Exam 14: The Valuation of Fixed-Income Securities

A high-yield bond has the following terms:       Principal amount         $1,000       Annual interest paid       $100       Maturity                     10 years a. What is the bond's price if comparable debt yields 12 percent? b. What would be the price if comparable debt yields 12 percent and the bond matures after five years? c. What are the current yields and yields to maturity in a and b? d. What would be the bond's price in a and b if interest rates declined to 9 percent? e. What are the current yield and yield to maturity in d? f. What two generalizations may be drawn from the above price changes?

Preferred stock generally pays

A bond has the following terms: Annual interest           $100 Term                               15 years Principal                  $1,000 a. What is the current price of the bond if comparable yields are 7 percent? b. What are the current yield and yield to maturity given the price of the bond in the previous question? c. If you expect the bond to be called at the end of the year, what would be the maximum price you should pay for the bond? d. Is there a reason to expect that the bond will be called?

If an investor were to anticipate that interest rates were going to fall, that individual should

The smaller a bond's coupon implies a longer duration.

If preferred stock is subject to mandatory retirement, its price is more volatile than preferred stock without the retirement feature.

The spread (the basis points)between the yields on AAA-rated bonds and B-rated bonds tends to rise when yields increase.

If you purchase a $5 preferred stock for $40 a share, what is the current yield? If you anticipate that yields will decline to 10 percent, what will be the anticipated capital gain on this investment?

Preferred stock pays a fixed amount of interest.

A bond's call feature may be exercised if 1. the yield to maturity exceeds the current yield 2. the yield to maturity is less than the current yield 3. interest rates have risen 4. interest rates have fallen

The smaller the duration, the more volatile the bond's price.

A few bonds called "perpetuals" never mature.

A conservative investor will prefer a bond with a smaller duration even though it may have a longer term to maturity.

a. What is the value (i.e., price)of the following preferred stocks if the comparable yield is 10 percent?     MN Inc. $6 preferred stock, $100 par         ST Inc. $6 preferred stock, $100 par and the stock is to be retired after twenty years b. What is the current yield offered by each preferred stock? c. Why are the prices of these preferred stocks different even though they both pay the same dividend?

If interest rates decline after a bond is issued and the investor reinvests the interest payment, the realized yield exceeds the yield to maturity.

While bond prices fluctuate,

If interest rates increase, a bond may be called.

Most bonds pay interest semi-annually.

If investors expect interest rates to decline, they are also expecting bond prices to rise.

If a 7 percent, $1,000 bond matures after ten years and current interest rates are 9 percent, the current price of the bond should not be   1. $1,000 2. $872 3. $1,140