**9.1 Overview of Corporate Debt**

1) The par value of a bond

A) never equals its market value.

B) is determined by the investor.

C) generally is $1,000.

D) is never returned to the bondholder.

2) The interest on corporate bonds is typically paid

A) semiannually.

B) annually.

C) quarterly.

D) monthly.

3) On any given day, a bond can be issued at

A) a discount.

B) a premium.

C) par.

D) all of the above.

4) Advantages to borrowing in the private market include

A) less restrictive covenants.

B) reduced initial costs.

C) lower interest costs.

D) avoiding future SEC registration.

5) Advantages of privately placing debt include all of the
following except

A) speed.

B) reduced placement costs.

C) restrictive covenants.

D) flexibility.

6) Corporate debt can be privately placed with

A) union pension funds.

B) life insurance companies.

C) state pension funds.

D) all of the above

7) Which of the following is generally NOT a characteristic
of a bond?

A) Voting rights

B) Par value

C) Claims on assets and income

D) Indenture

8) The detailed legal agreement between a bond's issuer and
its trustees is known as the

A) collateral agreement.

B) call provision.

C) indenture.

D) covenant.

9) The issuance of bonds to raise capital for a corporation

A) magnifies the returns to the stockholders.

B) increases risk to the stockholders.

C) is a cheaper form of capital than the issuance of common
stock.

D) all of the above.

10) A(n)________ is used to outline the issuing company's
contractual obligations to bondholders.

A) mortgage

B) debenture

C) bond rating

D) indenture

11) Bonds with ratings lower than Standard & Poor's BBB
or Moody's Baa are classified as

A) in default.

B) investment grade.

C) not investment grade.

D) medium quality.

12) Which of the following features allows a borrower to
redeem or repurchase a bond issue before its maturity date?

A) The call provision

B) Convertibility

C) Floating rate

D) The priority of claims

13) The par value of a corporate bond indicates the level
of interest payments that will be paid to investors.

Answer: FALSE

14) Any unsecured long-term debt instrument is a debenture.

Answer: TRUE

15) A conversion feature confers the option of redeeming a
bond for the company's stock rather than cash.

Answer: TRUE

16) The debenture is the legal agreement between the firm
issuing a bond and the bond trustee who represents the bondholders.

Answer: FALSE

17) The current yield is the average rate of interest a
bond will from the time of purchase until it matures.

Answer: FALSE

18) If the issuing company becomes insolvent, the claims of
the bondholders are honored before those of preferred stockholders.

Answer: TRUE

**9.2 Valuing Corporate Debt**

1) The yield to maturity on a bond

A) is fixed in the indenture.

B) is lower for higher-risk bonds.

C) is the required return on the bond.

D) is generally equal to the coupon interest rate.

2) All of the following affect the value of a bond EXCEPT

A) investors' required rate of return.

B) the recorded value of the firm's assets.

C) the coupon rate of interest.

D) the maturity date of the bond.

3) A $1,000 par value 10-year bond with a 10% coupon rate
recently sold for $900. The yield to maturity

A) is 10%.

B) is greater than 10%.

C) is less than 10%.

D) cannot be determined.

4) Sterling Corp. bonds pay 10% annual interest and are
selling at 97. The market rate of interest

A) is less than 10%.

B) is greater than 10%.

C) equals 10%.

D) cannot be determined.

5) The Blackburn Group has recently issued 20-year,
unsecured bonds rated BB by Moody's. These bonds yield 443 basis points above
the U.S. Treasury yield of 2.76%. The
yield to maturity on these bonds is

A) 4.43%.

B) 7.19%.

C) 12.23%.

D) mortgage bonds.

6) Colby & Company bonds pay semiannual interest of
$50. They mature in 15 years and have a par value of $1,000. The market rate of
interest is 8%. The market value of Colby bonds is (round to the nearest
dollar)

A) $1,173.

B) $743.

C) $1,000.

D) $827.

