Fin Ch 6

Blue Water bonds have a face value of $1,000, a coupon rate of 6.5 percent, semiannual interest payments, and mature in 11.5 years. What is the current price of these bonds if the yield to maturity is 6.36 percent?

$1,011.30 PV = [(.065 × $1,000) / 2]×{(1 - {1 / [1 + (.0636/ 2)]23}) / (.0636 / 2)} + $1,000 / [1 + (.0636 /2)]23

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?

$1,018.90

What is the price of a $1,000 face value bond if the quoted price is 102.1?

$1,021.00

A company originally issued bonds that were rated investment grade. These bonds have now been downgraded to junk status. These bonds are referred to as:

fallen angels.

Municipal bonds are:

generally callable.

The market-required rate of return on a bond that is held for its entire life is called the:

yield to maturity

All else held constant, the present value of a bond increases when the

yield to maturity decreases

You purchase a bond with an invoice price of $1,108.48. The bond has a coupon rate of 5.5 percent, semiannual coupons, and there are two months to the next coupon date. What is the clean price of the bond?

$1,090.15

You are buying a bond at a clean price of $1,140. The bond has a face value of $1,000, a coupon rate of 3.8 percent, and pays interest semiannually. The next coupon payment is one month from now. What is the dirty price of this bond?

$1,155.83

A company needs to raise $22 million and plans to issue 20-year bonds for this purpose. The required rate of return is7.6 percent in the current market. The company has two issue alternatives: a 7.6 percent coupon and a zero coupon bond. The company's tax rate is 34 percent. At bond maturity, how much will the company need to pay to its bondholders if it issues the coupon bonds? What if it issue the zeros? Assume semiannual compounding for both bond issues. (For simplicity's sake, assume the company can issue a partial bond.)

$22.836 million; $97.795 million

A bond has a par value of $1,000, a current yield of 6.25 percent, and semiannual interest payments. The bond quote is 100.8. What is the amount of each coupon payment?

$31.50 Coupon payment = [.0625×(1.008 ×$1,000)]/2 = $31.50

The 6.5 percent bond of ABCO has a yield to maturity of 6.82 percent. The bond matures

$32.50 Coupon payment = ($1,000 ×.065)/2 = $32.50

Arts and Crafts Warehouse wants to issue 15-year, zero-coupon bonds that yield 7.5 percent. What price should it charge for these bonds if the face value is $1,000? Assume semiannual compounding.

$331.40

Deltona Motors just issued 230,000 zero-coupon bonds. These bonds mature in 18 years, have a par value of $1,000, and have a yield to maturity of 5.9 percent. What is the approximate total amount of money the company raised from issuing these bonds? Assume semiannual compounding.

$80.76 million

The 4.5 percent bond of JL Motors has a face value of $1,000, a maturity of 7 years, semiannual interest payments, and a yield to maturity of 6.23 percent. What is the current market price of the bond?

$903.05 PV = [(.045 × $1,000)/ 2] ×{(1 - {1 / [1 + (.0623/ 2)]14}) / (.0623 / 2)} + $1,000 / [1 + ( .0623 / 2)]14

Jeffries, Inc.,has semiannual, 6 percent coupon bonds on the market that currently have 11 years left to maturity. If the market rate of return for this bond is 7.13 percent three years from now, what will be the bond's clean price at that time?

$932.00

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?

$967

A $1,000 face value bond currently has a yield to maturity of 8.22 percent. The bond matures in five years and pays interest semiannually. The coupon rate is7.5 percent. What is the current price of this bond?

$970.96

One year ago, Alpha Supply issued 15-year bonds at par. The bonds have a coupon rate of 6.5 percent, paid semiannually, and a face value of $1,000. Today, the market yield on these bonds is 7.2 percent. What is the percentage change in the bond price over the past year?

