Exam 4: Bond Valuation

A bond with a $1,000 face value and an 8 percent annual coupon pays interest semiannually. The bond will mature in 15 years. The nominal yield to maturity is 11 percent. What is the price of the bond today?

Semiannual payment bonds with the same risk (Aaa) and maturity (20 years) as your company's bonds have a nominal (not EAR) yield of 9 percent. Your company's treasurer is thinking of issuing at par some $1,000 par value, 20-year, quarterly payment bonds. She has asked you to determine what quarterly interest payment, in dollars, the company would have to set in order to provide the same effective annual rate (EAR) as those on the 20-year, semiannual payment bonds. What would the quarterly interest payment be, in dollars?

Suppose a new company decides to raise its initial $200 million of capital as $100 million of common equity and $100 million of long-term debt. By an iron-clad provision in its charter, the company can never borrow any more money. Which of the following statements is most correct?

A bond matures in 12 years, and pays an 8 percent annual coupon. The bond has a face value of $1,000, and currently sells for $985. What is the bond's current yield and yield to maturity?

Which of the following statements is most correct?

You intend to purchase a 10-year, $1,000 face value bond that pays interest of $60 every 6 months. If your nominal annual required rate of return is 10 percent with semiannual compounding, how much should you be willing to pay for this bond?

A bond that matures in 11 years has an annual coupon rate of 8 percent with interest paid annually. The bond's face value is $1,000 and its yield to maturity is 7.5 percent. The bond can be called 3 years from now at a price of $1,060. What is the bond's nominal yield to call?

Due to a number of lawsuits related to toxic wastes, a major chemical manufacturer has recently experienced a market reevaluation. The firm has a bond issue outstanding with 15 years to maturity and a coupon rate of 8 percent, with interest paid semiannually. The required nominal rate on this debt has now risen to 16 percent. What is the current value of this bond?

A corporate bond matures in 14 years. The bond has an 8 percent semiannual coupon and a par value of $1,000. The bond is callable in five years at a call price of $1,050. The price of the bond today is $1,075. What are the bond's yield to maturity and yield to call?

If the required rate of return on a bond is greater than its coupon interest rate (and rd remains above the coupon rate), the market value of that bond will always be below its par value until the bond matures, at which time its market value will equal its par value. (Accrued interest between interest payment dates should not be considered when answering this question.)

Which of the following statements is most correct?

Which of the following statements is most correct?

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

A $1,000 par value bond pays interest of $35 each quarter and will mature in 10 years. If your nominal annual required rate of return is 12 percent with quarterly compounding, how much should you be willing to pay for this bond?

Assume that a 15-year, $1,000 face value bond pays interest of $37.50 every 3 months. If you require a nominal annual rate of return of 12 percent, with quarterly compounding, how much should you be willing to pay for this bond? (Hint: The PVIFA and PVIF for 3 percent, 60 periods are 27.6748 and 0.1697, respectively.)

A 20-year original maturity bond with 1 year left to maturity has more interest rate risk than a 10-year original maturity bond with 1 year left to maturity. (Assume that the bonds have equal default risk and equal coupon rates.)

Which of the following statements is most correct?

A 6-year bond which pays 8 percent interest semiannually sells at par ($1,000). Another 6-year bond of equal risk pays 8 percent interest annually. Both bonds are non-callable and have a face value of $1,000. What is the price of the bond which pays annual interest?

A corporate bond with an 11 percent semiannual coupon has a yield to maturity of 9 percent. The bond matures in 20 years but is callable in ten years. The maturity value is $1,000. The call price is $1,055. What is the bond's yield to call?

Fish & Chips Inc. has two bond issues outstand¬ing, and both sell for $701.22. The first issue has an annual coupon rate of 8 percent and 20 years to maturity. The second has an identical yield to maturity as the first bond, but only 5 years until maturity. Both issues pay interest annually. What is the annual interest payment on the second issue?