Exam 5: Bonds

J.Masson Inc.recently issued noncallable bonds that mature in 10 years.They have a par value of $1,000 and an annual coupon of 5.5%.If the current market interest rate is 7.0%, at what price should the bonds sell?

Which of the following statements is CORRECT?

Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, generally be subject to much more interest rate price risk if you purchased a 30-day bond than if you bought a 30-year bond.

Niendorf Corporation's 5-year bonds yield 6.75%, and 5-year T-bonds yield 4.80%.The real risk-free rate is r* = 2.75%, the inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Niendorf's bonds is DRP = 1.20% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1)  0.1%, where t = number of years to maturity.What is the liquidity premium (LP) on Niendorf's bonds?

zero coupon bond is a bond that pays no interest and is offered (and subsequently sells initially) at par.These bonds provide compensation to investors in the form of capital appreciation.

Three $1,000 face value bonds that mature in 10 years have the same level of risk, hence their YTMs are equal.Bond A has an 8% annual coupon, Bond B has a 10% annual coupon, and Bond C has a 12% annual coupon.Bond B sells at par.Assuming interest rates remain constant for the next 10 years, which of the following statements is CORRECT?

call provision gives bondholders the right to demand, or "call for," repayment of a bond.Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

Short Corp.just issued bonds that will mature in 10 years, and Long Corp.issued bonds that will mature in 20 years.Both bonds promise to pay a semiannual coupon, they are not callable or convertible, and they are equally liquid.Further, assume that the Treasury yield curve is based only on expectations about future inflation, i.e., that the maturity risk premium is zero for T-bonds.Under these conditions, which of the following statements is correct?

Sadik Inc.'s bonds currently sell for $1,280 and have a par value of $1,000.They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050.What is their yield to call (YTC)?

"Restrictive covenants" are designed primarily to protect bondholders by constraining the actions of managers.Such covenants are spelled out in bond indentures.

5-year Treasury bonds yield 5.5%.The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year bonds is 0.4%.What is the real risk-free rate, r*?

Taussig Corp.'s bonds currently sell for $1,150.They have a 6.75% annual coupon rate and a 15-year maturity, but they can be called in 6 years at $1,067.50.Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future.Under these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds, the YTC or the YTM?

Bonds A, B, and C all have a maturity of 10 years and a yield to maturity of 7%.Bond A's price exceeds its par value, Bond B's price equals its par value, and Bond C's price is less than its par value.Which of the following statements is CORRECT?

prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds, other things held constant.

Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise.Since floating-rate debt shifts interest rate risk to companies, it offers no advantages to issuers.

Which of the following statements is CORRECT?

bonds, price sensitivity to a given change in interest rates is generally greater the longer before the bond matures.

desire for floating-rate bonds, and consequently their increased usage, arose out of the experience of the early 1980s, when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.

Consider some bonds with one annual coupon payment of 7.25%.The bonds have a par value of $1,000, a current price of $1,125, and they will mature in 13 years.What is the yield to maturity on these bonds?

Which of the following statements is CORRECT?