FINC 3304 - [QUIZ] CHAPTER 6 INTEREST RATES AND BOND VALUATION

CHAPTER 6

INTEREST RATES AND BOND VALUATION

1. The coupon is the:

a. amount of discount received when a bond is purchased.

b. amount paid to a bond dealer when a bond is purchased.

c. difference between the bid and ask price.

d. annual interest divided by the current bond price.

E. stated interest payment on a bond.

2. The principal amount of a bond that is repaid at the end of the loan term is called the:

A. face value.

b. premium value.

c. clean price.

d. dirty price.

e. compounded price.

3. The coupon rate for a bond is best defined as the:

a. annual interest divided by the current market price.

b. annual coupon divided by the dirty market price.

c. annual interest divided by the clean market price.

d. semi-annual interest divided by the par value.

E. annual interest divided by the face value.

4. The yield to maturity on a bond is:

a. equal to the coupon rate divided by the current market price.

b. another name for the current yield.

C. the current required market rate.

d. equal to the annual interest divided by the face value.

e. another name for the coupon rate.

5. The annual interest on a bond divided by the bond's market price is called the:

a. yield to maturity.

b. yield to call.

c. total yield.

D. current yield.

e. required yield.

6. A bond has a $1,000 face value, a market price of $1,115, and pays interest payments

of $90 every year. What is the coupon rate?

a. 4.50 percent

b. 6.75 percent

c. 7.39 percent

d. 8.25 percent

E. 9.00 percent

Coupon rate = 90/1000 = 9%

7. A $1,000 face value bond is currently quoted at 93.7. The bond pays semiannual

payments of $32.50 and matures in 8 years. What is the coupon rate?

a. 3.25 percent

b. 4.89 percent

c. 5.00 percent

D. 6.50 percent

e. 7.56 percent

Coupon rate = 32.5/1000 = 3.25% x 2 = 6.5%

8. A 7 percent bond has a yield to maturity of 6.75 percent, 10 years to maturity, a face

value of $1,000, and semiannual interest payments. What is the amount of each coupon

payment?

a. $33.75

B. $35.00

c. $50.00

d. $67.50

e. $70.00

coupon payment = (7% x 1000) / 2 =35

9. A 6 percent $1,000 bond matures in 4 years, pays interest semiannually, and has a

yield to maturity of 6.85 percent. What is the current market price of the bond?

a. $768.76

b. $801.38

c. $869.15

d. $910.27

E. $970.69

10. A $1,000 face value bond currently has a yield to maturity of 8.89 percent. The bond

matures in 7 years and pays interest annually. The coupon rate is 9 percent. What is the

current price of this bond?

a. $656.06

b. $778.24

c. $989.12

D. $1,005.56

e. $1,268.95

SEE BELOW

11. Lambert, Inc. bonds have a face value of $1,000. The bonds carry a 9 percent coupon,

pay interest semiannually, and mature in 11 years. What is the current price of these

bonds if the yield to maturity is 8.79 percent?

a. $705.14

b. $710.36

C. $1,014.62

d. $1,020.15

e. $1,641.04

SEE BELOW

12. An 8 percent semiannual coupon bond is priced at $1,204.60. The bond has a $1,000

face value and a yield to maturity of 4.88 percent. How many years will it be until this

bond matures?

A. 8.00 years

b. 8.65 years

c. 15.91 years

d. 16.00 years

e. 17.29 years

SEE BELOW

13. Gordon Industries has 6 percent coupon bonds outstanding with a face value of

$1,000 and a market price of $959.21. The bonds pay interest annually and have a yield

to maturity of 6.5 percent. How many years will it be until these bonds mature?

a. 6.0 years

b. 7.5 years

c. 10.0 years

D. 12.0 years

e. 13.0 years

SEE BELOW

14. The 8.5 percent annual coupon bonds of Eberly, Inc. are selling for $930.12. The

bonds have a face value of $1,000 and mature in 9 years. What is the yield to maturity?

a. 4.84 percent

b. 5.24 percent

c. 8.12 percent

d. 9.31 percent

E. 9.70 percent

SEE BELOW

15. The 6.5 percent, $1,000 face value bonds of The Theta Co. are currently selling at

$1,035.80. These bonds have 13 years left until maturity. What is the current yield?

