CHAPTER 4—BOND VALUATION
c.
6.87%
d.
7.24%
e.
7.62%
e
82. Sommers Co.’s bonds currently sell for $1,080 and have a par value of $1,000. They pay a $100 annual coupon and
have a 15-year maturity, but they can be called in 5 years at $1,125. What is their yield to maturity (YTM)?
a.
8.56%
b.
9.01%
c.
9.46%
d.
9.93%
e.
10.43%
83. Sentry Corp. bonds have an annual coupon payment of 7.25%. The bonds have a par value of $1,000, a current price
of $1,125, and they will mature in 13 years. What is the yield to maturity on these bonds?
a.
5.56%
CHAPTER 4—BOND VALUATION
b.
5.85%
c.
6.14%
d.
6.45%
e.
6.77%
84. Meacham Enterprises’ bonds currently sell for $1,280 and have a par value of $1,000. They pay a $135 annual coupon
and have a 15-year maturity, but they can be called in 5 years at $1,050. What is their yield to call (YTC)?
a.
6.39%
b.
6.72%
c.
7.08%
d.
7.45%
e.
7.82%
85. Perry Inc.’s bonds currently sell for $1,150. They have a 6-year maturity, an annual coupon of $85, and a par value of
CHAPTER 4—BOND VALUATION
$1,000. What is their current yield?
a.
7.39%
b.
7.76%
c.
8.15%
d.
8.56%
e.
8.98%
a
86. Rogoff Co.’s 15-year bonds have an annual coupon rate of 9.5%. Each bond has face value of $1,000 and makes
semiannual interest payments. If you require an 11.0% nominal yield to maturity on this investment, what is the maximum
price you should be willing to pay for the bond?
a.
$891.00
b.
$913.27
c.
$936.10
d.
$959.51
e.
$983.49
a
CHAPTER 4—BOND VALUATION
87. If 10-year T-bonds have a yield of 6.2%, 10-year corporate bonds yield 8.5%, the maturity risk premium on all 10–
year bonds is 1.3%, and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds,
what is the default risk premium on the corporate bond?
a.
1.90%
b.
2.09%
c.
2.30%
d.
2.53%
e.
2.78%
a
88. One year ago Lerner and Luckmann Co. issued 15-year, noncallable, 7.5% annual coupon bonds at their par value of
$1,000. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now
have 14 years to maturity?
a.
$1,077.01
b.
$1,104.62
c.
$1,132.95
d.
$1,162.00
e.
$1,191.79
e
CHAPTER 4—BOND VALUATION
89. Currently, Bruner Inc.’s bonds sell for $1,250. They pay a $120 annual coupon, have a 15-year maturity, and a $1,000
par value, but they can be called in 5 years at $1,050. Assume that no costs other than the call premium would be incurred
to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current
levels on into the future. What is the difference between this bond’s YTM and its YTC? (Subtract the YTC from the
YTM.)
a.
2.11%
b.
2.32%
c.
2.55%
d.
2.80%
e.
3.09%
a
Difficulty: Moderate
INTE.GENE.16.24 – LO: 4-6
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Yields to maturity and call
TYPE: Multiple Choice: Problem
90. Gilligan Co.’s bonds currently sell for $1,150. They have a 6.75% annual coupon rate and a 15-year maturity, and are
callable in 6 years at $1,067.50. Assume that no costs other than the call premium would be incurred to call and refund the
bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future.
Under these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds, the YTC
or the YTM?
a.
3.92%
Difficulty: Moderate
INTE.GENE.16.19 – LO: 4-3
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Bond valuation: annual coupons
TYPE: Multiple Choice: Problem
CHAPTER 4—BOND VALUATION
b.
4.12%
c.
4.34%
d.
4.57%
e.
4.81%
e
91. Haswell Enterprises’ bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000. The
going interest rate (rd) is 4.75%, based on semiannual compounding. What is the bond’s price?
a.
1,063.09
b.
1,090.35
c.
1,118.31
d.
1,146.27
e.
1,174.93
c
CHAPTER 4—BOND VALUATION
92. CMS Corporation’s balance sheet as of today is as follows:
Long-term debt (bonds, at par)
$10,000,000
Preferred stock
2,000,000
Common stock ($10 par)
10,000,000
Retained earnings
4,000,000
Total debt and equity
$26,000,000
The bonds have a 4.0% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from
today. The yield to maturity is 12%, so the bonds now sell below par. What is the current market value of the firm’s debt?
a.
$5,276,731
b.
$5,412,032
c.
$5,547,332
d.
$7,706,000
e.
