Exam 7: Valuing Bonds

Rank the following bonds in order from lowest credit risk to highest risk all with the same time to maturity, by their yield to maturity: JM Corporate bond with yield of 12.25 percent, IB Corporate bond with yield of 4.49 percent, TC Corporate bond with yield of 8.76 percent, and B&O Corporate bond with a yield of 5.99 percent.

Determine the interest payment for the following three bonds: 2.5 percent coupon corporate bond (paid semi-annually), 3.15 percent coupon Treasury note, and a corporate zero coupon bond maturing in 10 years. (Assume a $1,000 par value.)

Bonds are issued by which of the following?

Calculate the price of a zero coupon bond that matures in 10 years if the market interest rate is 6 percent. (Assume semi-annual compounding and $1,000 par value.)

A 3.75 percent TIPS has an original reference CPI of 175.8. If the current CPI is 207.7, what is the current interest payment and par value of the TIPS? (Assume semi-annual interest payments and $1,000 par value.)

Which of the following is true regarding U.S. Government Agency Securities?

A 7.5 percent coupon bond with nine years left to maturity is priced to offer a 10.4 percent yield to maturity. You believe that in one year, the yield to maturity will be 8 percent. What is the change in price the bond will experience in dollars? (Assume interest payments are semiannual and par value is $1,000.)

If a bond is selling at a premium, then:

A bond's current yield is defined as:

Which of the following terms is the chance that the bond issuer will not be able to make timely payments?

A 30-year bond with an 8 percent coupon has a yield to maturity of 6 percent. The bond could be called in seven years and if called would generate a yield to call of 5.75 percent. What is this bond's call premium? Assume the coupon payments are made annually and par value is $1,000.

Which of the following is a reason municipal bonds offer lower rates of interest income for their investors?

Which of the following terms means the chance that future interest payments will have to be reinvested at a lower interest rate?

Under which conditions will an investor demand a larger return (yield) on a bond?

An 8 percent coupon municipal bond has 15 years left to maturity and has a price quote of 98.5. The bond can be called in six years. The call premium is one year of coupon payments. Compute the bond's yield to call and determine if the bond will be called. Assume interest payments are paid semi-annually and a par value of $5,000.

A 5.75 percent coupon bond with 12 years left to maturity is offered for sale at $978.83. What yield to maturity is the bond offering? (Assume interest payments are paid semi-annually and par value is $1,000.)

A corporate bond with a 5 percent coupon has 10 years left to maturity. It has had a credit rating of BBB and a yield to maturity of 8.0 percent. The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BB. The new appropriate discount rate will be 9 percent. What will be the change in the bond's price in dollars? Assume interest payments are paid semi-annually and par value is $1,000.

A 15-year bond with a 10 percent coupon has a yield to maturity of 8 percent. The bond could be called in four years and if called would generate a yield to call of 6 percent. What is this bond's call premium? Assume the coupon payments are made semi-annually and par value is $1,000.

Sally is choosing between two bonds both of which mature in 15 years and have the same level of risk. Bond A is a municipal bond that yields 7.20 percent. Bond B is a corporate bond that yields 10.00 percent. If Sally is in the 28 percent tax bracket, which bond should she select and why?

A 6 percent coupon bond with 12 years left to maturity is priced to offer a 6.5 percent yield to maturity. You believe that in one year, the yield to maturity will be 6.25 percent. What is the change in price the bond will experience in dollars? (Assume semi-annual interest payments and $1,000 par value.)