Chapter 7 FIN 3000

Kaiser Industries has bonds on the market making annual payments, with 12 years to maturity, a par value of $1,000, and a current price of $1,142.60. At this price, the bonds yield 7.2 percent. What is the coupon rate? 7.20 percent 9.01 percent 8.78 percent 8.54 percent

9.01 percent

The term structure of interest rates includes all of the following basic components, except: Weighted Average Cost of Capital Interest Rate Risk Real Rate of Interest Rate of Inflation

Weighted Average Cost of Capital Explanation The term structure of interest rates includes all of the following, except, the weighted average cost of capital.

Redesigned Computers has 6.2 percent coupon bonds outstanding with a current market price of $604. The yield to maturity is 14.4 percent and the face value is $1,000. Interest is paid annually. How many years is it until these bonds mature? 14.69 years 17.84 years 12.48 years 8.84 years

8.84 years

When short-term rates are higher than long-term rates, we say it is __________________. Humped Downward sloping. Short-sighted Upward sloping Declining

Downward sloping. When short-term rates are higher than long-term rates, we say it is downward sloping.

Franklin Corporation has an opportunity to purchase bonds at a rate of 11%. They are in the 34% tax bracket. What is the after tax yield on these bonds? 7.26% 3.74% 5.93% 11% 9.62%

7.26% After tax yield = taxable × (1− tax rate) After tax yield = 11% × (1 − .34) After tax yield = 7.26%

Roadside Markets has 8.82 percent coupon bonds outstanding that mature in 11.5 years. The bonds pay interest semiannually. What is the market price per bond if the face value is $1,000 and the yield to maturity is 6.9 percent? $1,091.00 $1,150.72 $1,094.63 $1,082.34

$1,150.72

Oil Wells offers 5.75 percent coupon bonds with semiannual payments and a yield to maturity of 6.34 percent. The bonds mature in 8 years. What is the market price per bond if the face value is $1,000? $963.42 $929.42 $989.54 $932.89

$963.42

Genova Corporation has a four year 10% annual coupon bond. The price of the bond is $956.12. The Yield to Maturity is 11.43%. What is the current yield on this bond? 11.43% 10.46% 11.05% 10.01% 9.38%

10.46% Current Yield = annual coupon/price Current Yield = $100/$956.12 Current Yield = 10.46%

Warren Corporation is interested in a three-year, 11% annual coupon bond. A broker quotes a price of $930.35. What is the yield to Maturity? 10% 14% 13% 11% 12%

14% N = 3 I/YR = ? PV = $930.35 PMT = 110 ($1,000 x 11%) FV = $1,000 I/YR = 14%

Lochmere Corporation is evaluating a taxable bond at 7% and a municipal bond at 5.75%. What is the break-even tax rate? 12% 18% 44% 82% 88%

18% Taxable bond x (1 − tax rate) = Municipal bond .07 × ( − tax rate) = .0575 Tax rate = t* 1 − t* = .0575/.07 1 − t* = .82 t* = 1 − .82 = .18 (18%) is the − breakeven tax rate.

You own a bond that pays $62 in interest annually. The face value is $1,000 and the current market price is $1,034.14. The bond matures in 10 years. What is the yield to maturity? 6.12 percent 3.49 percent 5.90 percent 5.74 percent

5.74 percent

Allison just received the semiannual payment of $35 on a bond she owns. Which term refers to this payment? Yield Face value Discount Call premium Coupon

Coupon

Is the yield to maturity on a bond the same thing as the required return? Is YTM the same thing as the coupon rate? Suppose today a 10 percent coupon bond sells at par. Two years from now, the required return on the same bond is 8 percent. What is the coupon rate on the bond? What is the YTM on the bond?

CR = 10% YTM = 8% Explanation The yield to maturity is the required rate of return on a bond expressed as a nominal annual interest rate. For noncallable bonds, the yield to maturity and required rate of return are interchangeable terms. Unlike YTM and required return, the coupon rate is not a return used as the interest rate in bond cash flow valuation, but is a fixed percentage of par over the life of the bond used to set the coupon payment amount. For the example given, the coupon rate on the bond is still 10 percent, and the YTM is 8 percent.

Bert owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. What is the $1,000 called? Dirty price Face value Coupon Yield Discount

Face value

Municipal bonds are taxable for federal, state and local taxes.

False Municipal bonds are exempt for federal taxes and from some state and local taxes, especially if you live in the state in which the bond is issued.

Current Yield is the bond's annual coupon divided by its yield to maturity.

False Current Yield is the bond's annual coupon divided by its price.

The term structure of interest rates tells us what _________ interest rate are on default-free, pure discount bonds of all maturities. Future Expected Nominal Average Discount

Nominal The term structure of interest rates tells us what nominal interest rate are on default-free, pure discount bonds of all maturities.

A bond's principal is repaid on the ____ date. coupon yield maturity clean dirty

maturity

The bond market requires a return of 9.8 percent on the 5-year bonds issued by JW Industries. The 9.8 percent is referred to as the: face rate. coupon rate. current yield. yield to maturity. call rate.

yield to maturity.