978-0134083285 Chapter 7 Part 3

Unlock access to all the studying documents.

View Full Document

24) Bart’s Moving Company bonds have a 11% coupon rate. Interest is paid semiannually. The bonds

have a par value of $1,000 and will mature 8 years from now. Compute the value of Bart’s Moving

Company bonds if investors’ required rate of return is 9.5%.

A) $1,197.27

B) $1,133.05

C) $1,098.99

D) $1,082.75

Keywords: Intrinsic Value, Required Return, semiannual Coupon Rate, Bond Valuation

Learning Obj.: L.O. 7.6

AACSB: Analytical Thinking

25) Master Craft Control Inc. has bonds that mature in 6 1/2 years with a par value of $1,000. They pay a

coupon rate of 9% with semiannual payments. If the required rate of return on these bonds is 11% what is

the bond’s value?

A) $1,026.73

B) $973.76

C) $1,022.74

D) $908.83

Keywords: Intrinsic Value, Semiannual Interest

Learning Obj.: L.O. 7.6

AACSB: Analytical Thinking

26) Due to a number of lawsuits related to toxic wastes, a major chemical company has recently

experienced a market revaluation. The firm has bonds outstanding that were issued 8 years ago at their

par value of $1,000. These bonds have 12 years to maturity and a coupon rate of 6 percent, with interest

paid semiannually. The required return on these bonds has increased to 14 percent. What is the current

value of one of these bonds?

Keywords: Bond Valuation, Semiannual Interest

Learning Obj.: L.O. 7.6

AACSB: Analytical Thinking

27) A bond with a $1,000 face value and a 10 percent annual coupon rate matures in 15 years.

a. Determine the value of the bond to a friend of yours with a required rate of return of 13%.

b. A zero coupon bond with similar risk is selling for $180. The bond has a face value of $1,000 and

matures in 15 years. Your friend asks you which bond she should invest in, the zero coupon bond or the

bond in part (a). Which bond do you recommend, and why? Assume the market price of the bond in part

(a) is $820.

Keywords: Yield to Maturity, Zero Coupon Bond, Bond Valuation

Learning Obj.: L.O. 7.6

AACSB: Analytical Thinking

28) GAT, Inc. has issued a $1,000 par 4% annual coupon bond that is to mature in 18 years. If your

required rate of return is 6.5%, what price would you be willing to pay for the bond?

Keywords: Intrinsic Value, Required Return

Learning Obj.: L.O. 7.6

AACSB: Analytical Thinking

29) Calculate the value of a bond that is expected to mature in 18 years with a $1,000 face value. The

coupon rate is 4%, and the required rate of return is 8%. Interest is paid annually.

Keywords: Intrinsic Value, Required Return

Learning Obj.: L.O. 7.6

AACSB: Analytical Thinking

30) FYI bonds have a par value of $1,000. The bonds pay $40 in interest every six months and will mature

in 10 years.

a. Calculate the price if the yield to maturity on the bonds is 7, 8, and 9 percent, respectively.

b. Explain the impact on price if the required rate of return decreases.

c. Compute the coupon rate on the bonds. How does the relationship between the coupon rate and the

yield to maturity determine how a bond’s price will compare to it par value?

Keywords: Yield to Maturity, Intrinsic Value, Required Return, Coupon Rate

Learning Obj.: L.O. 7.6

AACSB: Analytical Thinking

Learning Objective 7.7

1) If two bonds have the same yield to maturity, they also have the same current yield.

Keywords: Yield to Maturity, Current Yield

Learning Obj.: L.O. 7.7

AACSB: Analytical Thinking

2) The yield to maturity is the discount rate that equates the present value of the interest and principal

payments with the current market price of the bond.

Keywords: Yield to Maturity

Learning Obj.: L.O. 7.7

AACSB: Reflective Thinking

3) The yield-to-maturity is the discount rate that equates the present value of the interest and principal

payments with the face value of the bond.

Keywords: Yield to Maturity

Learning Obj.: L.O. 7.7

AACSB: Reflective Thinking

4) The current yield is greater than the coupon rate for a bond selling above par value.

Keywords: Current Yield, Coupon Rate, Premium Bond

Learning Obj.: L.O. 7.7

AACSB: Reflective Thinking

5) The less risky the bond (or the higher the bond rating) the lower will be the yield to maturity on the

bond.

