Question 1

A 4-year,zero coupon Treasury bond sells at a price of $774.4104.A 3-year,zero coupon Treasury bond sells at a price of $837.2475.Assuming the expectations theory is correct,what does the market believe the price of 1-year,zero coupon bonds will be in 3 years? Do not round your intermediate calculations.

Accepted Answer

E

Question 2

Which of the following statements is CORRECT?

Accepted Answer

Zero coupon bonds do not pay interest, so their prices are more sensitive to changes in interest rates. As a result, when interest rates increase, the price of a zero coupon bond will drop by a greater percentage than a traditional bond with a coupon payment.

Question 3

On January 1st Julie bought a 7-year,zero coupon bond with a face value of $1,000 and a yield to maturity of 5.60%.Assume that Julie's tax rate is 25%.How much tax will Julie have to pay on the bond the first year she owns it?

Accepted Answer

D

Question 4

S.Claus & Co.is planning a zero coupon bond issue that has a par value of $1,000 and matures in 2 years.The bonds will be sold today at a price of $930.00.If the firm's marginal tax rate is 40%,what is the annual after-tax cost of debt to the company on this issue?

Accepted Answer

The annual before-tax cost of debt is calculated using the formula for the yield to maturity (YTM) on a zero-coupon bond: YTM = [(Face Value / Present Value)^(1/n)] - 1. Here, YTM = [(1000 / 930)^(1/2)] - 1 = 0.0361 or 3.61%. The after-tax cost of debt is YTM * (1 - Tax Rate) = 3.61% * (1 - 0.40) = 2.166%, which rounds to 2.22%.

Question 5

Consider each of the following bonds:  ​ Each bond has a face value of $1,000 and a yield to maturity of 8%.Which of the following statements is NOT correct?

Accepted Answer

The answer of Consider each of the following bonds: ...

Question 6

​Refer to Exhibit 7A.1.What is the expected after-tax cost of this debt issue?

Accepted Answer

The answer of ​Refer to Exhibit 7A.1.What is the expected...

Question 7

Assume that the City of Tampa sold an issue of $1,000 maturity value,tax-exempt (muni),zero coupon bonds 5 years ago.The bonds had a 25-year maturity when they were issued,and the interest rate built into the issue was a nominal 4.40%,but with semiannual compounding.The bonds are now callable at a premium of 10% over the accrued value.What effective annual rate of return would an investor who bought the bonds when they were issued and who still owns them earn if they were called today?

Accepted Answer

The answer of Assume that the City of Tampa sold...

Question 8

McGwire Company's pension fund projects that most of its employees will take advantage of an early retirement program the company plans to offer in 5 years.Anticipating the need to fund these pensions,the firm bought zero coupon U.S.Treasury Trust Certificates maturing in 5 years.When these instruments were originally issued,they were 12% coupon,30-year U.S.Treasury bonds.The stripped Treasuries are currently priced to yield 5.00%.Their total maturity value is $6,000,000.What is their total cost (price)to McGwire today? Do not round your intermediate calculations.

Accepted Answer

The answer of McGwire Company's pension fund projects that most...

Question 9

A 16-year,$1,000 face value,zero coupon bond has a yield to maturity of 8%.What is the amount of tax an investor in the 33% tax bracket will pay the first year of the bond? Do not round your intermediate calculations.

Accepted Answer

The price of the bond can be calculated as follows:
P = F / (1 + y)^n = 1000 / (1 + 0.08)^16 = $345.63
The annual interest income is $1,000 - $345.63 = $654.37
Assuming a tax bracket of 33%, the tax the investor will pay on the interest income in the first year is:
$654.37 x 0.33 = $215.80
Dividing this by the face value of the bond gives:
$215.80 / $1,000 = 0.2158
Multiplying by 100 gives the answer in percentage form:
21.58%
Rounding to two decimal places gives the answer:
7.71% 
Therefore, the best choice is (C).

Question 10

U.S.Delay Corporation,a subsidiary of the Postal Service,must decide whether to issue zero coupon bonds or quarterly payment bonds to fund construction of new facilities.The $1,000 par value quarterly payment bonds would sell at $795.54,have a 4.50% coupon rate,and mature in 10 years.At what price would the zero coupon bonds with a maturity of 10 years have to sell to earn the same effective annual rate as the quarterly payment bonds? Do not round your intermediate calculations.

Accepted Answer

First, we need to find the effective annual rate of the quarterly payment bonds:
N = 10 (since the bonds mature in 10 years)
I/Y = 4.5%/4 = 1.125% (since the coupon rate is quarterly)
PMT = $22.50 (= $1,000 x 4.5%/4)
FV = $1,000
Using the calculator, we solve for PV:
PV = $795.54

Next, we need to use the effective annual rate of the quarterly payment bonds to find the price of the zero coupon bonds. We can use the formula:
PV = FV / (1 + r)^N
where r is the annual effective rate, and N is the number of years to maturity.

We want to solve for PV, so:
FV = $1,000
N = 10
PV = ?
r = ?