-6.11 percent Since the bonds were issued at par, the initial market price per bond was $1,000. PV =[(.065 × $1,000) / 2] ×{(1 - {1 / [1 + (.072 / 2)]28}) / (.072 / 2)} + $1,000 / [1 + (.072 / 2)]28 PV = $938.89 Percentage change in price= ($938.89-1,000)/$1,000 = -.0611, or -6.11 percent

Last year, Forest Products issued both 5-year and 10-year bonds at par. The bonds each have a coupon rate of 5.5 percent, paid semiannually, and a face value of $1,000. Assume the yield to maturity on each of these bonds is now 7.4 percent. What is the percentage change in the price of the 5-year bond since it was issued? The 10-year bond?

-6.48; -12.33

If Treasury bills are currently paying 2.84 percent and the inflation rate is 1.63 percent, what is the approximate real rate of interest? The exact real rate?

1.21 percent; 1.19 percent

The App Store needs to raise $2.8 million for expansion. The firm wants to raise this money by selling 20-year, zero-coupon bonds with a par value of $1,000. The market yield on similar bonds is 6.49 percent. How many bonds must the company sell to raise the money it needs? Assume semiannual compounding.

10,044 bonds

Which one of the following bonds is the most sensitive to changes in market interest rates?

10-year, zero coupon

One year ago, you purchased a $1,000 face value bond for a clean price of $980. The bond currently has seven years remaining until maturity, pays a coupon payment of $45 every six months, and has a yield to maturity of 6.87 percent. What is the percentage change in the bond price over the past year?

13.96 percent

Of these choices, a risk-adverse investor who prefers to minimize interest rate risk is most apt to invest in:

2-year, 7 percent coupon bonds

A U.S. Treasury bond pays 3.05 percent interest. You are in the 28 percent marginal tax bracket. What is your after tax yield on this bond?

2.20 percent

AB Builders has 15-year bonds outstanding with a face value of $1,000 and a market price of $974. The bonds pay interest annually and have a yield to maturity of 4.03 percent. What is the coupon rate?

3.80 percent PV = $974 = PMT ×{1 - [1 / (1 + .0403)15]} / .0403 + $1,000 / (1 + .0403)15 PMT = $37.96 Coupon rate = $37.96 / $1,000 = .0380, or 3.80 percent

A $1,000 face value bond is currently quoted at 100.8. The bond pays semiannual payments of $22.50 each and matures in six years. What is the coupon rate?

4.50 percent Coupon rate = ($22.50 ×2)/$1,000 = .0450, or 4.50 percent

New Markets has $1,000 face value bonds outstanding that pay interest semiannually, mature in 14.5 years, and have a 4.5 percent coupon. The current price is quoted at 97.6. What is the yield to maturity?

4.73 percent PV = $976 = [(.045 × $1,000) / 2] ×{(1 - {1 / [1 + (r / 2)]29}) / (r / 2)} + $1,000 / [1 + (r/ 2)]29

Last year, you earned a rate of return of 6.42 percent on your bond investments. During that time, the inflation rate was 1.6 percent. What was your real rate of return?

4.74 percent

The 6 percent semiannual coupon bonds of IPO, Inc., are selling for $1,087. The bonds have a face value of $1,000 and mature in 11 years. What is the yield to maturity?

4.96 percent PV = $1,087 = [(.06 × $1,000) / 2] ×{(1 - {1 / [1 + (r / 2)]22}) / (r / 2)} + $1,000 / [1 + (r/ 2)]22

A corporate bond pays 6.65 percent interest. How much would a municipal bond have to pay to be equivalent to this on an after tax basis if you are in the 25 marginal percent tax bracket?

4.99 percent

The $1,000 face value bonds of Galaxies International have coupon of 6.45 percent and pay interest semiannually. Currently, the bonds are quoted at 103.4 and mature in 4 years. What is the yield to maturity?