Keywords: Bond Rating, Yield to Maturity, Risk

Learning Obj.: L.O. 7.7

AACSB: Reflective Thinking

6) Bond A has a current yield of 6% and Bond B has a current yield of 8%. If the market price of both

bonds is the same, then the yield to maturity on Bond B must be higher than the yield to maturity on

Bond A.

Keywords: Current Yield, Yield to Maturity

Learning Obj.: L.O. 7.7

AACSB: Analytical Thinking

7) The current yield for a bond is constant over time because the coupon rate is fixed.

Keywords: Coupon Rate, Current Yield

Learning Obj.: L.O. 7.7

AACSB: Reflective Thinking

8) A bond’s yield to maturity varies from investor to investor because each investor has his or her own

required return.

Keywords: Yield to Maturity, Required Return

Learning Obj.: L.O. 7.7

AACSB: Reflective Thinking

9) The yield to maturity on a bond

A) is fixed in the indenture.

B) is lower for higher risk bonds.

C) is the required rate of return on the bond.

D) is generally below the coupon interest rate.

Keywords: Yield to Maturity, Required Rate of Return

Learning Obj.: L.O. 7.7

AACSB: Reflective Thinking

10) The yield to maturity on a bond is the rate of return that equates the present value of the bond’s future

cash flows with the bond’s

A) face value.

B) market value.

C) liquidation value.

D) book value.

Keywords: Yield to Maturity

Learning Obj.: L.O. 7.7

AACSB: Reflective Thinking

11) In 2000 Jenson Inc. issued bonds with an 8 percent coupon rate and a $1,000 face value. The bonds

mature on March 1, 2025. If an investor purchased one of these bonds on March 1, 2012, determine the

yield to maturity if the investor paid $1,100 for the bond.

A) 7%

B) The yield to maturity is $900 ($1,000 interest less $100 capital loss).

C) The yield to maturity must be greater than 8% because the price paid for the bond exceeds the face

value.

D) 5.4%

Keywords: Yield to Maturity, Bond Valuation

Learning Obj.: L.O. 7.7

AACSB: Analytical Thinking

12) Which of the following statements is MOST correct?

A) If a bond‘s yield to maturity exceeds its coupon rate, the bond’s current yield (interest yield) must also

exceed its coupon rate.

B) If a bond‘s yield to maturity exceeds its coupon rate, the bond’s price must be less than its maturity

value.

C) If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds

should sell for the same price regardless of the bond‘s coupon rate.

D) Answers B and C are correct.

Keywords: Yield to Maturity, Coupon Rate, Bond Pricing

Learning Obj.: L.O. 7.7

AACSB: Reflective Thinking

13) A Heights Inc. bonds have a coupon rate of 7%, a yield to maturity of 10%, a face value of $1,000, and

mature in 10 years. Which of the following statements is MOST correct?

A) An investor who purchases the bond today will earn a return of 10% if he sells the bond after one year.

B) An investor who purchases the bond today will earn a return of 7% if he sells the bond after one year.

C) An investor who purchases the bond today will earn a return of 17% per year if he holds the bond

until it matures.

D) An investor who purchases the bond today will earn a return of 10% per year if he holds the bond

until it matures.

Keywords: Yield to Maturity

Learning Obj.: L.O. 7.7

AACSB: Reflective Thinking

14) A corporate bond has a coupon rate of 9%, a face value of $1,000, and matures in 15 years. Which of

the following statements is MOST correct?

A) An investor with a required return of 10% will value the bond at more than $1,000.

B) An investor who buys the bond for $900 and holds the bond until maturity will have a capital loss.

C) An investor who buys the bond for $900 will have a yield to maturity on the bond greater than 9%.

D) If the bond’s market price is $900, then the annual interest payments on the bond will be $81.

Keywords: Capital Gains, Maturity Value, Yield to Maturity

Learning Obj.: L.O. 7.7

AACSB: Reflective Thinking

15) PBJ Corporation issued bonds on January 1, 2006. The bonds had a coupon rate of 5.5%, with interest

paid semiannually. The face value of the bonds is $1,000 and the bonds mature on January 1, 2021. What

is the yield to maturity for a PBJ Corporation bond on January 1, 2012 if the market price of the bond on

that date is $950?

A) 5.50%

B) 6.23%

C) 8.43%

D) 10.50%

Keywords: Yield to Maturity, Semiannual Interest

Learning Obj.: L.O. 7.7

AACSB: Analytical Thinking

16) William Corp. bonds have a current yield of 7% and mature in 10 years. Smith Corp. bonds have a

current yield of 5% and mature in 10 years. Given this information, which of the following statements is

MOST correct?

