66.
|
"Cat" bonds are primarily designed to help:
Refer to section 7.4
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-01 Important bond features and types of bonds. Section: 7.4 Topic: "Cat" bonds |
67.
|
Mary is a retired widow who is financially dependent upon the interest income produced by her bond portfolio. Which one of the following bonds is the least suitable for her to own?
Refer to section 7.4
|
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 07-01 Important bond features and types of bonds. Section: 7.4 Topic: Bond features |
68.
|
Al is retired and enjoys his daily life. His one concern is that his bonds provide a steady stream of income that will continue to allow him to have the money he desires to continue his active lifestyle without lowering his present standard of living. Although he has sufficient principal to live on, he only wants to spend the interest income provided by his holdings and thus is concerned about the purchasing power of that income. Which one of the following bonds should best ease Al's concerns?
Refer to section 7.4
|
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 07-01 Important bond features and types of bonds. Section: 7.4 Topic: Bond features |
69.
|
Phil has researched TLM Technologies and believes the firm is poised to vastly increase in value. He wants to invest in this company. Phil has decided to purchase TLM Technologies bonds so that he can have a steady stream of interest income. However, he still wishes that he could share in the firm's success along with TLM's shareholders. Which one of the following bond features will help Phil fulfill his wish?
Refer to section 7.4
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-01 Important bond features and types of bonds. Section: 7.4 Topic: Bond features |
70.
|
A U.S. Treasury bond that is quoted at 100:11 is selling:
Refer to section 7.5
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-01 Important bond features and types of bonds. Section: 7.5 Topic: Treasury bond quote |
71.
|
Which of the following correctly describe U.S. Treasury bonds?
I. have a "tick" size of 1/32 II. highly liquid III. quoted in dollars and cents IV. quoted at the dirty price
Refer to section 7.5
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-01 Important bond features and types of bonds. Section: 7.5 Topic: Treasury bonds |
72.
|
A 6-year, $1,000 face value bond issued by Taylor Tools pays interest semiannually on February 1 and August 1. Assume today is October 1. What will the difference, if any, be between this bond's clean and dirty prices today?
Refer to section 7.5
|
AACSB: Analytic
Blooms: Understand Difficulty: 1 Easy Learning Objective: 07-02 Bond values and yields and why they fluctuate. Section: 7.5 Topic: Clean and dirty prices |
73.
|
Today, June 15, you want to buy a bond with a quoted price of 98.64. The bond pays interest on January 1 and July 1. Which one of the following prices represents your total cost of purchasing this bond today?
Refer to section 7.5
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-02 Bond values and yields and why they fluctuate. Section: 7.5 Topic: Dirty price |
74.
|
Which one of the following rates represents the change, if any, in your purchasing power as a result of owning a bond?
Refer to section 7.6
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-04 The impact of inflation on interest rates. Section: 7.6 Topic: Real rate |
75.
|
Which one of the following statements is correct?
Refer to section 7.6
|
AACSB: Analytic
Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-05 The term structure of interest rates and the determinants of bond yields. Section: 7.6 Topic: Bond yields |
76.
|
The Fisher Effect primarily emphasizes the effects of _____ on an investor's rate of return.
Refer to section 7.6
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-04 The impact of inflation on interest rates. Section: 7.6 Topic: Fisher effect |
77.
|
You are trying to compare the present values of two separate streams of cash flows which have equivalent risks. One stream is expressed in nominal values and the other stream is expressed in real values. You decide to discount the nominal cash flows using a nominal annual rate of 8 percent. What rate should you use to discount the real cash flows?
Refer to section 7.6
|
AACSB: Analytic
Blooms: Understand Difficulty: 1 Easy Learning Objective: 07-04 The impact of inflation on interest rates. Section: 7.6 Topic: Nominal and real rates |
78.
|
Which of the following statements is correct concerning the term structure of interest rates?
I. Expectations of lower inflation rates in the future tend to lower the slope of the term structure of interest rates. II. The term structure of interest rates includes both an inflation premium and an interest rate risk premium. III. The real rate of return has minimal, if any, affect on the slope of the term structure of interest rates. IV. The term structure of interest rates and the time to maturity are always directly related.
