Download sc5_h - Homework Market

1. How much will the coupon payments be of a 20-year $500 bond with a 8% coupon rate and
quarterly payments?
2. An investor holds a Ford bond with a face value of $5000, a coupon rate of 4%, and
semiannual payments that matures on 01/15/2009. How much will the investor receive on
01/15/2009?
3. A university issues a bond with a face value of $10,000 and a coupon rate of 5.65% that
matures on 07/15/2015. The holder of such a bond receives coupon payments of $282.50. How
frequently are coupon payments made in this case? (Monthly, quarterly, semiannually or
annually?
4. Which of the following is true about the face value of a bond?
It is the notional amount we use to compute coupon payments.
It is the amount that is repaid at maturity.
It is usually denominated in standard increments, such as $1,000.
All of the above are true.
5. What is the yield to maturity of a one-year, risk-free, zero-coupon bond with a $10,000 face
value and a price of $9600 when released? (percentage)
6. Why is the yield to maturity of a zero-coupon, risk-free bond that matures at the end of a
given period the risk-free interest rate for that period?
Since such a bond provides a risk-free return over that period, the Law of One Price
guarantees the risk-free interest rate be equal to this yield.
Since a bond's price will converge on its face value as the bond approaches the maturity
date, the Law of One Price dictates that the risk-free interest rate will reflect this convergence.
Since interest rates will rise and fall in response to the movement in bond prices.
Since there is, by definition, no risk in investing in such bonds, the return from such
bonds is the best that can be expected from any investment over the period.
7. A risk-free, zero-coupon bond with a face value of $1,000 has 15 years to maturity. If the
YTM is 5.8%, which of the following would be closest to the price this bond will trade at?
8. A risk-free, zero-coupon bond with a $5000 face value has ten years to maturity. The bond
currently trades at $3650. What is the yield to maturity of this bond? (percentage)
9. Which of the following statements is FALSE?
The amount of each coupon payment is determined by the coupon rate of the bond.
Prior to its maturity date, the price of a zero-coupon bond is always greater than its face value.
The simplest type of bond is a zero-coupon bond.
Treasury bills are U.S. government bonds with a maturity of up to one year.
10. Which of the following statements is FALSE?
The internal rate of return (IRR) of an investment in a zero-coupon bond is the rate of
return that investors will earn on their money if they buy a default free bond at its current price
and hold it to maturity.
The yield to maturity of a bond is the discount rate that sets the future value (FV) of the
promised bond payments equal to the current market price of the bond.
Financial professionals also use the term spot interest rates to refer to the default-free
zero-coupon yields.
When we calculate a bond's yield to maturity by solving the formula,
Price of an n-period bond = + + ... + , 1 + YTM)
the yield we compute will be a rate per coupon interval.
11. Consider a zero-coupon bond with a $1000 face value and ten years left until maturity. If the
YTM of this bond is 10.4%, then the price of this bond?
12. Consider a zero-coupon bond with a $1000 face value and ten years left until maturity. If the
bond is currently trading for $459, then the yield to maturity on this bond is?
13. What is the yield to maturity of a five-year, $5000 bond with a 4.5% coupon rate and
semiannual coupons if this bond is currently trading for a price of $4876?
14. What must be the price of a $10,000 bond with a 6.5% coupon rate, semiannual coupons,
and two years to maturity if it has a yield to maturity of 8% APR?
15. A $1000 bond with a coupon rate of 5.4% paid semiannually has five years to maturity
and a yield to maturity of 7.5%. If interest rates rise and the yield to maturity increases to
7.8%, what will happen to the price of the bond?
fall by $9.82
fall by $11.59
rise by $12.16
The price of the bond will not change.
16. What is the coupon rate of a two-year, $10,000 bond with semiannual coupons and a price
of $9543.45, if it has a yield to maturity of 6.8%?
17. Which of the following bonds will be most sensitive to a change in interest rates?
a ten-year bond with a $2000 face value whose yield to maturity is 5.8% and coupon
rate is 5.8% APR paid semiannually
a 15-year bond with a $5000 face value whose yield to maturity is 7.4% and coupon
rate is 6.2% APR paid annually
a 20-year bond with a $3000 face value whose yield to maturity is 6.0% and coupon
rate is 5.4% APR paid semiannually
a 30-year bond with a $1000 face value whose yield to maturity is 5.5% and coupon
rate is 6.4% APR paid annually
18. Which of the following bonds is trading at par?
a bond with a $2000 face value trading at $1987
a bond with a $1000 face value trading at $999
a bond with a $1000 face value trading at $1000
a bond with a $2000 face value trading at $2012
19. Which of the following bonds is trading at a premium?
a five-year bond with a $2000 face value whose yield to maturity is 7.0% and coupon
rate is 7.2% APR paid semiannually
a ten-year bond with a $4000 face value whose yield to maturity is 6.0% and coupon
rate is 5.9% APR paid semiannually
a 15-year bond with a $10,000 face value whose yield to maturity is 8.0% and coupon
rate is 7.8% APR paid semiannually
a two-year bond with a $50,000 face value whose yield to maturity is 5.2% and
coupon rate is 5.2% APR paid monthly
20. Which of the following statements are true?
A fall in bond prices causes interest rates to fall.
A fall in interest rates causes a fall in bond prices.
A rise in interest rates causes bond prices to fall.
Bond prices and interest rates are not connected.
21. A bond has a $1000 face value, ten years to maturity, and 7% semiannual coupon
payments. What would be the expected difference in this bond's price immediately before and
immediately after the next coupon payment?
$18
$35
$70
$84
22. Which of the following bonds will be most sensitive to a change in interest rates?
a ten-year bond with a $2000 face value whose yield to maturity is 5.8% and coupon
rate is 5.8% APR paid semiannually
a 15-year bond with a $5000 face value whose yield to maturity is 7.4% and coupon
rate is 6.2% APR paid annually
a 20-year bond with a $3000 face value whose yield to maturity is 6.0% and coupon
rate is 5.4% APR paid semiannually
a 30-year bond with a $1000 face value whose yield to maturity is 5.5% and coupon
rate is 6.4% APR paid annually
23. A company issues a ten-year bond at par with a coupon rate of 6% paid semi-annually.
The YTM at the beginning of the third year of the bond (8 years left to maturity) is 7.8%.
What is the new price of the bond?
24. A company issues a ten-year bond at par with a coupon rate of 6% paid semi-annually.
The YTM at the beginning of the third year of the bond (8 years left to maturity) is 7.8%.
What was the percentage change in the price of the bond over the past two years?
11.81%
-43.04%
-10.56%
75.55%
Use the information for the question(s) below.
Luther Industries needs to raise $25 million to fund a new office complex. The company plans
on issuing ten-year bonds with a face value of $1000 and a coupon rate of 7.0% (annual
payments). The following table summarizes the YTM for similar ten-year corporate bonds of
various credit ratings:
Rating
YTM
AAA
6.70%
AA
6.80%
A
7.00%
BBB
7.40%
BB
8.00%
25. Assuming that Luther's bonds receive a AAA rating, the price of the bonds will be closest
to: (Points : 1)
$1021
$1014
$1000
$937
26. Suppose that when these bonds were issued, Luther received a price of $972.42 for each
bond. What is the likely rating that Luther's bonds received? (Points : 1)
AA
BBB
B
A