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Finance 201 > Midterm 2 Part IV > Flashcards

Midterm 2 Part IV Flashcards

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1
Q

AXE Inc. is planning to issue a $1,000 face-value bond with an annual coupon rate of 7.5% that matures in 5 years. AXE is planning to pay quarterly interest payments. Similar AXE bonds are quoting at 95% of par. What is the amount of a single interest payment that AXE will make?

A

$18.75

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2
Q

AXE Inc. is planning to issue a $1,000 face-value bond with an annual coupon rate of 7.5% that matures in 5 years. AXE is planning to pay quarterly interest payments. Similar AXE bonds are quoting at 95% of par. Given this information, what is the amount for the final cash flow that a bondholder will receive?

A

$1,018.75

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3
Q

AXE Inc. is planning to issue a $1,000 face-value bond with an annual coupon rate of 7.5% that matures in 5 years. AXE is planning to pay quarterly interest payments. Similar AXE bonds are quoting at 95% of par. What is the price that bondholders will pay for this bond?

A

$950.00

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4
Q

The required rate of return on a bond is called the:

A

Yield to maturity

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5
Q

Why are bonds the primary method for raising capital?

A

They avoid the costs of the intermediary

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6
Q

Which of the following is an unsecured loan?

A

A Bond

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7
Q

Which is the largest source of capital for firms?

A

Bonds

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8
Q

Which of the following statements about a bond are true?
i. A bond is a fixed-income security
ii. The bond’s interest payments vary each year with the market
iii. A bond acts like an interest-only loan

A

i and iii

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9
Q

True or False: In general, the value of any asset is equal to the present value of the stream of expected cash flows discounted at an appropriate required rate of return.

A

TRUE

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10
Q

What are the two steps to value any asset?

A
  1. Determine the future cash flows from that asset
  2. Discount all future cash flows at the appropriate discount rate
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11
Q

BLU-DAY Co. is currently issuing a $1,000 face-value bond that has an annual coupon of 6% and matures in 10 years. Interest payments are made annually. If the yield to maturity is 8%, then what is the current price of the bond?

A

$865.80

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12
Q

LLY Corporation is planning to issue a $1,000 face value bond with a maturity of 30 years. The annual coupon rate is expected to be 7.25% and interest payments are expected to be paid semi-annually. If the market is requiring a return of 10% annually on similar bonds, then what should LLY expect to receive for each bond they issue?

A

$739.72

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13
Q

The Diamond Co. just issued some new bonds with a maturity of 15 years and a face value of $1,000. Similar bonds have an annual coupon rate of 8.5%, and a yield to maturity of 7.2%. What is the current price of these bonds?

A

$1,116.92

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14
Q

(Bond valuation) Tonic Juice Corp.’s 15-year, $1,000 par value bonds pay 12% interest annually. The market price of the bonds is $1,062.20 and your required rate of return is 10%. Determine the value of the bond to you given your required rate of return. Should you purchase this bond?

A

You should buy the bond since the actual price of the bond is lower than the price with your required rate.

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15
Q

Some Co. is planning to issue a 15-year $1,000 face-value bond that pays quarterly interest payments on an 8% annual coupon rate. The return required by bond holders is 7.2%. What is the price of the bond?

A

$1,073.01

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16
Q

Muligan Corp. is about to issue a 25 year bond with the following terms: $1,000 face value, an 8% coupon payment paid annually, and a required market return of 5.5%. What should the price of this bond be?

A

$1,335.35

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17
Q

Calculate the value of a bond that matures in 30 years and has a face value of $1,000. The coupon rate is 7% paid annually, and the investor’s required rate of return is 11%.

A

$652.25

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18
Q

What is the value of a bond?

A

The present value of its cash flows

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19
Q

What is the price of a bond with a $1000 face value, a coupon rate of 13% paid annually, and matures in 25 years? Your required rate of return is 7.5%.

A

$1613.08

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20
Q

An 8% annual coupon bond, with a face value of $1,000 that matures in 15 years, pays interest annually, and has a yield to maturity of 9.75 percent. What is the current market price of the bond?

A

$864.97

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21
Q

Calculate the current market price on the following bond – assume that the return required by bond holders is 7.8%:

Bond A: Face Value = $1,000, Coupon rate = 8%, Maturity = 15 years

A

$1,017.33

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22
Q

Calculate the current market price on the following bond – assume that the return required by bond holders is 7.8%:

Face Value = $1,000, Coupon rate = 8%, Maturity = 3 years

A

$1,005.17

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23
Q

What is the price of the bond if market interest rates (i.e., required returns by bond holders) increase to 10%?

