19) Calculate the value of a $1,000 bond which has 10 years until maturity and pays quarterly
interest at an annual coupon rate of 12 percent. The required return on similar-risk bonds is 20
percent.
A) $656.82
B) $835.45
C) $845.66
D) $2,201.08
20) Jia Hua Enterprises wants to issue sixty 20-year, $1,000 par value, zero-coupon bonds. If
each bond is priced to yield 7 percent, how much will Jia Hua receive (ignoring issuance costs)
when the bonds are first sold?
A) $11,212
B) $12,393
C) $15,505
D) $18,880
21) Zheng Corporation plans to issue new bonds to finance its expansion plans. In its efforts to
price the issue, Zheng Corporation has identified a company of similar risk with an outstanding
bond issue that has an 8 percent coupon rate having a maturity of ten years. This firm’s bonds are
currently selling for $1,091.96. If interest is paid annually for both bonds, what must the coupon
rate of the new bonds be in order for the issue to sell at par?
A) 5.78%
B) 6.88%
C) 6.50%
D) 6.71%
22) If the coupon rate of a bond is equal to its required rate of return, then ________.
A) the current value is not equal to par value
B) the current value is equal to par value
C) the maturity value is equal to par value
D) the current value is equal to maturity value
23) Bonds which sell at less than face value are priced at a ________, while bonds which sell at
greater than face value sell at a ________.
A) par; premium
B) discount; par
C) discount; premium
D) coupon; premium
24) The price of a bond with a fixed coupon rate and the required return have a relationship that
is best described as ________.
A) perfect positive correlation
B) constant
C) direct
D) inverse
25) When the required return is constant and equal to the coupon rate, the price of a bond as it
approaches its maturity date will ________.
A) remain at par
B) increase
C) decrease
D) change depending on whether it is a discount or premium bond
26) Interest rate risk and the time to maturity have a relationship that is best characterized as
________.
A) constant
B) varying
C) direct
D) inverse
27) If the required return is less than the coupon rate, a bond will sell at ________.
A) par
B) a discount
C) a premium
D) book value
28) When the required return is constant but different from the coupon rate, the price of a bond
as it approaches its maturity date will ________.
A) remain constant
B) increase
C) decrease
D) approach par
29) If the required return is greater than the coupon rate, a bond will sell at ________.
A) par
B) a discount
C) a premium
D) book value
30) ABC company has two bonds outstanding that are the same except for the maturity date.
Bond D matures in 4 years, while Bond E matures in 7 years. If the required return changes by 5
percent, then ________.
A) bond D will have a greater change in price
B) bond E will have a greater change in price
C) the price of the bonds will be constant
D) the percentage price change for the bonds will be equal
31) Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent annual
coupon interest rate. The issue has ten years remaining to the maturity date. Bonds of similar risk
are currently selling to yield a 12 percent rate of return. The current value of each Hewitt bond is
________.
A) $791.00
B) $1,000
C) $1,052.24
D) $1,113.00
32) A bond will sell ________ when the stated rate of interest exceeds the required rate of return,
________ when the stated rate of interest is less than the required return, and ________ when the
stated rate of interest is equal to the required return.
A) at a premium; at a discount; equal to the par value
B) at a premium; equal to the par value; at a discount
C) at a discount; at a premium; equal to the par value
D) equal to the par value; at a premium; at a discount
33) If a corporate bond is issued with a coupon rate that varies directly with the required return,
the price of the bond will ________.
A) equal the face value
B) be less than the face value
C) be greater than the face value
D) be greater than or less than the face value depending on how interest rates vary
Table 6.2
34) (a) Calculate the current value of Bond L. (See Table 6.2)
(b) What will happen to the value/price as the bond approaches maturity?
35) Calculate the current value of Bond M. (See Table 6.2)
36) Calculate the current value of Bond M if the time of maturity is six years. (See Table 6.2)
61
37) (a) Calculate the current value of Bond N. (See Table 6.2)
(b) What will happen to value/price as the bond approaches maturity?
38) Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent coupon
interest rate outstanding. The issue pays interest semiannually and has 10 years remaining to its
maturity date. Bonds of similar risk are currently selling to yield a 12 percent rate of return.