Refer to section 7.7
|
AACSB: Analytic
Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-05 The term structure of interest rates and the determinants of bond yields. Section: 7.7 Topic: Term structure of interest rates |
79.
|
Which two of the following factors cause the yields on a corporate bond to differ from those on a comparable Treasury security?
I. inflation risk II. interest rate risk III. taxability IV. default risk
Refer to sections 7.4 and 7.7
|
AACSB: Analytic
Blooms: Understand Difficulty: 1 Easy Learning Objective: 07-05 The term structure of interest rates and the determinants of bond yields. Section: 7.4 and 7.7 Topic: Determinants of bond yields |
80.
|
The bonds issued by Stainless Tubs bear an 8 percent coupon, payable semiannually. The bonds mature in 11 years and have a $1,000 face value. Currently, the bonds sell for $952. What is the yield to maturity?
This cannot be solved directly, so it's easiest to just use the calculator method to get an answer. You can then use the calculator answer as the rate in the formula just to verify that your answer is correct. |
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 07-02 Bond values and yields and why they fluctuate. Section: 7.1 Topic: Yield to maturity |
81.
|
Greenbrier Industrial Products' bonds have a 7.60 percent coupon and pay interest annually. The face value is $1,000 and the current market price is $1,062.50 per bond. The bonds mature in 16 years. What is the yield to maturity?
This cannot be solved directly, so it's easiest to just use the calculator method to get an answer. You can then use the calculator answer as the rate in the formula just to verify that your answer is correct. |
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 07-02 Bond values and yields and why they fluctuate. Section: 7.1 Topic: Yield to maturity |
82.
|
Collingwood Homes has a bond issue outstanding that pays an 8.5 percent coupon and matures in 16.5 years. The bonds have a par value of $1,000 and a market price of $944.30. Interest is paid semiannually. What is the yield to maturity?
This cannot be solved directly, so it's easiest to just use the calculator method to get an answer. You can then use the calculator answer as the rate in the formula just to verify that your answer is correct. |
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 07-02 Bond values and yields and why they fluctuate. Section: 7.1 Topic: Yield to maturity |
83.
|
Oil Well Supply offers 7.5 percent coupon bonds with semiannual payments and a yield to maturity of 7.68 percent. The bonds mature in 6 years. What is the market price per bond if the face value is $1,000?
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 07-02 Bond values and yields and why they fluctuate. Section: 7.1 Topic: Bond price |
84.
|
Roadside Markets has a 6.75 percent coupon bond outstanding that matures in 10.5 years. The bond pays interest semiannually. What is the market price per bond if the face value is $1,000 and the yield to maturity is 7.2 percent?
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 07-02 Bond values and yields and why they fluctuate. Section: 7.1 Topic: Bond price |
85.
|
Grand Adventure Properties offers a 9.5 percent coupon bond with annual payments. The yield to maturity is 11.2 percent and the maturity date is 11 years from today. What is the market price of this bond if the face value is $1,000?
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 07-02 Bond values and yields and why they fluctuate. Section: 7.1 Topic: Bond price |
86.
|
Redesigned Computers has 6.5 percent coupon bonds outstanding with a current market price of $832. The yield to maturity is 16.28 percent and the face value is $1,000. Interest is paid semiannually. How many years is it until these bonds mature?
It's easiest to solve this problem using a financial calculator. You can then use the calculator answer as the time period in the formula just to verify that your answer is correct. The number of six-month periods is 4.19. The number of years is 2.10 years. |
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 07-02 Bond values and yields and why they fluctuate. Section: 7.1 Topic: Time to maturity |
87.
|
Global Communications has a 7 percent, semiannual coupon bond outstanding with a current market price of $1,023.46. The bond has a par value of $1,000 and a yield to maturity of 6.72 percent. How many years is it until this bond matures?