7) Caldwell, Inc. sold an issue of 30-year, $1,000 par
value bonds to the public. The bonds carry a 10.85% coupon rate and pay
interest semiannually. It is now 12 years later. The current market rate of
interest on the Caldwell bonds is 8.45%. What is the current market price
(intrinsic value) of the bonds? Round off to the nearest $1.

A) $751

B) $1,177

C) $1,220

D) $976

8) MI has a $1,000 par value, 30-year bond outstanding that
was issued 20 years ago at an annual coupon rate of 10%, paid semiannually. Market
interest rates on similar bonds are 7%. Calculate the bond's price.

A) $956.42

B) $1,000.00

C) $1,168.31

D) $1,213.19

9) Davis & Davis issued $1,000 par value bonds at 102.
The bonds pay 12% interest annually and mature in 30 years. The market rate of
interest is (round to the nearest hundredth of a percent)

A) 12.00%.

B) 11.71%.

C) 10.12%.

D) 11.29%.

10) What is the yield to maturity of a nine-year bond that
pays a coupon rate of 20% per year, has a $1,000 par value, and is currently
priced at $1,407? Assume annual coupon payments.

A) 21.81%

B) 6.14%

C) 12.28%

D) 11.43%

11) What is the expected rate of return on a bond that
matures in seven years, has a par value of $1,000, a coupon rate of 14%, and is
currently selling for $911? Assume
annual coupon payments.

A) 7.81%

B) 15.36%

C) 15.61%

D) 16.22%

12) What is the expected rate of return on a bond that pays
a coupon rate of 9% paid semi-annually, has a par value of $1,000, matures in
five years, and is currently selling for $1071?

A) 7.28%

B) 8.40%

C) 3.64%

D) 4.21%

13) What is the value of a bond that has a par value of
$1,000, a coupon rate of $80 (annually), and matures in 11 years? Assume a
required rate of return of 11%, and round your answer to the nearest $10.

A) $320.66

B) $1,011.00

C) $813.80

D) $790.79

14) What is the value of a bond that matures in three
years, has an annual coupon payment of $110, and a par value of $1,000? Assume
a required rate of return of 11%, and round your answer to the nearest $10.

A) $970

B) $1,330

C) $330

D) $1,000

15) Bond ratings directly affect a bond's

A) spread over the Treasury yield.

B) coupon rate.

C) maturity date.

D) call provisions.

16) The discount rate used to value a bond is

A) the coupon interest rate.

B) determined by the issuing company.

C) fixed for the life of the bond.

D) the market rate of interest.

17) As interest rates, and consequently investors' required
rates of return, change over time, the ________ of outstanding bonds will also
change.

A) maturity date

B) coupon interest payment

C) par value

D) price

18) Mango Company bonds pay a semiannual coupon rate of
6.4%. They have eight years to maturity and face value, or par, of $1,000.
Compute the value of Mango bonds if investors' required rate of return is 5%.

A) $1,090.48

B) $883.66

C) $1,006.83

D) $950.00

19) Terminator Bug Company bonds have a 14% coupon rate.
Interest is paid semiannually. The bonds have a par value of $1,000 and will
mature 10 years from now. Compute the value of Terminator bonds if investors'
required rate of return is 12%.

A) $1,114.70

B) $1,149.39

C) $894.06

D) $1,000.00

20) Brookline, Inc. just sold an issue of 30-year bonds for
$1,107.20. Investors require a rate of return on these bonds of 7.75%. The
bonds pay interest semiannually. What is the coupon rate of the bonds?

A) 7.750%

B) 11.072%

C) 9.375%

D) 8.675%

21) Applebee sold an issue of 30-year, $1,000 par value
bonds to the public. The coupon rate of 8.75% is payable annually. It is now
five years later, and the current market rate of interest is 7.25%. What is the
current market price (intrinsic value) of the bonds? Round off to the nearest
$1.

A) $715

B) $1,171

C) $1,225

D) $697

22) Six years ago, Colt, Inc. sold an issue of 30-year,
$1,000 par value bonds. The coupon rate of 5.25% is payable annually. Investors
presently require a rate of return of 8.375%. What is the current market price
(intrinsic value) of the bonds? Round off to the nearest $1.

