Exam 5: Bonds, bond valuation, and interest rates

Bonds A and B are 15-year, $1, 000 face value bonds.Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon.Both bonds have a yield to maturity of 8%, which is expected to remain constant for the next 15 years.Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

You have funds that you want to invest in bonds, and you just noticed in the financial pages of the local newspaper that you can buy a $1, 000 par value bond for $800.The coupon rate is 10% (with annual payments), and there are 10 years before the bond will mature and pay off its $1, 000 par value.You should buy the bond if your required return on bonds with this risk is 12%.

Which of the following statements is CORRECT?

Bond A has a 9% annual coupon, while Bond B has a 7% annual coupon.Both bonds have the same maturity, a face value of $1, 000, and an 8% yield to maturity.Which of the following statements is CORRECT?

A bond that is callable has a chance of being retired earlier than its stated term to maturity.Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

Kessen Inc.'s bonds mature in 7 years, have a par value of $1, 000, and make an annual coupon payment of $70.The market interest rate for the bonds is 8.5%.What is the bond's price?

The desire for floating-rate bonds, and consequently their increased usage, arose out of the experience of the early 1980s, when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.

Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, generally be subject to much more interest rate price risk if you purchased a 30-day bond than if you bought a 30-year bond.

Assume that interest rates on 15-year noncallable Treasury and corporate bonds with different ratings are as follows: The differences in rates among these issues were most probably caused primarily by:

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?

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%.Which of the following statements is CORRECT?

Squire Inc.'s 5-year bonds yield 6.75%, and 5-year T-bonds yield 4.80%.The real risk-free rate is r* = 2.75%, the inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Squire's bonds is DRP = 1.20% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1)´ 0.1%, where t = number of years to maturity.What is the liquidity premium (LP)on Squire's bonds?

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.

Sentry Corp.bonds have an annual coupon payment of 7.25%.The bonds have a par value of $1, 000, a current price of $1, 125, and they will mature in 13 years.What is the yield to maturity on these bonds?

Which of the following statements is CORRECT?

McCurdy Co.'s Class Q bonds have a 12-year maturity, $1, 000 par value, and a 5.75% coupon paid semiannually (2.875% each 6 months), and those bonds sell at their par value.McCurdy's Class P bonds have the same risk, maturity, and par value, but the P bonds pay a 5.75% annual coupon.Neither bond is callable.At what price should the annual payment bond sell?

A call provision gives bondholders the right to demand, or "call for, " repayment of a bond.Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

Bonds A, B, and C all have a maturity of 15 years and a yield to maturity of 9%.Bond A's price exceeds its par value, Bond B's price equals its par value, and Bond C's price is less than its par value.Which of the following statements is CORRECT?

Sommers Co.'s bonds currently sell for $1, 080 and have a par value of $1, 000.They pay a $100 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1, 125.What is their yield to maturity (YTM)?