Bond A: Face Value = $1,000, Coupon rate = 8%, Maturity = 15 years

A

$847.88

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24
Q

Calculate the current market price on the following bond – assume that the return required by bond holders is 10%:

Bond B: Face Value = $1,000, Coupon rate = 8%, Maturity = 3 years

A

$950.26

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25
Q

Calculate the current market price on the following bond – assume that the return required by bond holders is 7.8%:

Face Value = $1,000, Coupon rate = 10%, Maturity = 10 years

A

$1,148.96

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26
Q

Calculate the current market price on the following bond – assume that the return required by bondholders is 7.8%:

Face Value = $1,000, Coupon rate = 5%, Maturity = 10 years

A

$810,41

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27
Q

What is the price of the following bond if market interest rates (i.e. required returns by bond holders) increase from 7.8% to 10%?

Face Value = $1,000, Coupon rate = 10%, Maturity = 10 years

A

$1,000.00

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28
Q

What is the price of the following bond if market interest rates (i.e. required returns by bond holders) increase from 7.8% to 10%?

Face Value = $1,000, Coupon rate = 5%, Maturity = 10 years

A

$692.77

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29
Q

YTM

A

it is the average annual rate of return that investors expect to receive on a bond if they hold it to maturity

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30
Q

Another name for YTM

A

Promised yield or discount rate

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31
Q

Current Yield equation

A

Current yield = annual coupon / current market value

32
Q

Current Government Treasury bills (i.e. short-term bonds) are priced at 96.8% of par, where par is $1,000. If these bonds do not pay a coupon and mature in one year from today, then what is the yield to maturity on these bonds?

A

3.3%

33
Q

A 7.5 percent semi-annual coupon bond is priced at $1,055.33. The bond has a $1,000 face value and an annual yield to maturity of 6.5 percent. How many years until this bond’s maturity?

A

6.97 years

34
Q

A bond for AJB Co. has a yield to maturity of 13.90 percent, a 9.5 percent annual coupon, a $1,000 face value, and a maturity date 5 years from today. What is the current yield?

A

11.20%

35
Q

(Bondholder’s expected rate of return) Jobby McJobberton’s Inc. is selling bonds for $700. It has an 8% coupon rate and makes payments semi-annually. The bond matures in 25 years. What is the bond’s expected rate of return?

A

11.74%

36
Q

(Bond valuation) Tonic Juice Corp.’s 15-year, $1,000 par value bonds pay 12% interest annually. The market price of the bonds is $1,062.20 and your required rate of return is 10%. Compute the bond’s market expected rate of return.

A

11.13%

37
Q

PIY Inc. is planning to issue a $1,000 face-value bond with an annual coupon rate of 7.5% that matures in 20 years. AXE is planning to pay semi-annual interest payments. Similar AXE bonds are quoting at 95% of par. What is the yield to maturity for this bond?

A

8%

38
Q

Another Co. expects to issue a $1,000 face-value bond that matures in 10 years. The annual coupon rate is 8.25% and interest payments are expected to be paid annually. Similar bonds are currently priced at 98.4% of face value. Given this information, what is the required return by bond holders?

A

8.49%

39
Q

Debentures

A

Unsecured bonds, no collateral associated with these bonds. They’re just an IOU backed by full faith of the comany

40
Q

Subordinated debentures

A

Not backed by collateral, these also have a lower claim than normal debentures to the assets of the firm in the event of liquidation.

These are based on date of the issue. Older ones will have first claim to company assets

41
Q

Mortgage bond

A

bond that has real estate as collateral behind it

42
Q

Zeroes

A

zero coupon bonds, typically sell at steep discounts

43
Q

Junk bonds

A

BB and below. Much more risky, not worth buying unless you want to take a chance.

44
Q

Eurobond

A

Payable in a currency not native to the country in which it was issued.

45
Q

Foreign bond

A

Issued in the domestic market in the domestic currency but by a foreign firm. Like if China floats debt in the U.S.

46
Q

Muni bonds

A

Municipal, local governments. Infrastructure, roads, schools, exempt from taxation

47
Q

Treasury bond

A

Federal government

48
Q

Convertible bond

A

The ability to convert a bond into equity securities, usually common stock. It gives the investor the right to trade each bond for a set number of shares of common stock whenever the investor chooses.

49
Q

A zero-coupon bond that is currently priced at $456, has a face value of $1,000, and matures in 10 years. What is the yield to maturity of this bond?

A

8.17%

50
Q

Duration

A

A measure of the interest rate sensitivity of a bond

51
Q

Suppose you bought a 10-year $1,000 face-value bond for $925 one year ago. The annual coupon rate is 7% and interest payments are paid annually. If the price today is $1,004, the yield to maturity must have changed from _____________ to ______________.

A

8.12%; 6.94%

52
Q

If returns required by bondholders have increased 1.5% from last year, we should expect bond prices to have _______________.

A

Decreased

53
Q

The relation between bond prices and yields to maturity can best be described as:

A

Inverse

54
Q

One year ago, you bought a 15-year $1,000 face-value bond that has an annual coupon rate of 7% and interest payments are paid semi-annually. If the yield to maturity was 9.1% when you bought the bond, but the yield to maturity is 8.2% today, then the price of the bond has increased ___________.