A) $1,050

B) $932

C) $681

D) $1,111

23) Blue's Chips Inc. has a $1,000 par value bond that is
currently selling for $1,300. It has an annual coupon rate of 7%, paid
semiannually, and has nine years remaining until maturity. What is the

*annual*yield to maturity on the bond? (Round to the nearest whole percentage.)
A) 3.15%

B) 1.57%

C) 3.12%

D) 6.24%

24) You are considering the purchase of Hytec bonds that
were issued 14 years ago. When the bonds were originally sold, they had a
30-year maturity and a 14.375% coupon interest rate that is payable
semiannually. The bond is currently selling for $1,508.72. What is the yield to
maturity on the bonds?

A) 8.50%

B) 14.38%

C) 11.11%

D) 7.67%

25) Aurand, Inc. has outstanding bonds with an 8% annual
coupon rate paid semiannually. The bonds have a par value of $1,000, a current
price of $904, and will mature in 14 years. What is the annual yield to
maturity on the bond?

A) 15.80%

B) 10.47%

C) 9.24%

D) 7.90%

E) 4.62%

26) Marshall Manufacturing has a bond outstanding that was
issued 20 years ago at a coupon rate of 9%. The $1,000 par value bond pays
interest semiannually and was originally issued with a term of 30 years. If
today's interest rate is 14%, what is the value of the bond today?

A) $654.98

B) $735.15

C) $814.42

D) $941.87

27) A $1,000 par value bond is currently listed as selling
at 92 1/8. This means

A) that you can buy the bond for $92.125.

B) that you can buy the bond for $921.25.

C) that if you purchase the bond today, you will receive
$921.25 when the bond matures.

D) none of the above.

28) You paid $865.50 for a corporate bond that has a 6.75%
coupon rate. What is the bond's current yield?

A) 8.375%

B) 7.800%

C) 15.001%

D) 6.667%

29) A $1,000 par value bond with a 12% coupon rate
currently selling for $825 has a current yield of

A) 14.55%.

B) 12.44%.

C) 7.27%.

D) 5.61%.

30) When a bond's coupon rate is higher than the required
rate of return, the bond

A) will sell at a discount from par.

B) will sell at a premium over par.

C) may sell at either a discount or a premium.

D) will sell at par value.

31) Miller Motorworks has a $1,000 par value, 8% annual
coupon bond with interest payable semiannually with a remaining term of 15
years. The annual market yield on similar bonds is 6%. This bond will at a discount from par.

Answer: FALSE

32) Lambda Co. has bonds outstanding that mature in 10
years. The bonds have $1,000 par value, pay interest annually at a rate of 9%,
and have a current selling price of $1,125. The yield to maturity on the bonds
is less than 9%.

Answer: TRUE

33) Generic, Inc. has bonds outstanding that mature in 20
years. The bonds have $1,000 par value, pay interest annually at a rate of 10%,
and have a current selling price of $875.25. The current yield on the bonds is
11.63%.

Answer: FALSE

34) A basis point is equal to one hundredth of a percentage
point.

Answer: TRUE

35) A bond's "spread" refers to the difference
between it's Moody's rating and its Standard & Poors rating.

Answer: FALSE

36) A bond issued by Pomme Computers has a coupon rate of
#5 paid semi-annually. If the market's
required rate of return on this bond is also 3%, the bond will sell at par
value.

Answer: TRUE

37) Dry Seal plans to issue bonds to expand operations. The
bonds will have a par value of $1,000, a 10-year maturity, and a coupon
interest rate of 9%, paid semiannually. Current market conditions are such that
the bonds will be sold to net $937.79.
The yield-to-maturity of these bonds is 10%.

Answer: FALSE

38) You purchased Photon, Inc. bonds exactly one year ago
today for $875. During the latest year, you received $65 in interest on the
bonds. The current yield on these bonds is 6.5%.

