Question 1

A firm issues $200 million in ten-year bonds with an annual coupon rate of 6%.The firm makes a final payment of $68 million on the tenth and final coupon date.If the firm uses a sinking fund to repurchase some of the bond issue on each coupon payment date,what percentage of the issue must they repurchase each year?

Accepted Answer

E) Final coupon payment = 0.06 × 200 = $12 million;
Principal payment = $68 million - $12 million = $56 million;
$200 million - $56 million = $144 million;
144/9 = $16 million;
16/200 = 0.08.

Question 2

In which of the following situations does the value of a convertible bond exceed the value of straight debt or equity by the greatest amount?

Accepted Answer

The answer of In which of the following situations does...

Question 3

A company issues a callable (at par)five-year,7% coupon bond with annual coupon payments.The bond can be called at par in one year after release or any time after that on a coupon payment date.On release,it has a price of $110 per $100 of face value.What is the yield to call of this bond when it is released?

Accepted Answer

B) Using a financial calculator, PV = -110, FV = 100, PMT = 7, N = 1;
computing interest = 2.73%

Question 4

A firm issues $200 million in ten-year bonds with an annual coupon rate of 6%.The firm uses a sinking fund to repurchase 8% of the bond issue on each coupon payment date.What payment must they make on the tenth and final coupon payment date?

Accepted Answer

E) Final coupon payment = 0.06 × 200 = $12 million;
balance principal payment = (1 - 9 × 0.08) × 200 = $56 million;
total payment = $56 million + $12 million = $68 million

Question 5

A callable bond with the call price set equal to the present value of the bond's remaining payments is a

Accepted Answer

The answer of A callable bond with the call price...

Question 6

A company issues a callable (at par)ten-year coupon bond with annual coupon payments.The bond can be called at par in one year after release or any time after that on a coupon payment date.On release,it has a price of $107 per $100 of face value,and has a yield to call of 3.5%.What is the bond's coupon rate?

Accepted Answer

D) Using a financial calculator, FV = 100, PV = -107, N = 1;
Interest = 3.5%. Compute PMT = 10.75

Question 7

A company issues a callable (at par)five-year,7% coupon bond with annual coupon payments.The bond can be called at par in one year after release or any time after that on a coupon payment date.On release,it has a price of $110 per $100 of face value.What is the yield to maturity of this bond when it is released?

Accepted Answer

C) Using a financial calculator, PV = -110, FV = 100, PMT = 7, N = 5;
computing interest = 4.71%

Question 8

A company issues a callable (at par)five-year,7% coupon bond with annual coupon payments.The bond can be called at par in one year after release or any time after that on a coupon payment date.On release,it has a price of $110 per $100 of face value.What is the yield to worst of this bond when it is released?

Accepted Answer

B) Using a financial calculator, PV = -110, FV = 100, PMT = 7, N = 1;
computing interest = 2.73%

Question 9

A company issues a callable (at par)ten-year,7% coupon bond with annual coupon payments.The bond can be called at par in one year after release or any time after that on a coupon payment date.On release,it has a yield to call of 3.1%.What is the price of this bond per $100 of face value when it is released?

Accepted Answer

A) Using a financial calculator, FV = 100, PMT = 7, N = 1;
Interest = 3.1%. Compute PV =-103.78

Question 10

A firm issues $500 million in twenty-year bonds with an annual coupon rate of 5%.The firm uses a sinking fund to repurchase 4% of the bond issue on each coupon payment date.What payment must they make on the first coupon payment date?

Accepted Answer

D) First coupon payment = 0.05 × 500 = $25 million
First principal payment = 0.04 × 500 = $20 million
total payment = $20 million + $25 million = $45 million

Question 11

A company issues a callable (at par)ten-year,7% coupon bond with annual coupon payments.The bond can be called at par in one year after release or any time after that on a coupon payment date.On release,it has a yield to maturity of 3.1%,which is below the yield to call.What is the price of this bond per $100 of face value when it is released?

Accepted Answer

E) Using a financial calculator, FV = 100, PMT = 7, N = 10;
Interest = 3.1%. Compute PV = -133.10

Question 12

A company issues a callable (at par)ten-year,6% coupon bond with annual coupon payments.The bond can be called at par in one year after release or any time after that on a coupon payment date.On release,it has a price of $104 per $100 of face value.What is the yield to maturity of this bond when it is released?

