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CFIN4
Chapter 6 – Bonds (Debt) – Characteristics and Valuation
88. Refer to Gargoyle Unlimited. What is the expected after-tax cost of this debt issue?
a. 11.20%
b. 4.48%
c. 6.72%
d. 6.10%
e. 4.00%
89. Trickle Corporation's 12 percent coupon rate, semiannual payment, $1,000 par value bonds which mature in 25
years. The bonds currently sell for $1,230.51 in the market, and the yield curve is flat. Assuming that the yield
curve is expected to remain flat, what is Trickle's most likely before-tax cost of debt if it issues new bonds today?
a. 4.78%
b. 6.46%
c. 7.70%
d. 9.56%
e. 12.92%
90. Leyland Enterprises has $5,000,000 in bonds outstanding. The bonds each have a maturity value of $1,000, an
annual coupon of 12 percent, and 15 years left until maturity. The bonds can be called at any time at a call price of
$1,100 per bond. If the bonds are called, the company must pay flotation costs of $50,000 ($10 for every $1,000 of
bonds outstanding). Ignore tax considerations. Assume that the tax rate is zero. The company's decision whether to
call the bonds depends critically on the current interest rate it would pay on new bonds issued. What is the
breakeven interest rate, below which it is profitable to call in the bonds?
a. 10.51%
b. 11.21%
c. 12.57%
d. 13.33%
e. 14.89%
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Chapter 6 – Bonds (Debt) – Characteristics and Valuation
91. 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 10 percent annual coupon rate, and mature in ten 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?
a. $274.50
b. $271.99
c. $198.89
d. $257.52
e. $254.84
92. A 15-year zero coupon bond has a yield to maturity of 8 percent and a maturity value of $1,000. What is the
amount of tax that an investor in the 30 percent tax bracket would pay during the first year of owning the bond?
a. $7.57
b. $10.41
c. $15.89
d. $20.44
e. $25.22
93. Two years ago, Targeau Corporation issued BBB rated bonds and the risk premium was 2.42 percentage points as
marked up on long-term U.S. government bonds. The firm's bonds had a 10-year maturity, were semiannual payme
percent coupon bonds with a $1,000 par value, and were originally priced at $973.17. Currently, Targeau's BBB-rat
bonds have 8 years to maturity and are priced at $1,070.43. The current risk premium on BBB rated bonds is 1.3
percentage points. By how many percentage points did the long-term government bond rates change in two years?
a. −0.38%
b. −1.12%
c. −0.62%
d. −0.50%
e. −1.50%
94. Semiannual payment bonds with the same risk (Aaa) and maturity (20 years) as your company's bonds have a simp
yield of 9 percent. Your company's treasurer is thinking of issuing at par some $1,000 par value, 20-year, quarterly p
bonds. She has asked you to determine what quarterly interest payment, in dollars, the company would have to set i
provide the same effective annual rate (EAR) as those on the 20-year, semiannual payment bonds. What would the
interest payment be, in dollars?
a. $45.00
b. $25.00
c. $22.25
d. $27.50
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Chapter 6 – Bonds (Debt) – Characteristics and Valuation
e. $23.00
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Chapter 6 – Bonds (Debt) – Characteristics and Valuation
95. Assume that the State of Florida sold tax-exempt, zero coupon bonds with a $1,000 maturity value 5 years ago. The
had a 25-year maturity when they were issued, and the interest rate built into the issue was 8 percent, compounded
semiannually. The bonds are now callable at a premium of 4 percent over the accrued value. What effective annual
return would an investor who bought the bonds when they were issued and who still owns them earn if they were ca
today?
a. 4.41%
b. 6.73%
c. 8.25%
d. 9.01%
e. 9.52%
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Chapter 6 – Bonds (Debt) – Characteristics and Valuation
96. You are offered a $1,000 par value bond which has a stepped-up coupon interest rate. The annual coupon rate is 10
percent coupon, payable semiannually ($50 each 6 months) for the first 15 years, and then the annual coupon increa
to 13 percent, also payable semiannually, for the next 15 years. The first interest payment will be made 6 months fro
today, and the $1,000 principal amount will be returned at the end of Year 30. You currently have savings in an
account which is earning a 9 percent simple rate, but with quarterly compounding; this is your opportunity cost for
purposes of analyzing the bond. What is the value of the bond to you today?