Answer: FALSE

39) A AAA rated bond's yield to maturity will be very close
to it's expected yield.

Answer: TRUE

40) The longer the time to maturity, the more sensitive a
bond's price to changes in market interest rates.

Answer: TRUE

41) A bond's value equals the present value of interest and
principal the owner will receive.

Answer: TRUE

42) The higher the bond rating, the more default risk
associated with the bond.

Answer: FALSE

43) Bond ratings measure the interest rate risk of a given
bond issue.

Answer: FALSE

44) When referring to bonds, expected rate of return and
yield to maturity are often used interchangeably.

Answer: TRUE

45) Investment grade bonds are rated BB or lower.

Answer: FALSE

46) The current yield of a bond will equal its coupon rate
when the bond is selling at par value.

Answer: TRUE

47) The better the bond rating, the lower the rate of
return demanded in the capital markets.

Answer: TRUE

48) The sensitivity of a bond's value to changing interest
rates depends on both the bond's time to maturity and its pattern of cash
flows.

Answer: TRUE

49) Compare and contrast current yield and yield to
maturity.

Answer: The current
yield is a measure of the one-year return on a bond if purchased today. The
current yield is calculated by taking a bond's annual coupon payment and
dividing by its market price. Yield to maturity measures the return on a bond
if it is held to maturity. The yield to maturity is that discount rate that
would make the present value of the expected future cash flows exactly equal to
the market price at time of calculation. In an efficient market, the yield to
maturity will reflect the market rate of interest and required return of
bondholders.

50) BCD's $1,000 par value bonds currently sell for
$798.50. The coupon rate is 10%, paid semiannually. If the bonds have five
years before maturity, what is the yield to maturity or expected rate of
return?

Answer: N=10,
PV=-798.50, PMT=50, FV=1000, solve for i=8.00 semi-annual rate, 8.00% × 2 = 16%

51) If you are willing to pay $1,392.05 for a 15-year,
$1,000 par value bond that pays 10% interest semiannually, what is your
expected rate of return?

Answer: N=30,
PV=-1,392.05, PMT=50, FV=1000, solve for i=2.99 semi-annual rate, 2.99 % × 2 =
6%

52) DAH, Inc. has issued a 12% bond that is to mature in
nine years. The bond had a $1,000 par value, and interest is due to be paid
semiannually. If your required rate of return is 10%, what price would you be
willing to pay for the bond?

Answer:

N=18, i=5, PMT=60, FV=1000, solve for PV=.-1116.90

Price = $1,116.90

53) The market price of a 20-year, $1,000 bond that pays 9%
interest semiannually is $774.31. What is the bond's yield to maturity?

Answer: N=40,
PV=-774.31, PMT=45, FV=1000, solve for i=6.00 semi-annual rate, 6.00 × 2 = 6%

54) Calculate the value of a bond that is expected to
mature in 13 years with a $1,000 face value. The interest coupon rate is 8%,
and the required rate of return is 10%. Interest is paid annually.

Answer:

N=13, i=5, PMT=80, FV=1000, solve for PV=.-1116.90

Price = $1,116.90

55) Garvin, Inc.'s bonds have a par value of $1,000. The
bonds pay semiannual interest of $40 and mature in five years.

a. How much would you pay for Garvin bonds if your required rate of
return is 10%?

b. How much would you pay if your required rate of return is 8%?

Answer:

a. N=10,
i=5, PMT=40, FV=1000, solve for PV=-922.78

*Price = $922.78*

b. Price
= $1,000

56) Given the following information, determine the market
value of EAO Company bonds.

Par value $1,000

Coupon rate 10%

Years to maturity 6

Market rate 8%

Interest paid semiannually

Answer:

N=12, i=4, PMT=50, FV=1000, solve for PV=-1093.85

Price = $1,093.85

**9.3 Bond Valuation: Four Key Relationships**

1) If the market price of a bond increases, then

A) the yield to maturity decreases.

B) the coupon rate increases.