a. 6.09 percent

B. 6.28 percent

c. 6.50 percent

d. 6.71 percent

e. 6.95 percent

SEE BELOW

16. A bond has a yield to maturity of 10.15 percent, an 11.5 percent annual coupon, a

$1,000 face value, and a maturity date 8 years from today. What is the current yield?

a. 9.47 percent

b. 10.15 percent

C. 10.73 percent

d. 11.50 percent

e. 11.86 percent

SEE BELOW

17. Waterfront Properties wants to raise $3.5 million by selling some coupon bonds at

par. Comparable bonds in the market have an 8 percent annual coupon, 10 years to

maturity, and are selling at 101.7 percent of par. What coupon rate should Waterfront

Properties set on its bonds?

a. 7.00 percent

b. 7.25 percent

c. 7.58 percent

D. 7.75 percent

e. 8.00 percent

SEE BELOW

18. One year ago, Auto Land issued 10-year bonds at par. The bonds have a coupon rate

of 6.5 percent and pay interest annually. Today, the market rate of interest on these bonds

is 6.25 percent. How does today's price of this bond compare to the issue price?

a. 1.82 percent lower

b. 1.68 percent lower

c. .25 percent higher

D. 1.68 percent higher

e. 1.82 percent higher

SEE BELOW

19. You own two bonds. Both bonds pay annual interest, have 8 percent coupons, $1,000

face values, and currently have 8 percent yields to maturity. Bond 1 has 9 years to

maturity and Bond 2 has 6 years to maturity. If the market rate of interest rises

unexpectedly to 9 percent, Bond _____ will be the most volatile with a price decrease of

_____ percent.

a. 1; 7.26

B. 1; 6.00

c. 1; 4.49

d. 2; 1.61

e. 2; 3.57

SEE BELOW

20. Cannon Industrial Equipment is currently issuing both 15-year and 25-year bonds at

par. The bonds each pay 7 percent annual interest and have face values of $1,000. You

decide to purchase one of each of these bonds. Assume the yield to maturity on each of

these bonds is 6.4 percent one year from now. Given this, you will realize _____ percent

price appreciation on the 15-year bond and _____ percent price appreciation on the 25-

year bond.

a. 5.44; 7.39

B. 5.44; 7.26

c. 5.68; 7.26

d. 5.68; 7.39

e. 5.90; 7.51

---------------------------------

Q9

 Enter 4×2 6.85/2 60/2 1,000

N I/Y PV PMT FV

Solve for -970.69

Q10

 Enter 7 8.89 90 1,000

N I/Y PV PMT FV

Solve for -1,005.56

Q11

 Enter 11×2 8.79/2 90/2 1,000

N I/Y PV PMT FV

Solve for -1,014.62

Q12

Enter 4.88/2 -1,204.60 80/2 1,000

N I/Y PV PMT FV

Solve for 16

Number of years = 16 / 2 = 8

Q13

 Enter 6.50 -959.21 60 1,000

N I/Y PV PMT FV

Solve for 12

Q14

 Enter 9 -930.12 85 1,000

N I/Y PV PMT FV

6 | Page

Solve for 9.70

Q15

Current yield = (.065 × $1,000) / $1,035.80 = .06275 = 6.28 percent

Q16

Enter 8 10.15 115 1,000

N I/Y PV PMT FV

Solve for -1,071.63

Current yield = $115 / $1,071.63 = .10731 = 10.73 percent

Q17

 Enter 10 -1,017 80 1,000

N I/Y PV PMT FV

Solve for 7.75

Since the current market yield on comparable bonds is 7.75%, Waterfront Properties

should set its coupon rate at 7.75% if it wants its bonds to sell at par.