a. $1,614.53
b. $1,419.18
c. $1,306.21
d. $1,250.25
e. $1,155.98
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Chapter 6 – Bonds (Debt) – Characteristics and Valuation
97. Tony's Pizzeria plans to issue bonds with a par value of $1,000 and 10 years to maturity. These bonds will pay $45
interest every 6 months. Current market conditions are such that the bonds will be sold to net $937.79. What is the
YTM of the issue as a broker would quote it to an investor?
a. 11%
b. 10%
c. 9%
d. 8%
e. 7%
98. The current market price of Smith Corporation's 10 percent, 10-year bonds is $1,297.58. A 10 percent coupon
interest rate is paid semiannually, and the par value is equal to $1,000. What is the YTM (stated on a simple, or
annual, basis) if the bonds mature 10 years from today?
a. 8%
b. 6%
c. 4%
d. 2%
e. 1%
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Chapter 6 – Bonds (Debt) – Characteristics and Valuation
99. A $1,000 par value bond sells for $1,216. It matures in 20 years, has a 14 percent coupon, pays interest semiannually
can be called in 5 years at a price of $1,100. What is the bond's YTM?
a. 6.05%
b. 10.00%
c. 10.06%
d. 8.59%
e. 11.26%
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Chapter 6 – Bonds (Debt) – Characteristics and Valuation
100. You have just been offered a $1,000 par value bond for $847.88. The coupon rate is 8 percent, payable annually,
and interest rates on new issues of the same degree of risk are 10 percent. You want to know how many more
interest payments you will receive, but the party selling the bond cannot remember. Can you determine how many
interest payments remain?
a. 14
b. 15
c. 12
d. 20
e. 10
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Chapter 6 – Bonds (Debt) – Characteristics and Valuation
101. Assume that McDonald's and Burger King have similar $1,000 par value bond issues outstanding. The bonds are eq
risky. The Burger King bond has interest payments of $80 paid annually and matures 20 years from today. The
McDonald's bond has interest payments of $80 paid semiannually, and it also matures in 20 years. If the simple requ
rate of return, rd, is 12 percent, semiannual basis, for both bonds, what is the difference in current market prices of t
two bonds?
a. No difference.
b. $2.20
c. $3.77
d. $17.53
e. $6.28
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Chapter 6 – Bonds (Debt) – Characteristics and Valuation
102. An 8 percent annual coupon, noncallable bond has ten years until it matures and a yield to maturity of 9.1 percent.
What should be the price of a 10-year bond of equal risk which pays an 8 percent semiannual coupon? Assume
both bonds have a maturity value of $1,000.
a. $898.64
b. $736.86
c. $854.27
d. $941.08
e. $964.23
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Chapter 6 – Bonds (Debt) – Characteristics and Valuation
103. Fish & Chips Inc. has two bond issues outstanding, and both sell for $701.22. The first issue has a coupon rate of 8
percent and 20 years to maturity. The second has an identical yield to maturity as the first bond, but only 5 years
until maturity. Both issues pay interest annually. What is the annual interest payment on the second issue?
a. $120.00
b. $37.12
c. $56.42
d. $29.68
e. $11.16
104. A two-year zero-coupon Treasury bond with a maturity value of $1,000 has a price of $873.4387. A one-year zero-
coupon Treasury bond with a maturity value of $1,000 has a price of $938.9671. If the pure expectations theory is
correct, for what price should one-year zero-coupon Treasury bonds sell one year from now?
a. $798.89
b. $824.66
c. $852.28
d. $930.23
e. $989.11
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Chapter 6 – Bonds (Debt) – Characteristics and Valuation
105. A four-year, zero-coupon Treasury bond sells at a price of $762.8952. A three-year, zero-coupon Treasury bond
sells at a price of $827.8491. Assuming the pure expectations theory is correct, what does the market believe the
price of one-year, zero-coupon bonds will be in three years?
a. $921.66
b. $934.58
c. $938.97
d. $945.26
e. $950.47