C) the yield to maturity increases.

D) none of the above.

2) If current market interest rates rise, what will happen
to the value of outstanding bonds?

A) It will rise.

B) It will fall.

C) It will remain unchanged.

D) There is no connection between current market interest
rates and the value of outstanding bonds.

3) If current market interest rates fall, what will happen
to the value of outstanding bonds?

A) It will rise.

B) It will fall.

C) It will remain unchanged.

D) There is no connection between current market interest
rates and the value of outstanding bonds.

4) Cassel Corp. bonds pay an annual coupon rate of 10%. If
investors' required rate of return is now 8% on these bonds, they will be
priced at

A) par value.

B) a premium to par value.

C) a discount to par value.

D) cannot be determined from information given.

5) Which of the following statements is true?

A) A bond that has a rating of AA is considered to be a
junk bond.

B) A bond will sell at a premium if the prevailing required
rate of return is less than the bond's coupon rate.

C) A zero coupon is a bond that is secured by a lien on
real property.

D) The legal document that describes all of the terms and
conditions of a bond issue is called a debenture agreement.

6) Quirk Drugs sold an issue of 30-year, $1,000 par value
bonds to the public that carry a 10.85% coupon rate, payable semiannually. It
is now 10 years later, and the current market rate of interest is 9.00%. If
interest rates remain at 9.00% until Quirk's bonds mature, what will happen to
the value of the bonds over time?

A) The bonds will sell at a premium and decline in value
until maturity.

B) The bonds will sell at a discount and rise in value
until maturity.

C) The bonds will sell at a premium and rise in value until
maturity.

D) The bonds will sell at a discount and fall in value
until maturity.

7) Which of the following statements is true?

A) When investors' required rate of return equals the
bond's coupon rate, then the market value of the bond may be selling at par
value.

B) When investors' required rate of return exceeds the
bond's coupon rate, then the market value of the bond will be greater than par
value.

C) When investors' required rate of return is less than the
bond's coupon rate, then market value of the bond will be greater than par
value.

D) When investors' required rate of return is less than the
bond's coupon rate, then the market value of the bond will be less than par
value.

8) A bond with a face value of $1,000 has annual coupon
payments of $100 and was issued seven years ago. The bond currently sells for
$1,085, has eight years left to maturity. This bond's ________ must be less
than 10%.

A) current yield

B) coupon rate

C) current yield and coupon rate

D) yield to maturity and current yield

Answer: D

9) A bond has a coupon rate of 6% paid semi-annually, a par
value of $1,000, and matures tomorrow.
The bond will sell for

A) approximately $1,030 .

B) approximately $1,000.

C) approximately $1,060.

D) The price cannot be estimated without knowing the market
rate of interest.

10) Which of the following statements about bonds is true?

A) Bond prices move in the same direction as market
interest rates.

B) If market interest rates change, long-term bonds will
fluctuate more in value than short-term bonds.

C) Long-term bonds are less risky than short-term bonds.

D) If market interest rates are higher than a bond's coupon
interest rate, then the bond will sell above its par value.

E) None of the above.

11) Which of the following statements about bonds is true?

A) As the maturity date of a bond approaches, the market
value of a bond will become more volatile.

B) Long-term bonds have less interest rate risk than do
short-term bonds.

C) Bond prices move in the same direction as market
interest rates.

D) If market interest rates are above a bond's coupon
interest rate, then the bond will sell below its par value.

12) Which of the following statements about bonds is true?

A) The market value of a bond moves in the opposite
direction of market interest rates.

B) As the maturity date of a bond approaches, the market
value of a bond will become more volatile.

C) Long-term bonds are less risky than short-term bonds.

D) If market interest rates are higher than a bond's coupon
interest rate, then the bond will sell above its par value.

E) None of the above.

13) A bond investor seeking capital gains should purchase

A) bonds with short maturity dates when interest rates are
expected to rise.

B) bonds with distant maturity dates when interest rates
are expected to rise.

C) bonds with short maturity dates when interest rates are
expected to decline.