A) William Corp. bonds will have a higher yield to maturity than Smith Corp. bonds.

B) Smith Corp. bonds will sell for a lower price than William Corp. bonds.

C) Smith Corp. bonds are riskier than William Corp. bonds.

D) If both bonds have the same yield to maturity, then the price of Smith Corp. bonds must be less than

the price of William Corp. bonds.

Keywords: Yield to Maturity, Intrinsic Value

Learning Obj.: L.O. 7.7

AACSB: Reflective Thinking

17) While checking the Wall Street Journal bond listings you notice that the price of an AT&T bond is the

same as the price of a K-Mart bond. Based on this information you know that

A) the bond with the lower coupon rate will have the lower current yield.

B) both bonds have the same yield to maturity.

C) both bonds will have the same bond rating.

D) the bond with the longest time to maturity will have the highest yield to maturity.

Keywords: Yield to Maturity, Intrinsic Value, Current Yield

Learning Obj.: L.O. 7.7

AACSB: Reflective Thinking

18) A $1,000 par value 14-year bond with a 10 percent coupon rate recently sold for $965. The yield to

maturity is

A) 10.49%.

B) 10.00%.

C) 8.87%.

D) 6.50%.

Keywords: Yield to Maturity

Learning Obj.: L.O. 7.7

AACSB: Analytical Thinking

19) Which of the following is NOT a definition of yield to maturity?

A) discount rate that equates present value of future cash flows with a bond’s price.

B) investors’ required rate of return on a bond investment.

C) return that an investor will earn if they buy the bond for its market price and hold it until maturity.

D) discount rate that equates present value of future cash flows with a bond’s face value.

Keywords: Yield to Maturity

Learning Obj.: L.O. 7.7

AACSB: Reflective Thinking

20) If the market price of a bond decreases, then

A) the yield to maturity decreases.

B) the coupon rate increases.

C) the yield to maturity increases.

D) the coupon rate decreases.

Keywords: Yield to Maturity, Coupon Rate

Learning Obj.: L.O. 7.7

AACSB: Analytical Thinking

21) Pentrax Corp. issued 25 year bonds in 2002 with a coupon rate of 6% and a face value of $1,000. The

bonds sold for face value when issued. Since 2002, interest rates have increased, so the going rate on

similar bonds is now 9%. Which of the following statements is MOST accurate?

A) An investor who purchased an Pentrax bond in 2002 and plans to keep the bond until it matures

expects to earn 6% per year over the life of the bond.

B) Pentrax Corp. must now pay bondholders interest payments of $90 per year due to the increase in

interest rates.

C) An investor who purchased an Pentrax bond in 2002 and plans to keep the bond until it matures

expects an increase in return from 6% per year to 9% per year.

D) The price of an Pentrax Corp. bond should be higher than $1,000 due to the increase in rates.

Keywords: Yield to Maturity

Learning Obj.: L.O. 7.7

AACSB: Reflective Thinking

22) What is the yield to maturity of a corporate bond with 13 years to maturity, a coupon rate of 8% per

year, a $1,000 par value, and a current market price of $1,250? Assume semiannual coupon payments.

A) 4.2%

B) 4.7%

C) 6.0%

D) 5.3%

Keywords: Yield to Maturity

Learning Obj.: L.O. 7.7

AACSB: Analytical Thinking

23) What is the expected rate of return on a bond that matures in 5 years, has a par value of $1,000, a

coupon rate of 11.5%, and is currently selling for $982? Assume annual coupon payments.

A) 12.5%

B) 12.0%

C) 12.7%

D) 13.4%

Keywords: Yield to Maturity, Expected Rate of Return

Learning Obj.: L.O. 7.7

AACSB: Analytical Thinking

24) What is the yield to maturity of a bond that pays an 5% coupon rate with annual coupon payments,

has a par value of $1,000, matures in 15 years, and is currently selling for $769?

A) 2.4%

B) 5.7%

C) 7.6%

D) 9.5%

Keywords: Yield to Maturity

Learning Obj.: L.O. 7.7

AACSB: Analytical Thinking

25) Visionary TV Corporation bonds are currently priced at $1,088. They have a par value of $1,000 and

12 years to maturity. They pay an annual coupon rate of 6%. What is the yield to maturity on this bond?

A) 6.7%

B) 6.1%

C) 5.4%

D) 5.0%

Keywords: Yield to Maturity

Learning Obj.: L.O. 7.7

AACSB: Analytical Thinking