Chapter 8 Quiz

Northern Warehouses wants to raise $11 million to expand its business. To accomplish this, it plans to sell 30-year, $1000 face value zero-coupon bonds. The bonds will be priced to yield 6 percent. What is the minimum number of bonds it must sell to raise the $11 million it needs? Assume semiannual compounding.

ANS:

The yield to maturity on a bond is currently 8.75 percent. The real rate of return is 3.40 percent. What is the rate of inflation?

ANS:

Oil Well Supply offers a 7 percent coupon bond with semiannual payments and a yield to maturity of 7.73 percent. The bond matures in 8 years. What is the market price per bond if the face value is $1000?

ANS: $957.04

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

ANS: Inflation

The _________________________ premium 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.

ANS: Liquidity