Q18

Enter 9 6.25 65 1,000

N I/Y PV PMT FV

Solve for -1,016.82

Percent price change = ($1,016.82 − $1,000) / $1,000 = .01682 = 1.68 percent

Q19

Enter 9 9 80 1,000

N I/Y PV PMT FV

Solve for -940.05

Percent price change of Bond 1 = ($940.05 − $1,000) / $1,000 = -.05995 = -6.00 percent

Enter 6 9 80 1,000

N I/Y PV PMT FV

Solve for -955.14

Percent price change of Bond 2 = ($955.14 − $1,000) / $1,000 = -.04486 = -4.49 percent

Q20

Enter 14 6.4 70 1,000

N I/Y PV PMT FV

Solve for -1,054.41

Percent price change = ($1,054.41 − $1,000) / $1,000 = .05441 = 5.44 percent

Enter 24 6.4 70 1,000

N I/Y PV PMT FV

Solve for -1,072.60

Percent price change = ($1,072.60 − $1,000) / $1,000 = .0726 = 7.26 percent

REVIEW QUIZ FOR CHAPTER 6

BONDS, BOND VALUATION, AND INTEREST RATES

1. If a bond’s coupon rate exceeds its yield to maturity, the bond is selling at:

a. a discount. b. par. c. a premium.

2. Which one of the following bonds is the least interest rate sensitive?

a. 3-year, 6 percent coupon

b. 3-year, 0 percent coupon

c. 6-year, 6 percent coupon

d. 6-year, 0 percent coupon

3. A bond has a face value of $1,000, a market price of $987, and pays $37.50 in interest every six months. What is the coupon rate?

a. 3.75 percent b. 4.50 percent c. 6.38 percent d. 7.50 percent

4. A 9 percent, $1,000 bond matures in 16 years, pays interest semi-annually, and has a yield-to-maturity of 9.68 percent. What is the current market price?

a. $938.47 b. $945.23 c. $1,028.60 d. $1,108.19

5. A 6 percent annual coupon bond has a face value of $1,000, a market price of $1,012.40, and a yield-tomaturity of 5.87 percent. How many years is it until the bond matures?

a. 7.77 years b. 7.84 years c. 14.27 years d. 14.39 years

6. A bond has a $1,000 face value and a $989 market value. The bond pays interest semi-annually, has a yield-to-maturity of 7.47 percent, and matures in 12 years. What is the current yield?

a. 6.67 percent b. 7.41 percent c. 7.47 percent d. 8.01 percent

7. A $1,000 bond matures in 8 years and pays interest semi-annually. The bond is selling for $994.63 and has a yield-to-maturity of 7.49 percent. What is the coupon rate?

a. 6.70 percent b. 6.87 percent c. 7.25 percent d. 7.40 percent

8. Market interest rates and bond prices are:

a. unrelated. b. inversely related. c. directly related.

9. World Importers wants to raise $11 million by issuing 15-year, zero coupon bonds. The market requires a 7.8 percent return on similar bonds. The face value per bond will be $1,000. How many bonds must the firm issue? Ignore all issue and transaction costs.

a. 11,000 bonds

b. 12,898 bonds

c. 34,662 bonds

d. 33,937 bonds

10. Last year, you earned 11.67 percent on your investments. During that time period, inflation averaged 6.4 percent. What was your real rate of return based on the Fisher formula?

a. 4.953 percent b. 5.208 percent c. 5.513 percent d. 5.711 percent

 Answer

1. c

2. a

3. d ($37.50 × 2) / $1,000 = .075 = 7.50 percent

4. b Enter 16×2 9.68/2 45 1,000

N I/Y PV PMT FV

Solve for -945.23

5. d Enter 5.87 -1,012.40 60 1,000

N I/Y PV PMT FV

Solve for 14.39

6. b Enter 12×2 7.47/2 -989 1,000

N I/Y PV PMT FV

Solve for 36.648

Current yield = ($36.648 × 2) / $989 = .07411 = 7.41 percent

7. d Enter 8×2 7.49/2 -994.63 1,000

N I/Y PV PMT FV

Solve for 36.998

Coupon rate = ($36.998 × 2) / $1,000 = .0740 = 7.40 percent

8. b

9. d Enter 15 7.8 1,000

N I/Y PV PMT FV

Solve for -324.13

Number of bonds needed = $11,000,000 / $324.13 = 33,937 bonds

10. a (1 + .1167) = (1 + r) × (1 + .064); r = .04953 = 4.953 percent