D) bonds with distant maturity dates when interest rates
are expected to decline.

14) Which of the following statements about bonds is true?

A) If market interest rates are below a bond's coupon
interest rate, then the bond will sell above its par value.

B) Long-term bonds have less interest rate risk than do
short-term bonds.

C) Bond prices move in the same direction as market
interest rates.

D) As the maturity date of a bond approaches, the market
value of a bond will become more volatile.

15) Bonds cannot be worth less than their book value.

Answer: FALSE

16) So long as a bond sells for an amount above its par
value, the coupon interest rate and yield to maturity remain equal.

Answer: FALSE

17) As market interest rates increase, bond prices
decrease.

Answer: TRUE

18) Bonds that sell at a discount have a coupon rate lower
than the market interest rate.

Answer: TRUE

19) Bonds with a longer time to maturity have less interest
rate risk.

Answer: FALSE

20) As investors' required rate of return on a bond
increases, the value of the bond increases also.

Answer: FALSE

21) As the maturity date of a bond approaches, the bond's
market value approaches its par value.

Answer: TRUE

22) Shorter-term bonds have greater interest rate risk than
do longer-term bonds.

Answer: FALSE

23) Why are longer-term bonds more sensitive to changes in
interest rates than shorter-term bonds?

Answer: Longer-term
bonds are more price-sensitive to changes in interest rates because there are
more cash flows remaining whose values are affected by the change. Since
shorter-term bonds have fewer cash flows remaining, price sensitivity to change
in interest rates will be lower. In addition, as the bond gets closer to
maturity, the present value of the maturity payment gets less and less
volatile. Duration is a measure of how responsive a bond's price is to changing
interest rates. Duration is higher for long-term bonds than for short-term
bonds.

**9.4 Types of Bonds**

1) Eurobonds are

A) issued in a country different from the one in whose
currency the bond is denominated.

B) issued only in Europe.

C) the European equivalent of a junk bond.

D) none of the above.

2) Which of the following statements about zero coupon
bonds is FALSE?

A) When the bonds mature, the issuing firm is faced with a
small cash outflow relative to the cash inflow the firm receives when the bonds
are initially issued.

B) Zero coupon bonds have lower interest rate risk than
bonds with high coupons.

C) Zero coupon bonds are an extremely popular way for
corporations to borrow money.

D) Most zero coupon bonds in the U.S. are government
issues.

3) Which of the following bond types has the greatest risk
for investors?

A) Debentures

B) Mortgage bonds

C) Floating rate bonds

D) Subordinated debentures

4) The holder of a non-amortizing bonds

A) receives no periodic interest payments.

B) receives the full par value of the bond when it matures.

C) receives shares of common stock rather than cash
interest payments.

D) receives periodic payments that consist of both interest
and principal.

5) Junk bonds

A) pay little or no interest.

B) are commonly used to finance municipal waste disposal
facilities.

C) are issued by the U. S. Treasury Department.

D) have yields that are considerably higher than those of
the highest rated bonds.

6) Debentures are unsecured long-term debt.

Answer: TRUE

7) Zero coupon bonds are disadvantageous to the issuing
firm if interest rates fall.

Answer: TRUE

8) Eurobonds are bonds issued in a country different from
the one in whose currency the bond is denominated.

Answer: TRUE

9) Convertible bonds can be exchanged for the issuing
firm's common stock at a price specified at the time of issue.

Answer: TRUE

**9.5 Determinants of Interest**

1) The nominal interest rate

A) does not include inflation.

B) includes inflation and the real rate of interest.

C) ignores the Fisher effect.

D) is the rate at which banks lend money to other banks.

2) Government bonds have lower yield to maturity than do
corporate bonds of the same maturity because the ________ premium is lower for
government bonds.

A) interest rate risk

B) inflation

C) default

D) maturity

3) The Fisher effect can be expressed mathematically as

A) ( nominal rate)= (the real rate of interest) ( the
inflation rate).