$7,898,650
Difficulty: Moderate
INTE.GENE.16.28 – LO: 4-5
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Bond valuation: semiannual coupons
TYPE: Multiple Choice: Problem
CHAPTER 4—BOND VALUATION
93. 5-year Treasury bonds yield 5.5%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-
year bonds is 0.4%. What is the real risk-free rate, r*?
a.
2.59%
b.
2.88%
c.
3.20%
d.
3.52%
e.
3.87%
c
94. The Gergen Group’s 5-year bonds yield 6.85%, and 5-year T-bonds yield 4.75%. The real risk-free rate is r* = 2.80%,
the default risk premium for Gergen’s bonds is DRP = 0.85% versus zero for T-bonds, the liquidity premium on Gergen’s
bonds is LP = 1.25%, and the maturity risk premium for all bonds is found with the formula MRP = (t − 1) × 0.1%, where
t = number of years to maturity. What is the inflation premium (IP) on 5-year bonds?
a.
1.40%
b.
1.55%
c.
1.71%
d.
1.88%
e.
2.06%
CHAPTER 4—BOND VALUATION
95. Chandler Co.’s 5-year bonds yield 7.00%, and 5-year T-bonds yield 5.15%. The real risk-free rate is r* = 3.0%, the
inflation premium for 5-year bonds is IP = 1.75%, the liquidity premium for Chandler’s bonds is LP = 0.75% versus zero
for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t − 1) × 0.1%, where t =
number of years to maturity. What is the default risk premium (DRP) on Chandler’s bonds?
a.
0.99%
b.
1.10%
c.
1.21%
d.
1.33%
e.
1.46%
Difficulty: Moderate
INTE.GENE.16.20 – LO: 4-11
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Default risk premium (DRP)
TYPE: Multiple Choice: Problem
96. Squire Inc.’s 5-year bonds yield 6.75%, and 5-year T-bonds yield 4.80%. The real risk-free rate is r* = 2.75%, the
inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Squire’s bonds is DRP = 1.20% versus
Difficulty: Moderate
INTE.GENE.16.30 – LO: 4-9
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Inflation premium (IP)
TYPE: Multiple Choice: Problem
CHAPTER 4—BOND VALUATION
zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t − 1) × 0.1%, where t =
number of years to maturity. What is the liquidity premium (LP) on Squire’s bonds?
a.
0.49%
b.
0.55%
c.
0.61%
d.
0.68%
e.
0.75%
e
97. Field Industries’ outstanding bonds have a 25-year maturity and $1,000 par value. Their nominal yield to maturity is
9.25%, they pay interest semiannually, and they sell at a price of $850. What is the bond’s nominal (annual) coupon
interest rate?
a.
6.27%
b.
6.60%
c.
6.95%
d.
7.32%
e.
7.70%
e
CHAPTER 4—BOND VALUATION
98. Jerome Corporation’s bonds have 15 years to maturity, an 8.75% coupon paid semiannually, and a $1,000 par value.
The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,050. What is the bond’s
nominal yield to call?
a.
5.01%
b.
5.27%
c.
5.54%
d.
5.81%
e.
6.10%
99. A 25-year, $1,000 par value bond has an 8.5% annual coupon. The bond currently sells for $875. If the yield to
CHAPTER 4—BOND VALUATION
maturity remains at its current rate, what will the price be 5 years from now?
a.
$839.31
b.
$860.83
c.
$882.90
d.
$904.97
e.
$927.60
c
100. McCurdy Co.’s Class Q bonds have a 12-year maturity, $1,000 par value, and a 5.75% coupon paid semiannually
(2.875% each 6 months), and those bonds sell at their par value. McCurdy’s Class P bonds have the same risk, maturity,
and par value, but the P bonds pay a 5.75% annual coupon. Neither bond is callable. At what price should the annual
payment bond sell?
a.
$943.98
b.
$968.18
c.
$993.01
d.
$1,017.83
e.
$1,043.28
c
CHAPTER 4—BOND VALUATION
101. Reinegar Corporation is planning two new issues of 25-year bonds. Bond Par will be sold at its $1,000 par value, and
it will have a 10% semiannual coupon. Bond OID will be an Original Issue Discount bond, and it will also have a 25-year
maturity and a $1,000 par value, but its semiannual coupon will be only 6.25%. If both bonds are to provide investors with
the same effective yield, how many of the OID bonds must Reinegar issue to raise $3,000,000? Disregard flotation costs,
and round your final answer up to a whole number of bonds.
a.
4,228
b.
4,337
c.
4,448
d.
4,562
e.
4,676
CHAPTER 4—BOND VALUATION