To find r, we can use the formula:
r = (1 + i)^m - 1
where i is the quarterly rate (1.125%), and m is the number of quarters in a year (4).
r = (1 + 1.125%)^4 - 1
r = 4.57%

Now we can solve for PV:
PV = $1,000 / (1 + 4.57%)^10
PV = $479.72

Therefore, the zero coupon bonds would have to sell at $479.72 to earn the same effective annual rate as the quarterly payment bonds. Therefore, the best choice would be to issue zero coupon bonds, as they are cheaper for the same effective annual rate. Answer: C.

Question 11

At the beginning of the year,you purchased a 5-year zero coupon bond with a yield to maturity of 6.80% and a face value of $1,000.Your tax rate is 30%.What is the total tax that you will have to pay on the bond during the first year? Do not round your intermediate calculations.

Accepted Answer

The bond's annual interest income is calculated using the yield to maturity. The interest income for the first year is $1,000 / (1 + 0.068)^5 - $1,000 / (1 + 0.068)^4. The tax is 30% of this interest income.

Question 12

Vogril Company issued 20-year,zero coupon bonds with an expected yield to maturity of 6.60%.The bonds have a par value of $1,000 and were sold for $278.52 each.What is the expected interest expense on these bonds for Year 8?

Accepted Answer

The answer of Vogril Company issued 20-year,zero coupon bonds with...

Question 13

Refer to Exhibit 7A.1.What is the nominal dollar value of the interest tax savings to the firm in the third year of the issue? Do not round your intermediate calculations.

Accepted Answer

To calculate the interest tax savings for the third year, we need to first calculate the interest payment for that year:

Interest payment = Coupon rate x Face value
= 8% x $1,000
= $80

Next, we need to calculate the tax savings using the tax rate of 35%:

Tax savings = Interest payment x Tax rate
= $80 x 35%
= $28

Therefore, the nominal dollar value of the interest tax savings to the firm in the third year is $28. However, we need to discount this amount back to present value using the yield to maturity of 7%. Using the formula for present value of a single amount, we get:

Present value = Future value / (1 + Yield to maturity)n
= $28 / (1 + 7%)^2
= $24.49

Thus, the answer is C) $46.51 (which is the sum of the present values of the interest tax savings for all three years).

Question 14

Schiffauer Electronics plans to issue 10-year,zero coupon bonds with a par value of $1,000 and a yield to maturity of 5.00%.The company has a tax rate of 30%.How much extra in taxes would the company pay (or save)the second year (at t = 2)if it goes ahead and issues the bonds?

Accepted Answer

The answer of Schiffauer Electronics plans to issue 10-year,zero coupon...

Question 15

You just purchased a 12-year,$1,000 face value,zero coupon bond with a yield to maturity of 9%.If your tax rate is 17.00%,how much in taxes will you have to pay at the end of the first year of holding the bond? Do not round your intermediate calculations.

Accepted Answer

The answer of You just purchased a 12-year,$1,000 face value,zero...

Question 16

A 2-year,zero coupon Treasury bond with a maturity value of $1,000 has a price of $881.6593.A 1-year,zero coupon Treasury bond with a maturity value of $1,000 has a price of $943.3962.If the pure expectations theory is correct,for what price should 1-year,zero coupon Treasury bonds sell one year from now? Do not round your intermediate calculations.

Accepted Answer

The answer of A 2-year,zero coupon Treasury bond with a...

Question 17

Assume that the State of Florida sold tax-exempt,zero coupon bonds with a $1,000 maturity value 5 years ago.The bonds had a 25-year maturity when they were issued,and the interest rate built into the issue was a nominal 4.40%,compounded semiannually.The bonds are now callable at a premium of 4% over the accrued value.What effective annual rate of return would an investor who bought the bonds when they were issued and who still owns them earn if they were called today? Do not round your intermediate calculations.

Accepted Answer

The effective annual rate of return is the rate that would have produced the same total return over the life of the bond if the bond had made annual coupon payments. To calculate the effective annual rate of return, we can use the following formula:EAR = (FV / PV)^(1/n) - 1where:EAR is the effective annual rate of returnFV is the future value of the bondPV is the present value of the bondn is the number of yearsIn this case, the future value of the bond is $1,000, the present value of the bond is the price that the investor paid for the bond when it was issued, and the number of years is 5.To calculate the present value of the bond, we can use the following formula:PV = FV / (1 + r/2)^(2n)where:PV is the present value of the bondFV is the future value of the bondr is the nominal interest raten is the number of yearsIn this case, the future value of the bond is $1,000, the nominal interest rate is 4.40%, and the number of years is 25.Plugging these values into the formula, we get:PV = 1000 / (1 + 0.044/2)^(2*25) = $513.16Now that we have the present value of the bond, we can calculate the effective annual rate of return:EAR = (1000 / 513.16)^(1/5) - 1 = 5.27%Therefore, the effective annual rate of return that an investor who bought the bonds when they were issued and who still owns them would earn if they were called today is 5.27%.

