Exam 7: Bonds and Their Valuation

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

If its yield to maturity declined by 1%,which of the following bonds would have the largest percentage increase in value?

Assume that interest rates on 20-year Treasury and corporate bonds with different ratings,all of which are noncallable,are as follows: T-bond =7.72\% =9.64\% =8.72\% =10.18\% The differences in rates among these issues were most probably caused primarily by:

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

The price sensitivity of a bond to a given change in interest rates is generally greater the longer the bond's remaining maturity.

Moon Software Inc.is planning to issue two types of 25-year,noncallable bonds to raise a total of $6 million,$3 million from each type of bond.First,3,000 bonds with a 10% semiannual coupon will be sold at their $1,000 par value to raise $3,000,000.These are called "par" bonds.Second,Original Issue Discount (OID)bonds,also with a 25-year maturity and a $1,000 par value,will be sold,but these bonds will have a semiannual coupon of only 6.75%.The OID bonds must be offered at below par in order to provide investors with the same effective yield as the par bonds.How many OID bonds must the firm issue to raise $3,000,000? Disregard flotation costs,and round your final answer up to a whole number of bonds.

Morin Company's bonds mature in 8 years,have a par value of $1,000,and make an annual coupon interest payment of $65.The market requires an interest rate of 6.1% on these bonds.What is the bond's price?

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 market interest rates are below 10% and at a discount if interest rates are greater than 10%.

Which of the following statements is CORRECT?

Assume that you are considering the purchase of a 20-year,noncallable bond with an annual coupon rate of 9.5%.The bond has a face value of $1,000,and it makes semiannual interest payments.If you require an 10.7% nominal yield to maturity on this investment,what is the maximum price you should be willing to pay for the bond?

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

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.None of the bonds can be called.Which of the following statements is CORRECT?

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%.

A 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?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?