It's easiest to solve this problem using financial calculator. You can then use the calculator answer as the time period in the formula just to verify that your answer is correct. The number of six-month periods is 25.052. The number of years is 12.53 years. |
AACSB: Analytic
Blooms: Analyze Difficulty: 1 Easy Learning Objective: 07-02 Bond values and yields and why they fluctuate. Section: 7.1 Topic: Time to maturity |
88.
|
You are purchasing a 20-year, zero-coupon bond. The yield to maturity is 8.68 percent and the face value is $1,000. What is the current market price?
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 07-02 Bond values and yields and why they fluctuate. Section: 7.1 and 7.4 Topic: Zero bond price |
89.
|
Today, you want to sell a $1,000 face value zero coupon bond you currently own. The bond matures in 4.5 years. How much will you receive for your bond if the market yield to maturity is currently 5.33 percent? Ignore any accrued interest.
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 07-02 Bond values and yields and why they fluctuate. Section: 7.1 and 7.4 Topic: Zero bond price |
90.
|
The zero coupon bonds of D&L Movers have a market price of $319.24, a face value of $1,000, and a yield to maturity of 8.45 percent. How many years is it until these bonds mature?
Number of years = 27.59/2 = 13.80 years |
AACSB: Analytic
Blooms: Apply Difficulty: 2 Medium Learning Objective: 07-01 Important bond features and types of bonds. Section: 7.1 and 7.4 Topic: Time to maturity |
91.
|
A 16-year, 4.5 percent coupon bond pays interest annually. The bond has a face value of $1,000. What is the percentage change in the price of this bond if the market yield to maturity rises to 5.7 percent from the current rate of 5.5 percent?
|
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 07-01 Important bond features and types of bonds. Section: 7.1 Topic: Interest rate risk |
92.
|
The Corner Grocer has a 7-year, 6 percent annual coupon bond outstanding with a $1,000 par value. The bond has a yield to maturity of 5.5 percent. Which one of the following statements is correct if the market yield suddenly increases to 7 percent?
Difference in prices = $946.11 - $1,028.41 = -$82.31 |
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 07-02 Bond values and yields and why they fluctuate. Section: 7.1 Topic: Interest rate risk |
93.
|
Blackwell bonds have a face value of $1,000 and are currently quoted at 98.4. The bonds have a 5 percent coupon rate. What is the current yield on these bonds?
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 07-02 Bond values and yields and why they fluctuate. Section: 7.1 Topic: Current yield |
94.
|
The outstanding bonds of The River Front Ferry carry a 6.5 percent coupon. The bonds have a face value of $1,000 and are currently quoted at 102.9. What is the current yield on these bonds?
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 07-02 Bond values and yields and why they fluctuate. Section: 7.1 Topic: Current yield |
95.
|
The 7 percent, semi-annual coupon bonds offered by House Renovators are callable in 2 years at $1,054. What is the amount of the call premium on a $1,000 par value bond?
Call premium = $1,054 - $1,000 = $54
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 07-02 Bond values and yields and why they fluctuate. Section: 7.2 Topic: Call premium |
96.
|
A corporate bond was quoted yesterday at 102.16 while today's quote is 102.19. What is the change in the value of a bond that has a face value of $5,000?
Market price = (1.0219 - 1.0216) × $5,000 = $1.50
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 07-02 Bond values and yields and why they fluctuate. Section: 7.5 Topic: Bond quote |
97.
|
A 10-year, 4.5 percent, semiannual coupon bond issued by Tyler Rentals has a $1,000 face value. The bond is currently quoted at 98.7. What is the clean price of this bond if the next interest payment will occur 2 months from today?
Clean price = 0.987 × $1,000 = $987
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 07-02 Bond values and yields and why they fluctuate. Section: 7.5 Topic: Clean price |
98.
|
A Treasury bond is quoted at a price of 105:10. What is the market price of this bond if the face value is $5,000?
Price = 105:10 = 105 and 10/32 percent of face = 1.053125 × $5,000 = $5,265.63
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 07-02 Bond values and yields and why they fluctuate. Section: 7.5 Topic: Treasury bond quote |
99.
|
A Treasury bond is quoted at a price of 101:14 with a current yield of 7.236 percent. What is the coupon rate?