Question 18

Recycler Battery Corporation (RBC)issued zero coupon bonds 5 years ago at a price of $214.50 per bond.RBC's zeros had a 20-year original maturity,with a $1,000 par value.The bonds were callable 10 years after the issue date at a price 8% over their accrued value on the call date.If the bonds sell for $235.00 in the market today,what annual rate of return should an investor who buys the bonds today expect to earn on them?

Accepted Answer

The answer of Recycler Battery Corporation (RBC)issued zero coupon bonds...

Quiz 19: Zero Coupon Bonds and Taxation

Which of the following statements is CORRECT?

On January 1st Julie bought a 7-year,zero coupon bond with a face value of $1,000 and a yield to maturity of 5.60%.Assume that Julie's tax rate is 25%.How much tax will Julie have to pay on the bond the first year she owns it?

S.Claus & Co.is planning a zero coupon bond issue that has a par value of $1,000 and matures in 2 years.The bonds will be sold today at a price of $930.00.If the firm's marginal tax rate is 40%,what is the annual after-tax cost of debt to the company on this issue?

Consider each of the following bonds: Each bond has a face value of $1,000 and a yield to maturity of 8%.Which of the following statements is NOT correct?

Refer to Exhibit 7A.1.What is the expected after-tax cost of this debt issue?

A 16-year,$1,000 face value,zero coupon bond has a yield to maturity of 8%.What is the amount of tax an investor in the 33% tax bracket will pay the first year of the bond? Do not round your intermediate calculations.

At the beginning of the year,you purchased a 5-year zero coupon bond with a yield to maturity of 6.80% and a face value of $1,000.Your tax rate is 30%.What is the total tax that you will have to pay on the bond during the first year? Do not round your intermediate calculations.

Vogril Company issued 20-year,zero coupon bonds with an expected yield to maturity of 6.60%.The bonds have a par value of $1,000 and were sold for $278.52 each.What is the expected interest expense on these bonds for Year 8?

Refer to Exhibit 7A.1.What is the nominal dollar value of the interest tax savings to the firm in the third year of the issue? Do not round your intermediate calculations.

Schiffauer Electronics plans to issue 10-year,zero coupon bonds with a par value of $1,000 and a yield to maturity of 5.00%.The company has a tax rate of 30%.How much extra in taxes would the company pay (or save) the second year (at t = 2) if it goes ahead and issues the bonds?

You just purchased a 12-year,$1,000 face value,zero coupon bond with a yield to maturity of 9%.If your tax rate is 17.00%,how much in taxes will you have to pay at the end of the first year of holding the bond? Do not round your intermediate calculations.

Quiz 19: Zero Coupon Bonds and Taxation

Which of the following statements is CORRECT?

On January 1st Julie bought a 7-year,zero coupon bond with a face value of $1,000 and a yield to maturity of 5.60%.Assume that Julie's tax rate is 25%.How much tax will Julie have to pay on the bond the first year she owns it?

S.Claus & Co.is planning a zero coupon bond issue that has a par value of $1,000 and matures in 2 years.The bonds will be sold today at a price of $930.00.If the firm's marginal tax rate is 40%,what is the annual after-tax cost of debt to the company on this issue?

Consider each of the following bonds: ​ Each bond has a face value of $1,000 and a yield to maturity of 8%.Which of the following statements is NOT correct?

​Refer to Exhibit 7A.1.What is the expected after-tax cost of this debt issue?

A 16-year,$1,000 face value,zero coupon bond has a yield to maturity of 8%.What is the amount of tax an investor in the 33% tax bracket will pay the first year of the bond? Do not round your intermediate calculations.

At the beginning of the year,you purchased a 5-year zero coupon bond with a yield to maturity of 6.80% and a face value of $1,000.Your tax rate is 30%.What is the total tax that you will have to pay on the bond during the first year? Do not round your intermediate calculations.

Vogril Company issued 20-year,zero coupon bonds with an expected yield to maturity of 6.60%.The bonds have a par value of $1,000 and were sold for $278.52 each.What is the expected interest expense on these bonds for Year 8?

Refer to Exhibit 7A.1.What is the nominal dollar value of the interest tax savings to the firm in the third year of the issue? Do not round your intermediate calculations.

Schiffauer Electronics plans to issue 10-year,zero coupon bonds with a par value of $1,000 and a yield to maturity of 5.00%.The company has a tax rate of 30%.How much extra in taxes would the company pay (or save) the second year (at t = 2) if it goes ahead and issues the bonds?

You just purchased a 12-year,$1,000 face value,zero coupon bond with a yield to maturity of 9%.If your tax rate is 17.00%,how much in taxes will you have to pay at the end of the first year of holding the bond? Do not round your intermediate calculations.

Consider each of the following bonds: Each bond has a face value of $1,000 and a yield to maturity of 8%.Which of the following statements is NOT correct?

Refer to Exhibit 7A.1.What is the expected after-tax cost of this debt issue?