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Exam 4: Bonds

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Question 21

Multiple Choice

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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%

F) C) and D)
G) A) and C)

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Question 22

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"Restrictive covenants" are designed primarily to protect bondholders by constraining the actions of managers Such covenants are spelled out in bond indentures.

A) True
B) False

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Question 23

Multiple Choice

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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) ?

Other things equal, a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, generally be subject to much more interest rate price risk if you purchased a 30-day bond than if you bought a 30-year bond.

Assume that a 10-year Treasury bond has a 12% annual coupon, while a 15-year T-bond has an 8% annual coupon Assume also that the yield curve is flat, and all Treasury securities have a 10% yield to maturity Which of the following statements is CORRECT?

10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premiumWhich of the following statements is CORRECT?

have funds that you want to invest in bonds, and you just noticed in the financial pages of the local newspaper that you can buy a $1,000 par value bond for $800 The coupon rate is 10% (with annual payments), and there are 10 years before the bond will mature and pay off its $1,000 par value You should buy the bond if your required return on bonds with this risk is 12%.

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 $1,000 What is their current yield?

Sentry Corpbonds 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?

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?

15-year bond has an annual coupon rate of 8% The coupon rate will remain fixed until the bond matures The bond has a yield to maturity of 6% Which of the following statements is CORRECT?

market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.

bond that had a 20-year original maturity with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity(Assume that the bonds have equal default risk and equal coupon rates, and they cannot be called.)

Kessen Inc.'s bonds mature in 7 years, have a par value of $1,000, and make an annual coupon payment of $70 The market interest rate for the bonds is 8.5% What is the bond's price?

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?

bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default The bond should sell at a premium if interest rates are below 10% and at a discount if interest rates are greater than 10%.

Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise Since floating-rate debt shifts interest rate risk to companies, it offers no advantages to issuers.

Reinegar Corporation's 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.

bonds, price sensitivity to a given change in interest rates is generally greater the longer before the bond matures.