Question 1

If 10-year T-bonds have a yield of 6.2%, 10-year corporate bonds yield 8.5%, the maturity risk premium on all 10-year bonds is 1.3%, and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond?

Accepted Answer

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Question 2

CMS Corporation's balance sheet as of today is as follows:

The bonds have a 4.0% coupon rate, payable semiannually, and a par value of $1, 000.They mature exactly 10 years from today.The yield to maturity is 12%, so the bonds now sell below par.What is the current market value of the firm's debt?

Accepted Answer

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Question 3

The Gergen Group's 5-year bonds yield 6.85%, and 5-year T-bonds yield 4.75%.The real risk-free rate is r* = 2.80%, the default risk premium for Gergen's bonds is DRP = 0.85% versus zero for T-bonds, the liquidity premium on Gergen's bonds is LP = 1.25%, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1)´ 0.1%, where t = number of years to maturity.What is the inflation premium (IP)on 5-year bonds?

Accepted Answer

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Question 4

Sommers Co.'s bonds currently sell for $1, 080 and have a par value of $1, 000.They pay a $100 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1, 125.What is their yield to maturity (YTM)?

Accepted Answer

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Question 5

Meacham Enterprises' bonds currently sell for $1, 280 and have a par value of $1, 000.They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1, 050.What is their yield to call (YTC)?

Accepted Answer

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Question 6

Curtis Corporation's noncallable bonds currently sell for $1, 165.They have a 15-year maturity, an annual coupon of $95, and a par value of $1, 000.What is their yield to maturity?

Accepted Answer

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Question 7

Perry Inc.'s bonds currently sell for $1, 150.They have a 6-year maturity, an annual coupon of $85, and a par value of $1, 000.What is their current yield?

Accepted Answer

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Question 8

Jerome Corporation's bonds have 15 years to maturity, an 8.75% coupon paid semiannually, and a $1, 000 par value.The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1, 050.What is the bond's nominal yield to call?

Accepted Answer

First, use the given data to find the bond's current price.Then use that price to find the YTC. 11ea1b84_8b95_45b7_a54a_0dcc36b1a217_TB3581_00

Question 9

McCurdy Co.'s Class Q bonds have a 12-year maturity, $1, 000 par value, and a 5.75% coupon paid semiannually (2.875% each 6 months), and those bonds sell at their par value.McCurdy's Class P bonds have the same risk, maturity, and par value, but the P bonds pay a 5.75% annual coupon.Neither bond is callable.At what price should the annual payment bond sell?

Accepted Answer

These two bonds should provide the same EFF%.Therefore, we can find the EFF% for the semiannual bond and then use it as the YTM for the annual payment bond.At the calculated price, the two bonds will have YTMs with the same EFF%.Note too that the semiannual payment bond must have a higher price than the annual bond because then it receives the same cash flow, but faster.Therefore Bond A must sell at a price below the $1, 000 par value at which S sells. 11ea1b84_8b95_6cc9_a54a_2d5116cd2550_TB3581_00

Question 10

Squire Inc.'s 5-year bonds yield 6.75%, and 5-year T-bonds yield 4.80%.The real risk-free rate is r* = 2.75%, the inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Squire's bonds is DRP = 1.20% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1)´ 0.1%, where t = number of years to maturity.What is the liquidity premium (LP)on Squire's bonds?

Accepted Answer

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Question 11

Field Industries' outstanding bonds have a 25-year maturity and $1, 000 par value.Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $850.What is the bond's nominal (annual)coupon interest rate?

Accepted Answer

First, use the data provided to find the dollar coupon payment per 6 months, then multiply by 2 to get the annual coupon, and then divide by the par value to find the coupon rate.One could use the indicated data and solve for the price.It would be $850, which confirms the rate. 11ea1b84_8b95_1ea6_a54a_173174112c48_TB3581_00

Question 12

One year ago Lerner and Luckmann Co.issued 15-year, noncallable, 7.5% annual coupon bonds at their par value of $1, 000.Today, the market interest rate on these bonds is 5.5%.What is the current price of the bonds, given that they now have 14 years to maturity?