Price = 101 and 14/32 percent of face = 1.014375 × $1,000 = $1,014.375
Annual interest = 0.07236 × $1,014.375 = $73.40 Coupon rate = $73.40/$1,000 = 7.34 percent |
AACSB: Analytic
Blooms: Apply Difficulty: 2 Medium Learning Objective: 07-02 Bond values and yields and why they fluctuate. Section: 7.1 Topic: Bond yields |
100.
|
A corporate bond is quoted at a price of 103.16 and carries a 5.20 percent coupon. The bond pays interest semiannually. What is the current yield on one of these bonds?
Current yield = (0.052 × $1,000)/(1.0316 × $1,000) = 5.04 percent
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 07-01 Important bond features and types of bonds. Section: 7.1 Topic: Current yield |
101.
|
A Treasury bond is quoted at a price of 106:23 with a 3.50 percent coupon. The bond pays interest semiannually. What is the current yield on one of these bonds?
Current price = 106 and 23/32nds percent of face = 1.0671875 × $1,000 = $1,067.1875
Current yield = (0.035 × $1,000)/$1,067.1875 = 3.28 percent |
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 07-02 Bond values and yields and why they fluctuate. Section: 7.1 and 7.5 Topic: Treasury yield |
102.
|
A Treasury bond is quoted as 99:18 asked and 99:09 bid. What is the bid-ask spread in dollars on a $5,000 face value bond?
Bid-ask spread = 99:18 - 99:09 = 9/32 of 1 percent of $5,000 = $14.06
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 07-02 Bond values and yields and why they fluctuate. Section: 7.5 Topic: Bid-ask spread |
103.
|
The semiannual, 8-year bonds of Alto Music are selling at par and have an effective annual yield of 8.6285 percent. What is the amount of each interest payment if the face value of the bonds is $1,000?
|
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 07-01 Important bond features and types of bonds. Section: 7.1 Topic: Bond yields and payments |
104.
|
A bond that pays interest annually yielded 7.47 percent last year. The inflation rate for the same period was 4 percent. What was the actual real rate of return on this bond for last year?
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 07-04 The impact of inflation on interest rates. Section: 7.6 Topic: Real return |
105.
|
Getty Markets has bonds outstanding that pay a 5 percent semiannual coupon, have a 5.28 percent yield to maturity, and a face value of $1,000. The current rate of inflation is 4.1 percent. What is the real rate of return on these bonds?
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 07-04 The impact of inflation on interest rates. Section: 7.6 Topic: Real rate |
106.
|
The outstanding bonds of Winter Time Products provide a real rate of return of 5.6 percent. The current rate of inflation is 4.68 percent. What is the actual nominal rate of return on these bonds?
(1 + 0.056) × (1 + 0.0468) - 1 = 10.54 percent
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 07-04 The impact of inflation on interest rates. Section: 7.6 Topic: Fisher effect |
107.
|
The yield to maturity on a bond is currently 8.46 percent. The real rate of return is 3.22 percent. What is the rate of inflation?
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 07-04 The impact of inflation on interest rates. Section: 7.6 Topic: Fisher effect |
108.
|
A zero coupon bond with a face value of $1,000 is issued with an initial price of $212.56. The bond matures in 22 years. What is the implicit interest, in dollars, for the first year of the bond's life?
Implicit interest = $228.06 - $212.56 = $15.50 |
AACSB: Analytic
Blooms: Apply Difficulty: 2 Medium Learning Objective: 07-01 Important bond features and types of bonds. Section: 7.4 Topic: Implicit interest |
109.
|
Northern Warehouses wants to raise $11.4 million to expand its business. To accomplish this, it plans to sell 40-year, $1,000 face value, zero-coupon bonds. The bonds will be priced to yield 8.75 percent. What is the minimum number of bonds it must sell to raise the $11.4 million it needs?
