Exam 4: Bond Valuation

If 10-year T-bonds have a yield of 6.2%,10-year corporate bonds yield 8.5%,the maturity risk premium on all 10-year bonds is 1.3%,and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds,what is the default risk premium on the corporate bond?

Bonds for two companies were just issued: Short Corp.'s bonds will mature in 5 years,and Long Corp.'s bonds will mature in 15 years.Both bonds promise to pay a semiannual coupon,they are not callable or convertible,and they are equally liquid.Further,assume that the Treasury yield curve is based only on expectations about future inflation,i.e.,that the maturity risk premium is zero for T-bonds.Under these conditions,which of the following statements is correct?

Which of the following statements is CORRECT?

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.

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

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?

Which of the following statements is CORRECT?

If a firm raises capital by selling new bonds,it is called the "issuing firm," and the coupon rate is generally set equal to the required rate on bonds of equal risk.

Perry Inc.'s bonds currently sell for $1,150.They have a 6-year maturity,an annual coupon of $85,and a par value of $1,000.What is their current yield?

Which of the following statements is CORRECT?

Curtis Corporation's noncallable bonds currently sell for $1,165.They have a 15-year maturity,an annual coupon of $95,and a par value of $1,000.What is their yield to maturity?

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?

A Treasury bond has an 8% annual coupon and a 7.5% yield to maturity.Which of the following statements is CORRECT?

Ranger Inc.would like to issue new 20-year bonds.Initially,the plan was to make the bonds non-callable.If the bonds were made callable after 5 years at a 5% call premium,how would this affect their required rate of return?

Which of the following statements is CORRECT?

The market value of any real or financial asset,including stocks,bonds,or art work purchased in hope of selling it at a profit,may be estimated by determining future cash flows and then discounting them back to the present.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following bonds has the greatest interest rate price risk?

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.