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120. A 5 percent coupon bond has 10 years to maturity and could be called in two years. If the
bond is called, investors will earn 6.2 percent. The call premium is one year of coupon payments.
If coupon payments are made semi-annually and par value is $1,000, what is the bond's yield to
maturity?
121. A 7 percent coupon bond has 10 years to maturity and could be called in three years. If
the bond is called, investors will earn 5.5 percent. The call premium is one year of coupon
payments. If coupon payments are made semi-annually and par value is $1,000, what is the
bond's yield to maturity?
122. A 10 percent coupon bond has 15 years to maturity and could be called in two years. If
the bond is called, investors will earn 4 percent. The call premium is one year of coupon
payments. If coupon payments are made annually and par value is $1,000, what is the bond's
yield to maturity?
123. Describe the relationship between interest rate changes and bond prices.
124. Describe reasons that the U.S. government and corporations would issue bonds.
125. Explain why high-income and wealthy people are more likely to buy a municipal bond
than a corporate bond.
126. Yields of a Bond A 4.75 percent coupon municipal bond has 20 years left to maturity and
has a price quote of 98.9. The bond can be called in five years. The call premium is one year of
coupon payments. Compute and discuss the bond's current yield, yield to maturity, taxable
equivalent yield (for an investor in the 35 percent marginal tax bracket), and yield to call.
(Assume interest payments are paid semi-annually and a par value of $5,000.)
127. Bond Ratings and Prices A corporate bond with a 5.75 percent coupon has 10 years left
to maturity. It has had a credit rating of BBB and a yield to maturity of 6.25 percent. The firm has
recently gotten into some trouble and the rating agency is downgrading the bonds to BB. The
new appropriate discount rate will be 6.75 percent. What will be the change in the bond's price in
dollars and percentage terms? (Assume interest payments are paid semi-annually and a par
value of $1,000.)
128. What does a call provision allow the issuer to do, and why would they do it?
129. All else equal, which bond's price is more affected by a change in interest rates, a bond
with a large coupon or a small coupon? Why?
130. Explain how investors can assess bond market performance.
131. What actions taken by the Federal Reserve preceded and possibly helped precipitate the
recent financial crisis?
132. Explain what the indenture agreement states.
133. Explain how mortgage-backed securities work.
134. Provide the definitions of a discount bond and a premium bond. Give examples.
135. All else equal, which bond's price is more affected by a change in interest rates, a short-
term bond or a longer-term bond? Why?
136. Explain how a bond's interest rate can change over time even if interest rates in the
economy do not change.
137. Describe the difference between a bond issued as a high-yield bond and one that has
become a "fallen angel."
138. Explain what credit quality risk measures.