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 07-02 Bond values and yields and why they fluctuate. Section: 7.4 Topic: Zero-coupon bond |
110.
|
You have won a contest and will receive $2,500 a year in real terms for the next 3 years. Each payment will be received at the end of the period with the first payment occurring one year from today. The relevant nominal discount rate is 6.3 percent and the inflation rate is 3.1 percent. What are your winnings worth today?
|
AACSB: Analytic
Blooms: Apply Difficulty: 2 Medium Learning Objective: 07-04 The impact of inflation on interest rates. Section: 7.6 Topic: Real cash flows |
111.
|
You purchased an investment which will pay you $8,000, in real dollars, a year for the next three years. Each payment will be received at the end of the period with the first payment occurring one year from today. The nominal discount rate is 7.5 percent and the inflation rate is 2.9 percent. What is the present value of these payments?
|
AACSB: Analytic
Blooms: Apply Difficulty: 2 Medium Learning Objective: 07-04 The impact of inflation on interest rates. Section: 7.6 Topic: Real cash flows |
112.
|
Sylvan Trees has a 7 percent coupon bond on the market with ten years left to maturity. The bond makes annual payments and currently sells for $842.10. What is the yield-to-maturity?
This cannot be solved directly, so it's easiest to just use the calculator method to get an answer. You can then use the calculator answer as the rate in the formula just to verify that your answer is correct. |
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy EOC: 7-4 Learning Objective: 07-02 Bond values and yields and why they fluctuate. Section: 7.1 Topic: Yield to maturity |
113.
|
Kaiser Industries has bonds on the market making annual payments, with 14 years to maturity, and selling for $1,382.01. At this price, the bonds yield 7.5 percent. What is the coupon rate?
Coupon rate = $120/$1,000 = 12 percent |
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy EOC: 7-5 Learning Objective: 07-02 Bond values and yields and why they fluctuate. Section: 7.1 Topic: Coupon rate |
114.
|
Dexter Mills issued 20-year bonds a year ago at a coupon rate of 10.2 percent. The bonds make semiannual payments. The yield-to-maturity on these bonds is 9.2 percent. What is the current bond price?
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy EOC: 7-6 Learning Objective: 07-02 Bond values and yields and why they fluctuate. Section: 7.1 Topic: Bond price |
115.
|
Soo Lee Imports issued 17-year bonds 2 years ago at a coupon rate of 10.3 percent. The bonds make semiannual payments. These bonds currently sell for 102 percent of par value. What is the yield-to-maturity?
This cannot be solved directly, so it's easiest to just use the calculator method to get an answer. You can then use the calculator answer as the rate in the formula just to verify that your answer is correct. |
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy EOC: 7-7 Learning Objective: 07-02 Bond values and yields and why they fluctuate. Section: 7.1 Topic: Yield to maturity |
116.
|
Bryceton, Inc. has bonds on the market with 13 years to maturity, a yield-to-maturity of 9.2 percent, and a current price of $802.30. The bonds make semiannual payments. What is the coupon rate?
Coupon rate = ($32.81 × 2)/$1,000 = 6.56 percent |
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy EOC: 7-8 Learning Objective: 07-02 Bond values and yields and why they fluctuate. Section: 7.1 Topic: Coupon rate |
117.
|
Suppose the real rate is 9.5 percent and the inflation rate is 1.8 percent. What rate would you expect to see on a Treasury bill?
(1 + R) = (1 + 0.095) × (1 + 0.018); R = 11.47 percent
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy EOC: 7-10 Learning Objective: 07-04 The impact of inflation on interest rates. Section: 7.6 Topic: Nominal rate |
118.
|
An investment offers a 10.5 percent total return over the coming year. Sam Bernanke thinks the total real return on this investment will be only 6.2 percent. What does Sam believe the inflation rate will be for the next year?
(1 + 0.105) = (1 + 0.062) × (1 + h); h = 4.05 percent
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy EOC: 7-11 Learning Objective: 07-04 The impact of inflation on interest rates. Section: 7.6 Topic: Inflation rate |
119.
|
Bond S is a 4 percent coupon bond. Bond T is a 10 percent coupon bond. Both bonds have 11 years to maturity, make semiannual payments, and have a yield-to-maturity of 7 percent. If interest rates suddenly rise by 2 percent, what will the percentage change in the price of Bond T be?
