Exam 5: Bonds

Moerdyk Corporation's bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000.The going interest rate (rd) is 4.75%, based on semiannual compounding.What is the bond's price?

Crockett Corporation's 5-year bonds yield 6.85%, and 5-year T-bonds yield 4.75%.The real risk-free rate is r* = 2.80%, the default risk premium for Crockett's bonds is DRP = 0.85% versus zero for T-bonds, the liquidity premium on Crockett's bonds is LP = 1.25%, 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 inflation premium (IP) on 5-year bonds?

Sinking funds are devices used to force companies to retire bonds on a scheduled basis prior to their maturity.Many bond indentures allow the company to acquire bonds for a sinking fund by either purchasing bonds in the market or selecting the bonds to be acquired by a lottery administered by the trustee through a call at face value.

a general rule, a company's debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured.

Other things equal, a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

Quigley Inc.'s bonds currently sell for $1,080 and have a par value of $1,000.They pay a $100 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,125.What is their yield to maturity (YTM)?

are considering two bonds.Bond A has a 9% annual coupon while Bond B has a 6% annual coupon.Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant.Which of the following statements is CORRECT?

25-year, $1,000 par value bond has an 8.5% annual coupon.The bond currently sells for $875.If the yield to maturity remains at its current rate, what will the price be 5 years from now?

Cosmic Communications Inc.is planning two new issues of 25-year bonds.Bond Par will be sold at its $1,000 par value, and it will have a 10% semiannual coupon.Bond OID will be an Original Issue Discount bond, and it will also have a 25-year maturity and a $1,000 par value, but its semiannual coupon will be only 6.25%.If both bonds are to provide investors with the same effective yield, how many of the OID bonds must Cosmic issue to raise $3,000,000? Disregard flotation costs, and round your final answer up to a whole number of bonds.

McCue Inc.'s bonds currently sell for $1,250.They pay a $120 annual coupon, have a 15-year maturity, and a $1,000 par value, but they can be called in 5 years at $1,050.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.What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM.)

Which of the following statements is CORRECT?

There is an inverse relationship between bonds' quality ratings and their required rates of return.Thus, the required return is lowest for AAA-rated bonds, and required returns increase as the ratings get lower.

bond that is callable has a chance of being retired earlier than its stated term to maturity.Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

Which of the following statements is CORRECT?

15-year bond with a face value of $1,000 currently sells for $850.Which of the following statements is CORRECT?

Assume that all interest rates in the economy decline from 10% to 9%.Which of the following bonds would have the largest percentage increase in price?

10-year T-bonds have a yield of 6.2%, 10-year corporate bonds yield 8.5%, the maturity risk premium on all 10-year bonds is 1.3%, and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond?

Which of the following statements is CORRECT?

order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures to a market value basis.KJM Corporation's balance sheet as of today is as follows: The bonds have a 4.0% coupon rate, payable semiannually, and a par value of $1,000.They mature exactly 10 years from today.The yield to maturity is 12%, so the bonds now sell below par.What is the current market value of the firm's debt?

Garvin Enterprises' bonds currently sell for $1,150.They have a 6-year maturity, an annual coupon of $85, and a par value of $1,000.What is their current yield?