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Exam 4: Bonds

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Question 1

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bond that is callable has a chance of being retired earlier than its stated term to maturity Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

A) True
B) False

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Question 2

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a general rule, a company's debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured.

A) True
B) False

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Question 3

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10-year corporate bond has an annual coupon of 9% The bond is currently selling at par ($1,000) Which of the following statements is NOT CORRECT?

YTMs of three $1,000 face value bonds that mature in 10 years and have the same level of risk are equalBond A has an 8% annual coupon, Bond B has a 10% annual coupon, and Bond C has a 12% annual coupon Bond B sells at par Assuming interest rates remain constant for the next 10 years, which of the following statements is CORRECT?

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) ?

are considering 2 bonds that will be issued tomorrow Both are rated triple B (BBB, the lowest investment-grade rating), both mature in 20 years, both have a 10% coupon, neither can be called except for sinking fund purposes, and both are offered to you at their $1,000 par values However, Bond SF has a sinking fund while Bond NSF does not Under the sinking fund, the company must call and pay off 5% of the bonds at par each year The yield curve at the time is upward sloping The bond's prices, being equal, are probably not in equilibrium, as Bond SF, which has the sinking fund, would generally be expected to have a higher yield than Bond NSF.

Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?

Curtis Corporation's noncallable bonds currently sell for $1,165 They have a 15-year maturity, an annual coupon of $95, and a par value of $1,000 What is their yield to maturity?

call provision gives bondholders the right to demand, or "call for," repayment of a bond Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

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 futureUnder these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds, the YTC or the YTM?

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*?

Income bonds pay interest only if the issuing company actually earns the indicated interestThus, these securities cannot bankrupt a company, and this makes them safer from an investor's perspective than regular bonds.

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?

zero coupon bond is a bond that pays no interest and is offered (and subsequently sells initially) at par These bonds provide compensation to investors in the form of capital appreciation.

its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in value?

A has a 9% annual coupon while Bond B has a 6% annual coupon Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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 futureWhat is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM.)

Nicholas Industries can issue a 20-year bond with a 6% annual coupon This bond is not convertible, is not callable, and has no sinking fund Alternatively, Nicholas could issue a 20-year bond that is convertible into common equity, may be called, and has a sinking fund Which of the following most accurately describes the coupon rate that Nicholas would have to pay on the convertible, callable bond?

25-year, $1,000 par value bond has an 8.5% annual coupon The bond currently sells for $875 If the yield to maturity remains at its current rate, what will the price be 5 years from now?