Exam 6: Interest Rates and Bond Valuation

Zheng Corporation plans to issue new bonds to finance its expansion plans. In its efforts to price the issue, Zheng Corporation has identified a company of similar risk with an outstanding bond issue that has an 8 percent coupon rate having a maturity of ten years. This firm's bonds are currently selling for $1,091.96. If interest is paid annually for both bonds, what must the coupon rate of the new bonds be in order for the issue to sell at par?

A bond with short maturity has less "interest rate risk" than a bond with long maturity when all other features-coupon interest rate, par value, and interest payment frequency-are the same.

Coupon interest rate on a bond represents the percentage of the bond's par value that will be paid annually, typically in two equal semiannual payments, as interest.

A call feature is a feature included in all corporate bonds and allows the issuer to repurchase bonds at the market price prior to maturity.

An interest rate or a required rate of return represents the cost of money.

Yield to maturity on a bond with price equal to its par value will ________.

A(n) ________ is issued with no or very low coupon and sells significantly below its par value.

To finance a new line of product, the Tangshan Toys has issued a bond with a par value of $1,000, coupon rate of 8 percent, and maturity of 30 years. Compute the price of the bond if the opportunity cost is 11 percent.

The bond indenture identifies any collateral pledged against a bond and specifies how it is to be maintained.

A(n) ________ yield curve reflects higher expected future rates of interest.

The nominal rate of interest is the actual rate of interest charged by the supplier of funds and paid by demander.

The yield to maturity on a bond with a current price equal to its par or face value, will always be equal to the coupon interest rate.

A downward-sloping yield curve that indicates generally cheaper long-term borrowing costs than short-term borrowing costs is called ________.

A flat yield curve indicates generally cheaper long-term borrowing costs than short-term borrowing costs.

Since the issuer of zero (or low) coupon bonds can annually deduct the current year's interest accrual without having to actually pay the interest until the bond matures (or is called), its cash flow each year is increased by the amount of the tax shield provided by the interest deduction.

When a bond's required return is greater than its coupon interest rate, the bond value will be less than its par value.

Increases in the basic cost of long-term funds or in risk will raise the required return on a bond.

The restrictive debt covenant that imposes fixed assets is to guarantee fixed-payment obligations by maintaining a specified level of fixed assets.

An inverted yield curve is a downward-sloping yield curve that indicates that short-term interest rates are generally higher than long-term interest rates.

Table 6.2 -Calculate the current value of Bond M if the time of maturity is six years. (See Table 6.2)