Exam 5: Bonds, bond valuation, and interest rates

You are considering 2 bonds that will be issued tomorrow.Both are rated triple B (BBB, the lowest investment-grade rating), both mature in 20 years, both have a 10% coupon, neither can be called except for sinking fund purposes, and both are offered to you at their $1, 000 par values.However, Bond SF has a sinking fund while Bond NSF does not.Under the sinking fund, the company must call and pay off 5% of the bonds at par each year.The yield curve at the time is upward sloping.The bond's prices, being equal, are probably not in equilibrium, as Bond SF, which has the sinking fund, would generally be expected to have a higher yield than Bond NSF.

Jerome Corporation's bonds have 15 years to maturity, an 8.75% coupon paid semiannually, and a $1, 000 par value.The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1, 050.What is the bond's nominal yield to call?

A 15-year bond has an annual coupon rate of 8%.The coupon rate will remain fixed until the bond matures.The bond has a yield to maturity of 6%.Which of the following statements is CORRECT?

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?

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 bonds has the greatest interest rate price risk?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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.

Which of the following statements is CORRECT?

A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium.Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Other things equal, a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

The YTMs of three $1, 000 face value bonds that mature in 10 years and have the same level of risk are equal.Bond A has an 8% annual coupon, Bond B has a 10% annual coupon, and Bond C has a 12% annual coupon.Bond B sells at par.Assuming interest rates remain constant for the next 10 years, which of the following statements is CORRECT?

Reinegar Corporation is planning two new issues of 25-year bonds.Bond Par will be sold at its $1, 000 par value, and it will have a 10% semiannual coupon.Bond OID will be an Original Issue Discount bond, and it will also have a 25-year maturity and a $1, 000 par value, but its semiannual coupon will be only 6.25%.If both bonds are to provide investors with the same effective yield, how many of the OID bonds must Reinegar issue to raise $3, 000, 000? Disregard flotation costs, and round your final answer up to a whole number of bonds.

Nicholas Industries can issue a 20-year bond with a 6% annual coupon.This bond is not convertible, is not callable, and has no sinking fund.Alternatively, Nicholas could issue a 20-year bond that is convertible into common equity, may be called, and has a sinking fund.Which of the following most accurately describes the coupon rate that Nicholas would have to pay on the convertible, callable bond?

A 25-year, $1, 000 par value bond has an 8.5% annual coupon.The bond currently sells for $875.If the yield to maturity remains at its current rate, what will the price be 5 years from now?

Bond A has a 9% annual coupon while Bond B has a 6% annual coupon.Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant.Which of the following statements is CORRECT?

Noncallable bonds that mature in 10 years were recently issued by Sternglass Inc.They have a par value of $1, 000 and an annual coupon of 5.5%.If the current market interest rate is 7.0%, at what price should the bonds sell?

There is an inverse relationship between bonds' quality ratings and their required rates of return.Thus, the required return is lowest for AAA-rated bonds, and required returns increase as the ratings get lower.