Question 1

When a bond's coupon rate is higher than the required rate of return, the bond [blank].

Accepted Answer

When a bond's coupon rate is higher than the required rate of return, investors are willing to pay more than the face value of the bond to secure the higher interest payments. This premium is reflected in the price of the bond, which will sell at a premium over par.

Question 2

Aurand Ltd has outstanding bonds with an 8% annual coupon rate paid semi-annually.The bonds have a par value of $1000, a current price of $904, and will mature in 14 years.What is the annual yield to maturity on the bond?

Accepted Answer

The yield to maturity (YTM) can be calculated using the formula for bonds, which considers the present value of future cash flows (coupon payments and par value at maturity) equal to the current price. Given the semi-annual coupon payments, the bond's YTM is approximately 9.24% annually.

Question 3

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

Accepted Answer

This is the basic principle of bond valuation. The value of a bond is determined by discounting the expected cash flows (interest payments and principal repayment) to their present value using an appropriate discount rate.

Question 4

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

Accepted Answer

This statement is true. The concept behind this statement is called duration, which measures how long it takes for a bond's cash flows to be received. The longer the duration, the more sensitive a bond's price will be to changes in interest rates. This is because longer-term bonds have more future cash flows, which are worth less today if interest rates rise. As a result, their prices fall more than those of shorter-term bonds when interest rates rise.

Question 5

Blue's Chips Pty Ltd has a $1000 par value bond that is currently selling for $1300.It has an annual coupon rate of 7%, paid semi-annually, and has nine years remaining until maturity.What is the annual yield to maturity on the bond? (Round to the nearest whole percentage.)

Accepted Answer

The yield to maturity (YTM) on a bond is the internal rate of return (IRR) for an investor if the bond is held until maturity, assuming that all payments are made as scheduled. The YTM can be found using financial calculators or spreadsheet software by inputting the current price, the par value, the coupon payment, and the number of periods until maturity. Given that the bond is selling for $1300, has a $1000 par value, a 7% annual coupon rate paid semi-annually, and nine years to maturity, the YTM calculated would be closest to 3.15% when rounded to the nearest whole percentage. This reflects the bond's price premium (selling for more than its par value) and the time until maturity.

Question 6

You purchased Photon Ltd 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%.

Accepted Answer

The answer of You purchased Photon Ltd bonds exactly one...

Question 7

Miller Motorworks has a $1000 par value, 8% annual coupon bond with interest payable semi-annually with a remaining term of 15 years.The annual market yield on similar bonds is 6%.This bond will at a discount from par.

Accepted Answer

The annual market yield on similar bonds is lower (6%) than the bond's coupon rate (8%), which means the bond will be priced at a premium above its par value to make it equivalent to bonds with a 6% yield.

Question 8

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 semi-annually.The bond is currently selling for $1508.72.What is the yield to maturity on the bonds?

Accepted Answer

The yield to maturity (YTM) on a bond is the interest rate that equates the present value of all future cash flows from the bond (coupon payments and the repayment of the principal) with the bond's current price. Given that the bond's price is above its par value, we can infer that the YTM will be lower than the coupon rate due to the bond's premium status. Among the provided options, 8.50% is the only rate that is lower than the original coupon rate of 14.375%, making it the correct choice.

Question 9

NuStar.has bonds outstanding that mature in 10 years.The bonds have $1000 par value, pay interest annually at a rate of 9%, and have a current selling price of $1125.The yield to maturity on the bonds is less than 9%.

Accepted Answer

The yield to maturity (YTM) is less than the coupon rate when the bond's current selling price is above its par value, as the bond is selling at a premium.

Question 10

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

Accepted Answer

To calculate the bond's current yield, we need to divide the annual coupon payment by the current market price:

Annual coupon payment = Coupon rate x Face value = 6.75% x $1000 = $67.5
Current market price = $865.50

Current yield = Annual coupon payment / Current market price x 100%
= $67.50 / $865.50 x 100%
= 7.8%

Therefore, the correct answer is B) 7.800%.

Question 11

An AAA-rated bond's yield to maturity will be very close to it's expected yield.

Accepted Answer

An AAA-rated bond is considered to be of very high credit quality and therefore has very low default risk. This makes its yield to maturity very close to its expected yield.

Question 12

A bond is most likely to be called when the market rate is lower than the coupon rate.

Accepted Answer

When the market interest rates fall below the coupon rate of a bond, issuers are more likely to call (or redeem) the bond before its maturity to refinance the debt at a lower interest rate, saving on interest expenses.

Question 13

Immersive Technologies has bonds outstanding that mature in 20 years.The bonds have $1000 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%

Accepted Answer

The current yield on the bonds is not 11.63%, as that rate is higher than the stated annual interest rate of 10%. The current yield is actually 10/875.25 = 1.144%, which is lower than 11.63%.

Question 14

Reindeer Corp.plans to issue bonds to expand operations.The bonds will have a par value of $1000, a 10-year maturity, and a coupon interest rate of 9%, paid semi-annually.Current market conditions are such that the bonds will be sold to net $937.79.The yield to maturity of these bonds is 10.65%.

Accepted Answer

The yield to maturity of the bonds is higher than the coupon rate of 9%, which indicates that the bonds are being sold at a discount. Therefore, the net proceeds from the sale of the bonds should be lower than the par value of $1000. Since the net proceeds are $937.79, this confirms that the bonds are being sold at a discount.

Question 15

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

Accepted Answer

A basis point is indeed equal to one-hundredth of a percentage point. For example, an interest rate increase from 2.5% to 2.55% is an increase of 5 basis points.

Question 16

Six years ago, Colt Ltd sold an issue of 30-year, $1000 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.

Accepted Answer

The current market price of the bond is calculated using the present value of future cash flows, which include annual coupon payments and the par value at maturity, discounted at the required rate of return (8.375%). Given the bond's coupon rate of 5.25% and the remaining 24 years to maturity, the intrinsic value is approximately $681.

Question 17

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

Accepted Answer

A bond's spread refers to the difference in yield between two bonds with different credit ratings.

Question 18

Marshall Manufacturing has a bond outstanding that was issued 20 years ago at a coupon rate of 9%.The $1000 par value bond pays interest semi-annually 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?

Accepted Answer

The value of a bond is calculated using the present value of its future cash flows, which include the semiannual interest payments and the principal amount to be received at maturity. The formula for the present value of an annuity (for the interest payments) and the present value of a lump sum (for the principal repayment) are used. Given a 9% annual coupon rate on a $1,000 bond, the semiannual interest payment is $45 ($1,000 * 9% / 2). There are 20 years left until maturity, which means 40 semiannual periods. The current market interest rate is 14% annually, or 7% per semiannual period. Using the present value formulas:- Present value of the semiannual interest payments (Annuity): PV = Pmt * [(1 - (1 + r)^-n) / r] = $45 * [(1 - (1 + 0.07)^-40) / 0.07] ≈ $435.15- Present value of the principal amount (Lump Sum): PV = F / (1 + r)^n = $1,000 / (1 + 0.07)^40 ≈ $300Adding these two components gives the total current value of the bond: ≈ $435.15 + $300 ≈ $735.15.

Question 19

The expected yield of a bond will be less than its yield to maturity when [blank].

Accepted Answer

The answer of The expected yield of a bond will...

Question 20

When a bond's coupon rate is lower than the required rate of return, the bond [blank].

Accepted Answer

When the coupon rate is lower than the required rate of return, investors will demand a discount on the bond price to compensate for the lower interest payment. This discount lowers the price of the bond below its par value, making choice A the correct answer.

Quiz 9: Debt Valuation and Interest Rates