A

$71.19

55
Q

Suppose you bought a 10-year, $1,000 face-value bond for par 3 years ago. The annual coupon rate on this bond is 8.5% and interest payments are paid annually. If returns required by bond holders are now 2% higher than they were 3 years ago, then how much of a decrease have you experienced in the price of your bond?

A

$95.79

56
Q

T or F – If interest rates increase then bond prices will also increase.

A

F

57
Q

T or F – As the coupon rate increases, the bond price will increase.

A

T

58
Q

T or F – A 20-year bond with a $1,000 face value pays an annual coupon of $50. The yield to maturity for the bond is 9.5%. Given this information, the final payment bond holders will receive will be $1,095.

A

F

59
Q

T or F – A 20-year bond with a $1,000 face value has a coupon rate of 8.5% but pays coupons semiannually. The yield to maturity for the bond is 9.5%. Given this information, first coupon that will be paid will be $42.50.

A

T

60
Q

T or F – Bond A has 20 years to maturity while bond B has 5 years to maturity. Bond A and bond B have identical coupon rates. Given this information, Bond A will have the same yield to maturity as bond B.

A

F

61
Q

T or F – A bond with a longer time to maturity will have less sensitivity to changes in interest rates.

A

F

62
Q

T or F – A bond with a coupon rate that is less than the yield to maturity will be priced at a discount.

A

T

63
Q

T or F – A bond with a face value of $1,000 will have a current price of $1,000 if the coupon rate is equal to the yield to maturity.

A

T

64
Q

T or F – Suppose a bond has a duration of 3.5 and a yield to maturity of 10%. If interest rates increase 1%, the bond price is expected to decrease .35%.

A

F

65
Q

T or F - Bond A has 20 years to maturity while bond B has 5 years to maturity. Given this information, if interest rates increase, then the price of Bond A will decrease more than the price of Bond B.

A

T

66
Q

A bond has a face value of $1,000, a coupon rate of 8%, and a yield to maturity of 9.5%. If the bond matures in 8 years, what is the bond’s price? (assume coupons are paid annually)

A

$918.50

67
Q

A 20-year bond has a face value of $1,000, a coupon rate of 7.5%, and a yield to maturity of 9.5%. If the bond pays semiannual coupons, what is the bond’s price?

A

$822.37

68
Q

A 15-year bond has a face value of $1,000, a coupon rate of 8%, and a yield to maturity of 8%. If the bond pays semiannual coupons, what is the bond’s price?

A

$1,000

69
Q

A 25-year bond has a face value of $1,000, a coupon rate of 8.5%, and a yield to maturity of 7.5%. If the bond pays annual coupons, what is the bond’s price?

A

$1,111.47

70
Q

A 10-year bond has a face value of $1,000, a coupon rate of 7.5%, and a yield to maturity of 8.5%. If the bond pays quarterly coupons, what is the bond’s price?

A

$933.09

71
Q

A company just issued a 15-year bond that has a face value of $1,000 and a coupon rate of 10%. Similar bonds are priced at 95% of par (or face) value. Given this information, what is the yield to maturity on this bond? (assume the bond pays annual coupons)

A

10.68%

72
Q

A company just issued a 10-year bond that has a face value of $1,000 and a coupon rate of 6.5%. Similar bonds are priced at 88% of par (or face) value. Given this information, what is the yield to maturity on this bond? (assume the bond pays semiannual coupons)

A

8.29%

73
Q

A company just issued a 20-year bond that has a face value of $1,000 and a coupon rate of 8.5%. Similar bonds are priced at 92.5% of par (or face) value. Given this information, what is the yield to maturity on this bond? (assume the bond pays semiannual coupons)

A

9.34%

74
Q

A company just issued a unique, 5-year bond with a face value of $1,000 that pays a coupon of $60 in year 1, $70 in year 2, $80 in year 3, $90 in year 4, $100 in year 5. The company also pays the face value of the bond at the end of year 5. If the yield to maturity is 8%, what is the price of this bond? (Assume coupons are paid annually)

A

$993.87

75
Q

A company issued a 10-year bond one year ago that was priced at par. The bond has a face value of $1,000 and a coupon rate of 10%. If interest rates have increased by 1%, the price of this bond has decreased ___________________. (Assume coupons are paid annually)

A

$55.37

76
Q

A company issued a 20-year bond four years ago that was priced at $988. The bond has a face value of $1,000 and a coupon rate of 8%. If interest rates have decreased by 1%, the price of this bond has increased ___________________. (Assume coupons are paid annually)

A

$94.18

77
Q

A company issued a 10-year bond three years ago that was priced at $1,012. The bond has a face value of $1,000 and a coupon rate of 9.5%. If interest rates have decreased by 1%, what is the price of this bond? (Assume coupons are paid annually)

A

$1,061.30

Finance 201 (18 decks)

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