Accepted Answer

D) Using a financial calculator, PV = -104, FV = 100, PMT = 6, N = 10 ;
computing interest = 5.47%

Question 13

A company issues a callable (at par)ten-year,6% coupon bond with annual coupon payments.The bond can be called at par in one year after release or any time after that on a coupon payment date.On release,it has a yield to maturity of 4.8%,which is below the yield to call.What is the price of this bond per $100 of face value when it is released?

Accepted Answer

B) Using a financial calculator, FV = 100, PMT = 6, N = 10;
Interest = 4.8%. Compute PV = -109.36

Question 14

Which of the following statements concerning the use of sinking funds to repurchase a bond issue is most correct?

Accepted Answer

A sinking fund is a fund created by a company to set aside a certain amount of money each year to repay a portion of its bond issue. The company makes periodic payments into the fund, which are used to buy back some of the outstanding bonds. By doing so, the company reduces the amount of outstanding debt without affecting the cash flows of the remaining bonds. This benefits both the bondholders and the company, as the former are guaranteed a portion of their principal back, and the latter is able to reduce its debt burden. Option A is incorrect, as sinking fund payments are made periodically, not at the beginning of the life of the bond. Option C is partially correct, as payments into the sinking fund are held in reserve to retire the bonds, but not to protect the firm from default. Option D is incorrect, as bonds can be issued with both a sinking fund and a call provision. Finally, option E is incorrect, as sinking fund provisions require the issuer to make periodic payments into the sinking fund to retire a portion of the bond issue, not the entire principal balance on the maturity date.

Question 15

A company issues a callable (at par)ten-year,6% coupon bond with annual coupon payments.The bond can be called at par in one year after release or any time after that on a coupon payment date.On release,it has a yield to call of 4.8%.What is the price of this bond per $100 of face value when it is released?

Accepted Answer

A) Using a financial calculator, FV = 100, PMT = 6, N = 1;
Interest = 4.8%. Compute PV =-101.15

Question 16

A company issues a callable (at par)ten-year coupon bond with annual coupon payments.The bond can be called at par in one year after release or any time after that on a coupon payment date.On release,it has a price of $102.50 per $100 of face value,and has a yield to call of 4.8%.What is the bond's coupon rate?

Accepted Answer

D) Using a financial calculator, FV = 100, PV = -102.50, N = 1;
Interest = 4.8%. Compute PMT = 7.42

Question 17

A company issues a callable (at par)ten-year,6% coupon bond with annual coupon payments.The bond can be called at par in one year after release or any time after that on a coupon payment date.On release,it has a price of $104 per $100 of face value.What is the yield to worst of this bond when it is released?

Accepted Answer

B) Using a financial calculator, PV = -104, FV = 100, PMT = 6, N = 1;
computing interest = 1.92%
Using financial calculator, PV = -104 FV = 100 PMT = 6 N =10
computing interest = 5.47%
1.92% is worse than 5.47%; hence, 1.92% is the yield to worst.

Question 18

A firm issues $500 million in twenty-year bonds with an annual coupon rate of 5%.The firm uses a sinking fund to repurchase 4% of the bond issue on each coupon payment date.What payment must they make on the twentieth and final coupon payment date?

Accepted Answer

C) Final coupon payment = 0.05 × 500 = $25 million;
balance principal payment = (1 - 19 × 0.04) × 500 = $120 million;
total payment = $120 million + $25 million = $145 million

Question 19

A firm issues $200 million in ten-year bonds with an annual coupon rate of 6%.The firm uses a sinking fund to repurchase 8% of the bonds on each coupon payment date.What payment must they make on the first coupon payment date?

Accepted Answer

E) First coupon payment = 0.06 × 200 = $12 million
First principal payment = 0.08 × 200 = $16 million
total payment = $12 million + $16 million = $28 million

Question 20

A firm issues $500 million in twenty-year bonds with an annual coupon rate of 5%.The firm makes a final payment of $145 million on the tenth and final coupon date.If the firm uses a sinking fund to repurchase some of the bond issue on each coupon payment date,what percentage of the issue must they repurchase each year?

Accepted Answer

A) Final coupon payment = 0.05 × 500 = $25 million;
Principal payment = $145 million - $25 million = $120 million;
$500 million - $120 million = $380 million;
380/19 = $20 million;
20/500 = 0.04

Quiz 15: Debt Financing