What is the value of these Hewitt Packing Company bonds?
39) To expand its business, the Kingston Outlet factory would like to issue a bond with par value
of $1,000, coupon rate of 10 percent, and maturity of 10 years from now. What is the value of
the bond if the required rate of return is 1) 8 percent, 2) 10 percent, and 3) 12 percent?
40) To finance a new line of product, the Tangshan Toys has issued a bond with a par value of
$1,000, coupon rate of 8 percent, and maturity of 30 years. Compute the price of the bond if the
opportunity cost is 11 percent.
41) Zhen Yi Computers has an outstanding issue of bond with a par value of $1,000, paying 12
percent coupon rate semi-annually. The bond was issued 25 years ago and has 5 years to
maturity. What is the value of the bond assuming 14 percent rate of interest?
42) Tangshan Coal Inc. just issued a 10 percent, 25-year bond with a $1,000 par value that pays
interest semiannually.
(a) How much can the investor expect in annual interest (in dollars)?
(b) How much can the investor expect in interest every six months (in dollars)?
(c) How much can the investor expect in par value at the end of the 25th year?
43) Yantai Food, Inc. has issued a bond with par value of $1,000, a coupon rate of 9 percent that
is paid semi-annually, and that matures in 10 years. What is the value of the bond if the required
rate of return is 12 percent?
44) Gong Li has recently inherited $10,000 and is considering purchasing 10 bonds of the Lucky
Corporation. The bond has a par value of $1,000 with 10 percent coupon rate and will mature in
10 years. Does Gong Li have enough money to buy 10 bonds if the required rate of return is 9
percent?
6.6 Explain yield to maturity (YTM), its calculation, and the procedure used to value bonds that
pay interest semiannually.
1) Yield to maturity (YTM) is the rate investors earn if they buy the bond at a specific price and
hold it until maturity.
2) The yield to maturity on a bond with a current price equal to its par or face value, will always
be equal to the coupon interest rate.
3) If a bond’s required return always equals its coupon interest rate, the bond’s value will remain
at par until it matures.
4) When a bond’s value differs from par, its yield to maturity will differ from its coupon interest
rate.
5) Yield to call represents the rate of return that investors earn if they buy a callable bond at a
specific price and hold it until it is called back and they receive the call price, which would be set
above the bond’s par value.
6) For an investor who plans to purchase a bond maturing in one year, the primary consideration
should be ________.
A) retained earnings
B) face value
C) yield to maturity
D) net income
7) Yield to maturity on a bond with price equal to its par value will ________.
A) be less than the coupon rate
B) be more than the coupon rate
C) always be equal to the coupon rate
D) be less than or equal to the coupon rate depending on the required return
8) What is the current price of a $1,000 par value bond maturing in 9 years with a coupon rate of
8 percent, paid annually, that has a YTM of 9 percent?
A) $700
B) $945
C) $940
D) $1,062
9) What is the approximate yield to maturity for a $1,000 par value bond selling for $1,120 that
matures in 6 years and pays 12 percent interest annually?
A) 8.5 percent
B) 9.3 percent
C) 12.0 percent
D) 13.2 percent
10) Tangshan Industries has issued a bond which has a $1,000 par value and a 15 percent annual
coupon interest rate. The bond will mature in ten years and currently sells for $1,250. Using this
information, the yield to maturity on the Tangshan Industries bond is ________.
A) 10.79 percent
B) 11.39 percent
C) 12.19 percent
D) 13.29 percent
11) What is the yield to maturity, to the nearest percent, for the following bond: current price is
$908, coupon rate is 11 percent, $1,000 par value, interest paid annually, eight years to maturity?
A) 11 percent
B) 12 percent
C) 13 percent
D) 14 percent
12) What is the current price of a $1,000 par value bond maturing in 12 years with a coupon rate
of 14 percent, paid semiannually, that has a YTM of 13 percent?
A) $604
B) $1,090
C) $1,060
D) $1,073
13) Nico Corp issued bonds bearing a coupon rate of 12 percent, pay coupons semiannually,
have 3 years remaining to maturity, and are currently priced at $940 per bond. What is the yield
to maturity?
A) 12.00%
B) 13.99%
C) 14.54%
D) 15.25%