978-0133507676 chapter 6 Part 4

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20) A 20-year bond with a $1,000 face value was issued with a yield to maturity of 4.3%

and pays coupons semi-annually. After ten years, the yield to maturity is still 4.3% and the

clean price of the bond is $959.71. After three more months go by, what would you expect

the dirty price to be?

A) $978.71

B) $969.21

C) $997.71

D) Cannot be determined from information given.

AACSB Objective: Analytic Skills

Author: JP

Question Status: Revised

21) Under what situation should the clean price, dirty price, and the price calculated by the

basic annuity and present value (PV) equations for a bond be equal?

AACSB Objective: Relective Thinking Skills

Author: SS

Question Status: Revised

6.5 Corporate Bonds

1) Bonds with a high risk of default generally ofer high yields.

AACSB Objective: Analytic Skills

Author: DS

Question Status: Previous Edition

2) The credit spread of a bond shrinks if it is perceived that the probability of the issuer

defaulting increases.

AACSB Objective: Analytic Skills

Author: DS

Question Status: Previous Edition

Use the information for the question(s) below.

3) The above information is for a corporate bond issued by the Markel Corporation. What

sort of bond is this?

A) a high-risk bond

B) an investment grade bond

C) a speculative bond

D) a high-yield bond

AACSB Objective: Relective Thinking Skills

Author: DS

Question Status: Previous Edition

4) Which of the following best describes a bond rated by Standard & Poor’s and Moody as

A) judged to be high quality by all standards

B) considered to be medium grade obligations

C) neither highly protected nor poorly secured

D) generally lacks the characteristics of a desirable investment

AACSB Objective: Analytic Skills

Author: DS

Question Status: Revised

5) Why are the interest rates of U.S. Treasury securities less than the interest rates of

equivalent corporate bonds?

A) The U.S. government has a high credit spread.

B) There is signiicant risk that the U.S. government will default.

C) U.S. Treasury securities are widely regarded to be risk-free.

D) U.S. Treasury securities yield inlation adjusted interest rates.

AACSB Objective: Analytic Skills

Author: DS

Question Status: Previous Edition

Security: Treasury AAA Corporate BBB Corporate B Corporate

Yield (%): 5.2 5.4 6.6 6.9

The above table shows the yields to maturity on a number of three-year, zero-coupon

securities. What is the price per $100 of the face value of a three-year, zero-coupon

corporate bond with a BBB rating?

A) $99.06

B) $115.57

C) $82.55

D) $66.04

AACSB Objective: Analytic Skills

Author: DS

Question Status: Revised

Security: Treasury AAA Corporate BBB Corporate B Corporate

Yield (%): 5.2 5.4 6.8 7.2

The above table shows the yields to maturity on a number of two-year, zero-coupon

securities. What is the credit spread on a two-year, zero-coupon corporate bond with a B

rating?

A) 2.4%

B) 2.0%

C) 2.8%

D) 1.6%

AACSB Objective: Analytic Skills

Author: DS

Question Status: Revised

8) A irm issues two-year bonds with a coupon rate of 6.7%, paid semiannually. The credit

spread for this irm’s two-year debt is 0.8%. New two-year Treasury notes are being issued

at par with a coupon rate of 3.1%. What should the price of the irm’s outstanding two-year

bonds be per $100 of face value?

A) $126.40

B) $147.47

C) $84.27

D) $105.34

AACSB Objective: Analytic Skills

Author: DS

Question Status: Revised

9) A irm issues 5-year bonds with a coupon rate of 4.7%, paid semiannually. The credit

spread for this irm’s 5-year debt is 1.2%. New 5-year Treasury notes are being issued at

par with a coupon rate of 5.1%. What should the price of the irm’s outstanding 5-year

bonds be if their face value is $1,000?

A) $932.28

B) $12.00

C) $1305.19

D) $745.82

AACSB Objective: Analytic Skills

Author: DS

Question Status: Revised

10)

Security:

AAA

Corporate

BBB

Corporate

Yield (%): 5.6 5.7 6.1 6.4 7.0

A mining company needs to raise $100 million in order to begin open-pit mining of a coal

seam. The company will fund this by issuing 30-year bonds with a face value of $1,000 and

a coupon rate of 6.5%, paid annually. The above table shows the yield to maturity for

similar 30-year corporate bonds of diferent ratings. If the company’s bonds are rated A,

what will be their selling price?

A) $1265.37

B) $1476.27

C) $1054.48

D) $843.58

AACSB Objective: Analytic Skills

Author: DS

Question Status: Revised

11)

Security:

AAA

Corporate

BBB

Corporate

Yield (%): 6.2 6.4 6.7 7.0 7.5

Consolidated Insurance wants to raise $35 million in order to build a new headquarters.

The company will fund this by issuing 10-year bonds with a face value of $1,000 and a

coupon rate of 6.3%, paid semiannually. The above table shows the yield to maturity for

similar 10-year corporate bonds of diferent ratings. Which of the following is closest to

how many more bonds Consolidated Insurance would have to sell to raise this money if

their bonds received an A rating rather than an AA rating?

A) 937 bonds

B) 1093 bonds

C) 781 bonds

D) 625 bonds

AACSB Objective: Analytic Skills

Author: DS

Question Status: Revised

12)

Security:

AAA

Corporate

BBB

Corporate

Yield (%): 5.7 5.8 6.0 6.6 6.9

Lloyd Industries raised $28 million in order to upgrade its roller kiln furnace for the

production of ceramic tiles. The company funded this by issuing 15-year bonds with a face

value of $1,000 and a coupon rate of 6.2%, paid annually. The above table shows the yield

to maturity for similar 15-year corporate bonds of diferent ratings issued at the same time.

When Lloyd Industries issued their bonds, they received a price of $962.63. Which of the

following is most likely to be the rating these bonds received?

A) AA

B) A

C) BBB

D) BB

AACSB Objective: Analytic Skills

Author: DS

Question Status: Revised

13) A corporate bond which receives a BBB rating from Standard & Poor’s is considered

________.

A) a junk bond

B) an investment grade bond

C) a defaulted bond

D) a high-yield bond

AACSB Objective: Analytic Skills

Author: JN

Question Status: Revised

14) Consider the following yields to maturity on various one-year, zero-coupon securities:

Security Yield (%)

Treasury 5.5

AAA

Corporate 5.7

BBB

Corporate 6.5

B Corporate 7.1

The price (expressed as a percentage of the face value) of a one-year, zero-coupon

corporate bond with a BBB rating is closest to ________.

A) 112.68

B) 131.46

C) 75.12

D) 93.90

AACSB Objective: Analytic Skills

Author: JN

Question Status: Revised

15) Consider the following yields to maturity on various one-year, zero-coupon securities:

Security Yield (%)

Treasury 5.5

AAA

Corporate 5.7

BBB

Corporate 6.5

B Corporate 7.1

The price (expressed as a percentage of the face value) of a one-year, zero-coupon

corporate bond with a AAA rating is closest to ________.

A) 113.53

B) 132.45

C) 75.69

D) 94.61

AACSB Objective: Analytic Skills

Author: JN

Question Status: Revised