ensuring that bond ownership will increase his or her purchasing power? OTC Death CAT PETS TIPS
TIPS
Which one of the following is the price that an investor pays to purchase an outstanding bond? Multiple Choice a) Dirty price b) Face value c) Call price d) Bid price e) Clean price
a) Dirty price
The price at which an investor can purchase in the bond market is called the __________blank price. Multiple Choice a) asked b) coupon c) call d) face e) bid
a) asked
A bond dealer sells at the __________blank price and buys at the __________blank price. Multiple Choice clean; dirty dirty; clean bid; asked asked; bid asked; asked
asked; bid
In relation to bonds, which one of the following terms has the same meaning as the term "crossover"? a) Speculative b) 5B c) Fallen angel d) Junk e) Triple A
b) 5B
When a bond's yield to maturity is less than the bond's coupon rate, the bond: a) had to be recently issued. b) is selling at a premium. c) has reached its maturity date. d) is priced at par. e) is selling at a discount.
b) is selling at a premium.
Which one of the following might be included in a bond's list of negative covenants? Multiple Choice a) Maintain a current ratio of 1.2 or more b) Maintain a minimum cash balance of $1.2 million c) Limit cash dividends to $1 per share or less d) Maintain a times interest earned ratio of 2 or more e) Provide audited financial statements in a timely manner
c) Limit cash dividends to $1 per share or less
The yield to maturity on a discount bond is: Multiple Choice a) equal to both the coupon rate and the current yield. b) equal to the current yield but greater than the coupon rate. c) greater than both the current yield and the coupon rate. d) less than the current yield but greater than the coupon rate. e) less than both the current yield and the coupon rate.
c) greater than both the current yield and the coupon rate.
The primary purpose of bond covenants is to: a) meet regulatory requirements. b) define the bond's repayment terms. c) protect the bondholders. d) identify the bond's rating. e) protect the bond issuer from lawsuits.
c) protect the bondholders.
Which one of the following bonds is the most sensitive to changes in market interest rates? Multiple Choice a) 5-year, zero coupon b) 5-year, 5 percent coupon c) 5-year, 8 percent coupon d) 10-year, zero coupon e) 10-year, 5 percent coupon
d) 10-year, zero coupon
Of these choices, a risk-averse investor who prefers to minimize interest rate risk is most apt to invest in: Multiple Choice a) 5-year, 7 percent coupon bonds. b) 20-year, 6 percent coupon bonds. c) 20-year, zero coupon bonds. d) 2-year, 7 percent coupon bonds. e) 3-year, zero coupon bonds.
d) 2-year, 7 percent coupon bonds.
What condition must exist if a bond's coupon rate is to equal both the bond's current yield and its yield to maturity? Assume the market rate of interest for this bond is positive. Multiple Choice a) The clean price of the bond must equal the bond's dirty price. b) The bond must be a zero-coupon bond and mature in exactly one year. c) The market price must exceed the par value by the value of one year's interest. d) The bond must be priced at par. e) There is no condition under which this can occur.
d) The bond must be priced at par.
On which one of the following dates is the principal amount of a semiannual coupon bond repaid? a) A portion of the principal is repaid on each coupon date. b) The entire bond is repaid on the issue date. c) Half of the principal is repaid evenly over each coupon period with the remainder paid on the issue date. d) The entire bond is repaid on the maturity date. e) Half of the principal is repaid evenly over each coupon period, with the remainder paid on the maturity date.
d) The entire bond is repaid on the maturity date.
A protective covenant: Multiple Choice a) protects the borrower from unscrupulous practices by the lender. b) guarantees the interest and principal payments will be paid in full on a timely basis. c) prevents a bond from being called. d) limits the actions of the borrower. e) guarantees the market price of a bond will never be less than par value.
d) limits the actions of the borrower.
Which one of the following statements is true? a) The current yield on a par value bond will exceed the bond's yield to maturity. b) The yield to maturity on a premium bond exceeds the bond's coupon rate. c) The current yield on a premium bond is equal to the bond's coupon rate. d) A premium bond has a current yield that exceeds the bond's coupon rate. e) A discount bond has a coupon rate that is less than the bond's yield to maturity.
e) A discount bond has a coupon rate that is less than the bond's yield to maturity.
An unexpected decrease in market interest rates will cause a: Multiple Choice a) coupon bond's current yield to increase. b) zero coupon bond's price to decrease. c) fixed-rate bond's coupon rate to decrease. d) zero coupon bond's current yield to decrease. e) coupon bond's yield to maturity to decrease.
e) coupon bond's yield to maturity to decrease.
A bond has a yield to maturity of 9.25 percent, a coupon of 7.25 percent paid semiannually, a $1,000 face value, and a maturity date 21 years from today. What is the current yield?
need financial calculator to find PV $72.50 ÷ $816.16 = .0888, or 8.88%