Accepted Answer

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Question 13

Chandler Co.'s 5-year bonds yield 7.00%, and 5-year T-bonds yield 5.15%.The real risk-free rate is r* = 3.0%, the inflation premium for 5-year bonds is IP = 1.75%, the liquidity premium for Chandler's bonds is LP = 0.75% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1)´ 0.1%, where t = number of years to maturity.What is the default risk premium (DRP)on Chandler's bonds?

Accepted Answer

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Question 14

A 25-year, $1, 000 par value bond has an 8.5% annual coupon.The bond currently sells for $875.If the yield to maturity remains at its current rate, what will the price be 5 years from now?

Accepted Answer

First find the YTM at this time, then use the YTM with the other data to find the bond's price 5 years hence. 11ea1b84_8b95_6cc8_a54a_11c6a9150c25_TB3581_00

Question 15

Sentry Corp.bonds have an annual coupon payment of 7.25%.The bonds have a par value of $1, 000, a current price of $1, 125, and they will mature in 13 years.What is the yield to maturity on these bonds?

Accepted Answer

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Question 16

Haswell Enterprises' bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1, 000.The going interest rate (rd)is 4.75%, based on semiannual compounding.What is the bond's price?

Accepted Answer

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Question 17

Currently, Bruner Inc.'s bonds sell for $1, 250.They pay a $120 annual coupon, have a 15-year maturity, and a $1, 000 par value, but they can be called in 5 years at $1, 050.Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future.What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM.)

Accepted Answer

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Question 18

Gilligan Co.'s bonds currently sell for $1, 150.They have a 6.75% annual coupon rate and a 15-year maturity, and are callable in 6 years at $1, 067.50.Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future.Under these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds, the YTC or the YTM?

Accepted Answer

If the coupon rate exceeds the YTM, then it is likely that the bonds will be called and replaced with new, lower coupon bonds.In that case, the YTC will be earned.Otherwise, one should expect to earn the YTM. 11ea1b84_8b94_a96f_a54a_55c475d09d1f_TB3581_00

Question 19

Rogoff Co.'s 15-year bonds have an annual coupon rate of 9.5%.Each bond has face value of $1, 000 and makes semiannual interest payments.If you require an 11.0% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

Accepted Answer

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Question 20

Reinegar Corporation is planning two new issues of 25-year bonds.Bond Par will be sold at its $1, 000 par value, and it will have a 10% semiannual coupon.Bond OID will be an Original Issue Discount bond, and it will also have a 25-year maturity and a $1, 000 par value, but its semiannual coupon will be only 6.25%.If both bonds are to provide investors with the same effective yield, how many of the OID bonds must Reinegar issue to raise $3, 000, 000? Disregard flotation costs, and round your final answer up to a whole number of bonds.

Accepted Answer

The par bond has a coupon rate of 10% and a periodic rate of 5%, and it sells at par.Therefore, the going nominal rate must be 10%.The OID bond must provide the same EFF%, because it is equally risky.Therefore, it must be evaluated with the parameters shown below to find its price, which is then used to find the number of bonds issued. 11ea1b84_8b95_93da_a54a_3b671b3992bd_TB3581_00

Quiz 5: Bonds, bond valuation, and interest rates

If 10-year T-bonds have a yield of 6.2%, 10-year corporate bonds yield 8.5%, the maturity risk premium on all 10-year bonds is 1.3%, and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond?

CMS Corporation's balance sheet as of today is as follows: The bonds have a 4.0% coupon rate, payable semiannually, and a par value of $1, 000.They mature exactly 10 years from today.The yield to maturity is 12%, so the bonds now sell below par.What is the current market value of the firm's debt?

Sommers Co.'s bonds currently sell for $1, 080 and have a par value of $1, 000.They pay a $100 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1, 125.What is their yield to maturity (YTM) ?

Meacham Enterprises' bonds currently sell for $1, 280 and have a par value of $1, 000.They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1, 050.What is their yield to call (YTC) ?