Unit 8 Quiz – Flashcards
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Which one of the following bonds is the most sensitive to changes in market interest rates?
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10-year, zero coupon
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On which one of the following dates is the principal amount of a semiannual coupon bond repaid?
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The entire bond is repaid on the maturity date.
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Of these choices, a risk-adverse investor who prefers to minimize interest rate risk is most apt to invest in:
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2-year, 7 percent coupon bonds.
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Which one of the following terms applies to a junk bond that was originally issued with a bond rating of AA?
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Fallen angel
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A protective covenant:
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limits the actions of the borrower.
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The call premium is the amount by which the:
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call price exceeds the par value.
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Bond ratings classify bonds based on:
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default risk only.
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Which one of the following individuals is most apt to purchase a municipal bond?
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Highly compensated business owner
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Which one of the following terms applies to a bond that initially sells at a deep discount and only makes one payment to bondholders?
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Zero coupon
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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?
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5.49 percent
PV = $1,034 = [(.0645 × $1,000) / 2] ×{(1 - {1 / [1 + (r / 2)]8}) / (r / 2)} + $1,000 / [1 + (r/ 2)]8
r = .0549, or 5.49 percent
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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?
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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.
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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?
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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
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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?
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7.57 percent
Current yield = (.08 ×$1,000)/$1,057
Current yield = .0757 , or 7.57 percent
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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.
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$331.40
PV = $1,000 / [1 + (.075 / 2)]30
PV = $331.40
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tein Co. issued 16-year bonds two years ago at a coupon rate of 9.5 percent. The bonds make semiannual payments.
If these bonds currently sell for 104 percent of par value, what is the YTM? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
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Yield to maturity 9%
Here, we are finding the YTM of a semiannual coupon bond. The bond price equation is:
P = $1,040 = $47.50(PVIFAR%,28) + $1,000(PVIFR%,28)
Since we cannot solve the equation directly for R, use a spreadsheet, a financial calculator, or trial and error to find:
R = 4.496%
Since the coupon payments are semiannual, this is the semiannual interest rate. The YTM is the APR of the bond, so:
YTM = 2 × 4.496%
YTM = 8.99%
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The Timberlake-Jackson Wardrobe Co. has 10.8 percent coupon bonds on the market with eight years left to maturity. The bonds make annual payments and have a par value of $1,000.
If the bonds currently sell for $1,129.70, what is the YTM?
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8.50 ± 1%
Here, we need to find the YTM of a bond. The equation for the bond price is:
P = $1,129.70 = $108(PVIFAR%,8) + $1,000(PVIFR%,8)
Notice the equation cannot be solved directly for R. Using a spreadsheet, a financial calculator, or trial and error, we find:
R = YTM = 8.50%
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Union Local School District has bonds outstanding with a coupon rate of 2.9 percent paid semiannually and 24 years to maturity. The yield to maturity on these bonds is 2.5 percent and the bonds have a par value of $10,000.
What is the price of the bonds? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
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10,718.63 ± .1%
To find the price of this bond, we need to find the present value of the bond's cash flows. So, the price of the bond is:
P = $145(PVIFA1.25%,48) + $10,000(PVIF1.25%,48)
P = $10,718.63
