Question 1

You are buying a bond at a clean price of $1,140.The bond has a face value of $1,000, a coupon rate of 3.8 percent, and pays interest semiannually.The next coupon payment is one month from now.What is the dirty price of this bond?

Accepted Answer

The dirty price of a bond is the clean price plus the accrued interest. The accrued interest is the amount of interest that has accrued since the last coupon payment. In this case, the last coupon payment was one month ago, so the accrued interest is one month's worth of interest, or $15.83. The dirty price of the bond is therefore $1,140 + $15.83 = $1,155.83.

Question 2

If your nominal rate of return is 8.68 percent and your real rate of return is 2.05 percent, what is the inflation rate?

Accepted Answer

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Question 3

A bond yielded a real rate of return of 3.87 percent for a time period when the inflation rate was 3.75 percent.What was the actual nominal rate of return?

Accepted Answer

The nominal rate of return can be calculated using the formula: (1 + nominal rate) = (1 + real rate) * (1 + inflation rate). Plugging in the values: (1 + nominal rate) = (1 + 0.0387) * (1 + 0.0375) = 1.0777. Therefore, the nominal rate is approximately 7.77 percent.

Question 4

You purchase a bond with a coupon rate of 6.15 percent, semiannual coupons, and a clean price of $998.40.If the next coupon payment is due in two months, what is the invoice price?

Accepted Answer

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Question 5

Smiley Industrial Goods has $1,000 face value bonds on the market with semiannual interest payments, 13.5 years to maturity, and a market price of $1,023.At this price, the bonds yield 6.4 percent.What must be the coupon rate on these bonds?

Accepted Answer

The coupon rate is the annual interest payment divided by the face value of the bond. In this case, the annual interest payment is $1,000 * 6.4% / 2 = $32. The face value of the bond is $1,000, so the coupon rate is $32 / $1,000 = 3.2%.

Question 6

Phili Manufacturing, Inc.bonds have a face value of $1,000, a coupon rate of 6.5 percent, semiannual interest payments, and mature in 19 years.What is the current price of these bonds if the yield to maturity is 6.65 percent?

Accepted Answer

The correct answer is C because the current price of the bond is $983.95. This is calculated using the following formula:Bond Price = (C * (1 - (1 + r/2)^(-n*2))) / r + (FV * (1 + r/2)^(-n*2))Where:C = Coupon payment = $1,000 * 6.5% / 2 = $32.50r = Yield to maturity = 6.65% / 2 = 3.325%n = Number of years to maturity = 19FV = Face value = $1,000Plugging these values into the formula, we get:Bond Price = ($32.50 * (1 - (1 + 0.03325)^(-19*2))) / 0.03325 + ($1,000 * (1 + 0.03325)^(-19*2))= $983.95

Question 7

A bond has a $1,000 face value, a market price of $1,023.32, and pays interest payments of $54.00 every year.What is the coupon rate?

Accepted Answer

The coupon rate is calculated by dividing the annual interest payment by the face value of the bond. $54 / $1,000 = 0.054 or 5.40 percent.

Question 8

GN Supply wants to issue new 10-year, $1,000 face value bonds at par.The company currently has 6.35 percent coupon bonds on the market that sell for $983.20, make semiannual interest payments, and mature in 10 years.What coupon rate should the company set on its new bonds?

Accepted Answer

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Question 9

A $1,000 face value bond currently has a yield to maturity of 7.14 percent.The bond matures in sixteen years and pays interest semiannually.The coupon rate is 6.95 percent.What is the current price of this bond?

Accepted Answer

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Question 10

A semiannual 5.4 percent coupon bond currently sells for par value.What is the maturity on this bond?

Accepted Answer

A bond selling at par value means its coupon rate equals the market interest rate. This can occur at any maturity, not just specific ones.

Question 11

Clock and Cane Company.has 6.8 percent, semiannual coupon bonds on the market with twelve years left to maturity.If the bond currently sells for $989.45, what is its YTM?

Accepted Answer

The YTM can be calculated using the formula for the present value of a bond, which equates the present value of the bond's future cash flows to its current price. Given the bond's semiannual coupon rate, current price, and time to maturity, the YTM is approximately 6.93 percent.

Question 12

Keyser Materials has 6.5 percent coupon bonds on the market with 15 years to maturity.The bonds make semiannual payments and currently sell for 102 percent of par.What is the current yield? The YTM? The effective annual yield?

Accepted Answer

The correct answer is A because the current yield is the annual coupon payment divided by the current market price of the bond, which is 6.5% / 1.02 = 6.37%. The YTM is the annual rate of return that equates the present value of the bond's future cash flows to its current market price, which is 6.29%. The effective annual yield is the annual rate of return that takes into account the compounding of interest, which is 6.39%.

Question 13

A company needs to raise $22 million and plans to issue 20-year bonds for this purpose.The required rate of return is7.6 percent in the current market.The company has two issue alternatives: a 7.6 percent coupon and a zero coupon bond.The company's tax rate is 34 percent.At bond maturity, how much will the company need to pay to its bondholders if it issues the coupon bonds? What if it issue the zeros? Assume semiannual compounding for both bond issues.(For simplicity's sake, assume the company can issue a partial bond.)

Accepted Answer

For coupon bonds, the company will pay the face value of $22 million at maturity. For zero-coupon bonds, the future value is calculated using the formula for compound interest, resulting in $97.795 million.

Question 14

Last year, you earned a rate of return of 5.89 percent on your bond investments.During that time, the inflation rate was 1.2 percent.What was your real rate of return?

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Question 15

The 6.4 percent bond of Berberich, Inc.has a yield to maturity of 6.9 percent.The bond matures in eleven years, has a face value of $1,000, and pays semiannual interest payments.What is the amount of each coupon payment?

Accepted Answer

The bond has a 6.4% annual coupon rate, which means it pays 6.4% of its face value in interest each year. The face value is $1,000, so the annual coupon payment is 6.4% of $1,000, which is $64. Since the bond pays interest semiannually, each coupon payment is $64/2 = $32.00.

Question 16

A seventeen-year, semiannual coupon bond is selling for $1,030.The bond has a face value of $1,000 and a yield to maturity of 5.95 percent.What is the coupon rate?

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Question 17

Jeffries, Inc., has semiannual, 6 percent coupon bonds on the market that currently have 11 years left to maturity.If the market rate of return for this bond is 7.13 percent three years from now, what will be the bond's clean price at that time?

Accepted Answer

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Question 18

The 6.9 percent bond of Peters Pickles has a face value of $1,000, a maturity of 15 years, semiannual interest payments, and a yield to maturity of 7.11 percent.What is the current market price of the bond?

Accepted Answer

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Question 19

If Treasury bills are currently paying 3.05 percent and the inflation rate is 1.89 percent, what is the approximate real rate of interest? The exact real rate?

Accepted Answer

The approximate real rate is calculated by subtracting the inflation rate from the nominal rate: 3.05% - 1.89% = 1.16%. The exact real rate is calculated using the formula: (1 + nominal rate) / (1 + inflation rate) - 1, which gives approximately 1.14%.

Question 20

You purchase a bond with an invoice price of $1,108.48.The bond has a coupon rate of 5.5 percent, semiannual coupons, and there are two months to the next coupon date.What is the clean price of the bond?

Accepted Answer

The answer of You purchase a bond with an invoice...

Quiz 6: Interest Rates and Bond Valuation