5.49 percent PV = $1,034 = [(.0645 × $1,000) / 2] ×{(1 - {1 / [1 + (r / 2)]8}) / (r / 2)} + $1,000 / [1 + (r/ 2)]8

Dairy Delight wants to raise $1.4 million by selling 15-year coupon bonds at par. Comparable bonds in the market have a coupon rate of 5.4 percent, semiannual payments, 15 years to maturity, and are selling at 97.8 percent of par. What coupon rate should Dairy Delight set on its bonds?

5.62 percent PV = $978 =[(.054 × $1,000) / 2] ×{(1 - {1 / [1 + (r / 2)]30}) / (r / 2)} + $1,000 / [1 + (r / 2)]30 r = .0562, or 5.62 percent

A bond has a coupon rate of 5.65 percent, a face value of $1,000, semiannual payments, and sells at par. The current yield is _____ percent and the effective annual yield is _____ percent.

5.65; 5.73 Since the bond sells at par: Current yield = Coupon rate = Yield to maturity = 5.65 percent EAR = [1 + .0565 / 2)]2 - 1 EAR = .0573, or 5.73 percent

In relation to bonds, which one of the following terms has the same meaning as the term "crossover"?

5B

The 6.3 percent, semi-annual coupon bonds of PE Engineers mature in 13 years and have a price quote of 99.2. These bonds have a current yield of _____ percent, a yield to maturity of _____ percent, and an effective annual yield of _____ percent.

6.35; 6.39; 6.49

A 12-year, annual coupon bond is priced at $1,102.60. The bond has a $1,000 face value and a yield to maturity of 5.33 percent. What is the coupon rate?

6.51 percent PV = $1,102.60 = PMT ×{1 - [1 / (1 + .0533)12]} / .0533 + $1,000 / (1 + .0533)12 PMT = $65.09 Coupon rate = $65.09 / $1,000 = .0651, or 6.51 percent

GN Supply wants to issue new 10-year, $1,000 face value bonds at par. The company currently has 6.35 percent coupon bonds on the market that sell for $983.20, make semiannual interest payments, and mature in 10 years. What coupon rate should the company set on its new bonds?

6.58 percent

Smiley Industrial Goods has $1,000 face value bonds on the market with semiannual interest payments, 13.5 years to maturity, and a market price of $1,023. At this price, the bonds yield 6.4 percent. What must be the coupon rate on these bonds?

6.66 percent

National Distributors has $1,000 face value bonds outstanding with a market price of $1,013. The bonds pay interest semiannually, mature in 11 years, and have a yield to maturity of 6.87 percent. What is the current yield?

6.95 percent PV = $1,013 = C× {(1 - {1 / [1 + (.0687 / 2)]22}) / (.0687 / 2)} + $1,000 / [1 + (.0687 / 2)]22 C = $35.20 Current yield = (2 × $35.20) / $1,013 Current yield = .0695. or 6.95 percent

A bond has a $1,000 face value, a market price of $1,045, and pays interest payments of $74.50 every year. What is the coupon rate?

7.45 percent Coupon rate = $74.50/$1,000 = .0745, or 7.45 percent

TAC Co. has 4.8 percent, semiannual coupon bonds on the market with four years left to maturity. If the bond currently sells for $908.60, what is its YTM?

7.49 percent

The 8 percent, $1,000 face value bonds of Sweet Sue Foods are currently selling at $1,057. These bonds have 16 years left until maturity. What is the current yield?

7.57 percent Current yield = (.08 ×$1,000)/$1,057 Current yield = .0757 , or 7.57 percent

A bond yielded a real rate of return of 3.87 percent for a time period when the inflation rate was 3.75 percent. What was the actual nominal rate of return?

7.77 percent

Keyser Materials has 8 percent coupon bonds on the market with 19 years to maturity. The bonds make semiannual payments and currently sell for 102 percent of par. What is the current yield? The YTM? The effective annual yield?

7.84 percent; 7.80 percent; 7.95 percent

If your nominal of return is 14.38 percent and your real rate of return is 4.97 percent, what is the inflation rate?