Percentage change in price = ($1,068.92 - $1,227.51)/$1,227.51 = -12.92 percent |
AACSB: Analytic
Blooms: Apply Difficulty: 2 Medium EOC: 7-17 Learning Objective: 07-01 Important bond features and types of bonds. Section: 7.1 Topic: Interest rate risk |
120.
|
Technical Sales, Inc. has 6.6 percent coupon bonds on the market with 9 years left to maturity. The bonds make semiannual payments and currently sell for 92.5 percent of par. What is the effective annual yield?
This cannot be solved directly, so it's easiest to just use the calculator method to get an answer. You can then use the calculator answer as the rate in the formula just to verify that your answer is correct. Effective annual rate = [1 + (0.07774/2)]2 - 1 = 7.93 percent |
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium EOC: 7-18 Learning Objective: 07-02 Bond values and yields and why they fluctuate. Section: 7.1 Topic: Effective bond yield |
121.
|
Bonner Metals wants to issue new 18-year bonds for some much-needed expansion projects. The company currently has 11 percent bonds on the market that sell for $1,459.51, make semiannual payments, and mature in 18 years. What should the coupon rate be on the new bonds if the firm wants to sell them at par?
This cannot be solved directly, so it's easiest to just use the calculator method to get an answer. You can then use the calculator answer as the rate in the formula just to verify that your answer is correct. To sell a bond at par, the coupon rate must be set equal to the required return. |
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium EOC: 7-19 Learning Objective: 07-01 Important bond features and types of bonds. Section: 7.1 Topic: Bond yields |
122.
|
You purchase a bond with an invoice price of $1,460. The bond has a coupon rate of 7.5 percent, and there are 3 months to the next semiannual coupon date. What is the clean price of this bond?
Accrued interest = (0.075 × $1,000) × (3/12) = $18.75
Clean price = $1,460 - $18.75 = $1,441.25 |
AACSB: Analytic
Blooms: Apply Difficulty: 2 Medium EOC: 7-20 Learning Objective: 07-01 Important bond features and types of bonds. Section: 7.5 Topic: Accrued interest |
123.
|
Suppose the following bond quote for the Beta Company appears in the financial page of today's newspaper. Assume the bond has a face value of $1,000 and the current date is April 15, 2009. What is the yield to maturity on this bond?
This cannot be solved directly, so it's easiest to just use the calculator method to get an answer. You can then use the calculator answer as the rate in the formula just to verify that your answer is correct. |
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium EOC: 7-23 Learning Objective: 07-05 The term structure of interest rates and the determinants of bond yields. Section: 7.7 Topic: Using bond quotes |
124.
|
You want to have $1.04 million in real dollars in an account when you retire in 38 years. The nominal return on your investment is 8 percent and the inflation rate is 3.5 percent. What is the real amount you must deposit each year to achieve your goal?
(1 + 0.08) = (1 + r) × (1 + 0.035); r = 4.347826 percent
|
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium EOC: 7-28 Learning Objective: 07-04 The impact of inflation on interest rates. Section: 7.6 Topic: Real cash flows |
125.
|
The yield-to-maturity on a bond is the interest rate you earn on your investment if interest rates do not change. If you actually sell the bond before it matures, your realized return is known as the holding period yield. Suppose that today, you buy a 12 percent annual coupon bond for $1,000. The bond has 13 years to maturity. Two years from now, the yield-to-maturity has declined to 11 percent and you decide to sell. What is your holding period yield?
The yield-to-maturity at the time of purchase must be 12 percent, which is the coupon rate, because the bond was purchased at par value.
Yield-to-maturity in 2 years = 12 percent - 1 percent = 11 percent This cannot be solved directly, so it's easiest to just use the calculator method to get an answer. You can then use the calculator answer as the rate in the formula just to verify that your answer is correct. |
AACSB: Analytic
Blooms: Analyze Difficulty: 3 Hard EOC: 7-30 Learning Objective: 07-01 Important bond features and types of bonds. Section: 7.1 Topic: Holding period yield |
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