Exam 5: Bonds, Bond Valuation, and Interest Rates

A 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.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Jerome Corporation's bonds have 15 years to maturity, an 8.75% coupon paid semiannually, and a $1,000 par value.The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,050.What is the bond's nominal yield to call?

Which of the following statements is CORRECT?

Suppose International Digital Technologies decides to raise a total of $200 million, with $100 million as long-term debt and $100 million as common equity.The debt can be mortgage bonds or debentures, but by an iron-clad provision in its charter, the company can never raise any additional debt beyond the original $100 million.Given these conditions, which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default.The bond should sell at a premium if interest rates are below 10% and at a discount if interest rates are greater than 10%.

Which of the following statements is CORRECT?

Under normal conditions, which of the following would be most likely to increase the coupon rate required to enable a bond to be issued at par?

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

Which of the following statements is CORRECT?

If the required rate of return on a bond (r_d) is greater than its coupon interest rate and will remain above that rate, then the market value of the 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 CORRECT?

An 8-year Treasury bond has a 10% coupon, and a 10-year Treasury bond has an 8% coupon.Both bonds have the same yield to maturity.If the yield to maturity of both bonds increases by the same amount, which of the following statements would be 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.

You have funds that you want to invest in bonds, and you just noticed in the financial pages of the local newspaper that you can buy a $1,000 par value bond for $800.The coupon rate is 10% (with annual payments), and there are 10 years before the bond will mature and pay off its $1,000 par value.You should buy the bond if your required return on bonds with this risk is 12%.

Sentry Corp.bonds have an 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?

Income bonds pay interest only if the issuing company actually earns the indicated interest.Thus, these securities cannot bankrupt a company, and this makes them safer from an investor's perspective than regular bonds.