8.96 percent

A six-year, semiannual coupon bond is selling for $991.38. The bond has a face value of $1,000 and a yield to maturity of 9.19 percent. What is the coupon rate?

9.00 percent PV = $991.38 = PMT ×{(1 - {1 / [1 + (.0919/ 2)]12}) / (.0919 / 2)} + $1,000 / [1 + ( .0919/ 2)]12 PMT = $45.00 Coupon rate = (2 ×$45.00) / $1,000 = .0900, or 9.00 percent

A bond has a yield to maturity of 9.38 percent, a coupon of 7.5 percent paid semiannually, a $1,000 face value, and a maturity date 21 years from today. What is the current yield?

9.05 percent PV = [(.075 × $1,000) / 2] ×{(1 - {1 / [1 + (.0938 / 2)]42}) / (.0938/ 2)} + $1,000 / [1 + (.0938/ 2)]42 PV = $828.81 Current yield = (.075 × $1,000)/$828.81 Current yield = .0905, or 9.05 percent

Whitts BBQ would like to issue some 10-year, semiannual coupon bonds at par. Comparable bonds have a current yield of 9.16 percent, an effective annual yield of 9.68 percent, and a yield to maturity of 9.50 percent. What coupon rate should Whitts BBQ set on its bonds?

9.50 percent To sell bonds at par, the coupon rate must be set equal to the yield to maturity on comparable bonds, which in this case is 9.50 percent.

Which one of the following statements is true?

A discount bond has a coupon rate that is less than the bond's yield to maturity.

You own two bonds, each of which currently pays semiannual interest, has a coupon rate of 6 percent, a $1,000 face value, and 6 percent yields to maturity. Bond A has 12 years to maturity and Bond B has 4 years to maturity. If the market rate of interest rises unexpectedly to 7 percent, Bond _____ will be the most volatile with a price decrease of _____ percent.

A; 8.03

Which statement is true?

An indenture is a contract between a bond's issuer and its holders.

The lowest rating a bond can receive from Standard and Poor's and still be classified as an investment-quality bond is:

BBB.

This morning, Jeff found an aged bond certificate lying on the street. He picked it up and noticed that it was a 50-year bond that matured today. He presented the bond to the bank teller at his local bank and received payment for both the entire principal and the final interest payment. The bond that Jeff found must have been which one of the following?

Bearer-form bond

Which statement is correct?

Bond markets are dealer based.

Which one of the following types of bonds permits its issuer to forego paying interest payments if certain natural events cause significant losses?

CAT

Which one of the following is the quoted price of a bond?

Clean price

Which one of the following is a unique characteristic of an income bond?

Coupon payments are dependent on the issuer's income.

Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected?

Default risk premium

Which one of the following is the price that an investor pays to purchase an outstanding bond?

Dirty price

What is the principal amount of a bond that is repaid at the end of the loan term called?

Face value

Which one of the following terms applies to a junk bond that was originally issued with a bond rating of AA?

Fallen angel

The relationship between nominal returns, real returns, and inflation is referred to as the:

Fisher effect.

Which one of the following individuals is most apt to purchase a municipal bond?

Highly compensated business owner

The term structure of interest rates is primarily based on which three of the following? I. Interest rate risk premium II. Real rate of interest III. Default risk premium IV. Inflation premium V. Liquidity premium

I, II, and IV

A real rate of return is defined as a rate that has been adjusted for which one of the following?

Inflation

Changes in interest rates affect bond prices. Which one of the following compensates bond investors for this risk?

Interest rate risk premium

Which one of the following might be included in a bond's list of negative covenants?

Limit cash dividends to $1 per share or less

Suppose that a small, rural city in the countryside of North Dakota plans to issue $150,000 worth of 10-year bonds. Which one of the following components of the bond's yield will be affected by the fact that no active secondary market is expected for these bonds?

Liquidity premium

Which one of the following provides compensation to a bondholder when a bond is not readily marketable at its full value?

