Exam 6: Bond Markets

A life insurer owes $550,000 in eight years. To fund this outflow,the insurer wishes to buy STRIPS that mature in eight years. The STRIPS have a $5,000 face value per STRIP and pay a 6 percent APR with semiannual compounding. How much must the insurer spend now to fully fund the outflow (to the nearest dollar)?

Interest income from Treasury securities is ________,and interest income from municipal bonds is always ________.

"On the run" Treasury notes and bonds are newly issued securities and "off-the-run" Treasuries are securities that have been previously issued.

A T-bond with a $10,000 par is quoted at a bid of 92-11 and an ask of 92-17. If you bought the bond and then immediately sold it at the same quotes,how much money would you gain or lose (ignore commissions)?

An investor is holding a $1,000 par,10-year 9 percent coupon convertible bond with a 9 percent required bond yield. The bond is convertible into 40 shares of stock. Each share is worth $30. The bond has a current market value of $1,200. If interest rates don't change,what is the maximum gain and loss on the bond?

A T-bond with a $1,000 par is quoted at 97-14 bid,97-15 ask. The clean price for you to buy this bond is

A bond investor has a 99 percent chance of receiving all of her promised payments on a particular bond issue in the first year of holding the bond,but only a 98 percent chance in the second year,and a 97 percent chance in the third year and beyond. What is the cumulative default probability over the first three years she holds the bond?

The quoted ask yield on a 30-year $1,000 par T-bond with a 6.25 percent coupon and a price quote of 106-16 is ________ (use semiannual compounding).

What do bond rating agencies look at in setting a bond's rating?

The ask yield on a 6 percent coupon Treasury bond maturing in eight years is 5.488 percent. If the face value is $1,000,what should be the QUOTED cost of the bond today (use semiannual compounding)?

On July 1,2012,you purchase a $10,000 par T-note that matures in five years. The coupon rate is 8 percent and the price quote is 98-6. The last coupon payment was May 1,2012,and the next payment is November 1,2012 (184 days total). The accrued interest is

You are an investment banker and one of your large U.S. corporate clients has come to you asking for help deciding on the best market in which to place a sizable issue of bonds. You could try to issue dollar-denominated bonds,or Euro- or yen-denominated bonds. You could also issue in the United States or overseas. What major factors should you consider in advising your client on where to market the issue?

A Treasury security in which periodic coupon interest payments can be separated from each other and from the principal payment is called a

With respect to private placements of bonds,which of the following is correct? I. Issuers of privately placed bonds tend to be less well known than public bond issuers. II. Interest rates on privately placed debt tend to be higher than for similar public issues. III. Purchasers of privately placed debt have assets of at least $1 million. IV. Once bonds have been privately placed,the original buyers must hold the bonds until maturity.

The total sale proceeds from selling the stripped components of a Treasury security can sometimes be greater than the fair present value of the Treasury security. Why might this happen?

Bearer bonds are bonds

"Off-the-run" Treasury securities are considered to be more risky.

An investor is in the 28 percent federal tax bracket and pays a 9 percent state tax rate and 4 percent in local income taxes. For this investor a municipal bond paying 6 percent interest is equivalent to a corporate bond paying ________ interest.

What ratings comprise investment-grade bonds and what ratings are used for junk bonds? What are the primary differences between the two? In particular,why are investment-grade bonds more marketable and why are junk bonds issued at all?

You purchased a five-year annual payment 6 percent coupon bond for $1,000 and you planned on holding it to maturity. However,right after you bought the bond,it was called at $1,043.29 when all interest rates fell to 5 percent and remained there for the full five years. You reinvested the money for the full five years. What was your annual compound rate of return off your original investment?