B) (1+ the nominal rate)= (1+the real rate of interest) (1
+ the inflation rate).

C) the nominal
rate)= the real rate of interest + the inflation rate).

D) the real rate of interest= the nominal rate - the
inflation rate).

4) The yield on a corporate bond with a 20 year maturity
would include

A) only the real rate of interest and expected inflation.

B) the risk-free rate multiplied by 1+ default rate.

C) the risk-free rate plus a default risk premium, a
liquidity risk premium and a maturity risk premium.

D) the real rate of interest, the expected inflation rate
and a default risk premium.

5) Pursuant to the Fisher Effect, the real interest rate is
exactly equal to the nominal interest rate less the rate of inflation.

Answer: FALSE

6) When inflation rates go up, bond prices go up as well.

Answer: FALSE

7) As the time to maturity increases, the maturity premium
increases.

Answer: TRUE

8) Maturity risk and liquidity risk are equivalent terms.

Answer: FALSE

9) Maturity risk and liquidity risk are equivalent terms.

Answer: FALSE

10) Long-term government bonds are not without maturity
risk.

Answer: TRUE

11) Explain why an increase in the inflation rate will
cause the yield to maturity on a bond to increase.

Answer: When the
inflation rate increases, it means that the risk free rate of return will
increase. This happens because investors need to make some real return, even on
a risk free investment. This means that in order to keep the real rate of
return constant, when the inflation rate goes up, the nominal interest rate
goes up as well. Consequently, to maintain the same real rate of return, the
nominal rate must go up, which in turn raises the required return, or yield to
maturity.

12) What elements determine what the yield to maturity will
be for a bond?

Answer: The starting
point is the risk free rate, a rate for a bond with no risks. A short term
treasury bill reflects the risk free rate. The risk free rate comprises the
real rate of return plus an inflation premium, so that the investor can earn
the real return. If one knows the nominal risk free rate and the inflation
rate, one can determine the real rate through the Fisher effect. When there is
a possibility of default, the investor must receive a default premium to
reflect that risk. Finally, there is the risk that the yield to maturity of the
bond may change over the life of the bond, possibly lowering its value. This
risk is reflected by the investor adding a maturity premium to the required
return. In summary, the yield to maturity will be the real return, plus
premiums for inflation, default, and maturity.

13) Given the anticipated rate of inflation (i) of 6.3% and
the real rate of interest (R) of 4.7%, find the nominal rate of interest (r).

Answer:

r = R + i + iR

r = .047 + 0.63 + (.063)(.047)

r = 11.3%

14) If provided the nominal rate of interest (r) of 14.2%
and the anticipated rate of inflation (i) of 5.5%, what is the real rate of
interest (R)?

Answer:

r = R + i + iR

.142 = R + .055 + (.055)(R)

.142 - .055 = 1.055R + .055 - .055

.087 = 1.055R

R = 8.2%

15) Given the anticipated rate of inflation (i) of 6.13%
and the real rate of interest (R) of 7.56%, what is the true inflation premium?

Answer: We know the
inflation premium to equal i + iR or = 0.0613 + (.0613)(.0756) = 6.59%

Regarding this question,

ReplyDelete6) Quirk Drugs sold an issue of 30-year, $1,000 par value bonds to the public that carry a 10.85% coupon rate, payable semiannually. It is now 10 years later, and the current market rate of interest is 9.00%. If interest rates remain at 9.00% until Quirk's bonds mature, what will happen to the value of the bonds over time?

A) The bonds will sell at a premium and decline in value until maturity.

B) The bonds will sell at a discount and rise in value until maturity.

C) The bonds will sell at a premium and rise in value until maturity.

D) The bonds will sell at a discount and fall in value until maturity.

when i calculated it i got 1339.1 for 20 years and 1405.09 for 10 years. so it increases

what shoul the price of a bond be that has a par value of 1000 dollars, an annual coupon of 40 dollars, a rate of 5% and a maturity of 10yrs? Round your answer to the nearest hundredth please slove this

ReplyDelete