Liquidity premium

The term structure of interest rates represents the relationship between which of the following?

Nominal rates on default-free, pure discount bonds and time to maturity

What term is used to describe an account that a bond trustee manages for the sole purpose of redeeming bonds early?

Sinking fund

Which one of the following statements concerning sinking funds is correct?

Sinking funds may be used to purchase bonds in the open market.

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?

TIPS

Which one of the following premiums is paid on a corporate bond due to its tax status?

Taxability premium

A semiannual 5.4 percent coupon bond currently sells for par value. What is the maturity on this bond?

The bond could have any maturity date.

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.

The bond must be priced at par.

On which one of the following dates is the principal amount of a semiannual coupon bond repaid?

The entire bond is repaid on the maturity date

Which one of the following bonds is most apt to have the smallest liquidity premium?

Treasury bill

Which one of the following terms applies to a bond that initially sells at a deep discount and only makes one payment to bondholders?

Zero coupon

A debenture is:

an unsecured bond

. The price at which an investor can purchase in the bond market is called the _____ price.

asked

A bond dealer sells at the _____ price and buys at the _____ price

asked; bid

The price at which a dealer will purchase a bond is referred to as the _____ price

bid

A bond trader just purchased and resold a bond. The amount of profit earned by the trader from this purchase and resale is referred to as the:

bid-ask spread.

The call premium is the amount by which the:

call price exceeds the par value.

A bond has a make-whole call provision. Given this, you know that the

call price is inversely related to the market rate of interest.

Travis recently purchased a callable bond. However, that bond cannot be currently redeemed by the issuer. Thus, the bond must currently be:

call protected.

The inflation premium

compensates investors for expected price increases

An unexpected decrease in market interest rates will cause a:

coupon bond's yield to maturity to decrease

A bond's annual interest divided by its face value is referred to as the

coupon rate.

Zero coupon bonds:

create annual taxable income to individual bondholders

The current yield on a bond is equal to the annual interest divided by the:

current market price

Miller Farm Products is issuing a 15-year, unsecured bond. Based on this information, you know that this debt can bedescribed as a:

debenture.

Bond ratings classify bonds based on

default risk only.

Russell's has a bond issue outstanding. The issue's indenture provision prohibits the firm from redeeming the bonds during the first five years following issuance. This provision is referred to as the _____ provision.

deferred call

If inflation is expected to steadily decrease in the future, the term structure of interest rates will most likely be:

downward sloping.

The yield to maturity on a discount bond is:

greater than both the current yield and the coupon rate

If intermediate-term, default-free, pure discount bonds

humped

The written agreement that contains the specific details related to a bond issue is called the bond

indenture.

When a bond's yield to maturity is less than the bond's coupon rate, the bond:

is selling at a premium.

A protective covenant:

limits the actions of the borrower

The Treasury yield curve plots the yields on Treasury notes and bonds relative to the ____ of those securities

maturity

A callable bond:

may be structured to pay bondholders the current value of the bond on the date of call.

A bond's indenture agreement generally includes all of the following except the:

names of registered shareholders

The rate of return an investor earns on a bond prior to adjusting for inflation is called the:

nominal rate.

"R" in fisher effect formula represents the

nominal return

A call provision grants the bond issuer the:

option of repurchasing the bonds prior to maturity at a prespecified price.

A registered form bond is defined as a bond that:

pays coupon payments directly to the owner of record.

The primary purpose of protective covenants is to help:

protect bondholders from issuer actions.

The primary purpose of bond covenants is to:

protect the bondholders

A floating-rate bond frequently has a:

put provision.

The purpose of a bond sinking fund is to

repay bonds early either through purchases or calls.

Generally speaking, bonds issued in the U.S. pay interest on a(n) _____ basis.

semiannual

An upward-sloping term structure of interest rates indicates

the nominal rate is increasing even though the real rate is constant as the time to maturity increases