Exam 6: Valuing Bonds

Assume a bond is currently selling at par value. What will happen if the bond's expected cash flows are discounted at a rate lower than the bond's coupon rate?

How much should you be prepared to pay for a 10-year bond with a 6% coupon, semiannual payments, and a semiannually compounded yield of 7.5%?

The current yield tends to understate a bond's total return when the bond sells for a discount because:

If a bond offers a current yield of 5% and a yield to maturity of 5.45%, then the:

Explain why bond prices fluctuate in response to changing interest rates. What adverse effect might occur if bond prices remain fixed prior to their maturity?

An investor holds two bonds, one with 5 years until maturity and the other with 20 years until maturity. Which of the following is more likely if interest rates suddenly increase by 2%?

Even when the yield curve is upward-sloping, investors might rationally stay away from long-term bonds.

What is the total return to an investor who buys a bond for $1,100 when the bond has a 9% coupon and 5 years until maturity, then sells the bond after 1 year for $1,085?

The current yield tends to overstate a bond's total return when the bond sells for a premium because:

By how much will a bond increase in price over the next year if it currently sells for $925.16, has 5 years until maturity, and an annual coupon rate of 7%? (Do not round intermediate calculations.)

You purchased a 6% annual coupon bond at par and sold it one year later for $1,015.16. What was your rate of return on this investment if the face value at maturity was $1,000?

Which of the following would not be associated with a zero-coupon bond?

If an investor purchases a bond when its current yield is higher than the coupon rate, then the bond's price will be expected to:

If you purchase a 5-year, zero-coupon bond for $691.72, how much could it be sold for 3 years later if interest rates have remained stable?

The coupon rate of a bond equals:

What is the current yield of a bond with a 6% coupon, 4 years until maturity, and a price quote of 84?

Nominal U.S. Treasury bond yields:

Assume an investor purchased a fixed-coupon bond at a time when the bond's yield to maturity was 6.9%. Further assume the investor sold the bond prior to maturity and realized a total return of 7.1%. Which of these most likely occurred while the investor owned the bond?

What is the relationship between a bondholder's rate of return and the bond's yield to maturity if he does not hold the bond until it matures?

Assume you just purchased a 12% annual coupon bond for $1,100 that matures in 3 years. Determine the current yield, yield to maturity, and price of the bond as of the date of purchase and on each anniversary date of its purchase until maturity.