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Exam 4: Bond Valuation

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Question 41

Multiple Choice

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Rogoff Co.'s 15-year bonds have an annual coupon rate of 9.5%.Each bond has face value of $1,000 and makes semiannual interest payments.If you require an 11.0% nominal yield to maturity on this investment,what is the maximum price you should be willing to pay for the bond?

A) $891.00
B) $913.27
C) $936.10
D) $959.51
E) $983.49

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

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Question 42

Multiple Choice

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Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

A) Market interest rates rise sharply.
B) Market interest rates decline sharply.
C) The company's financial situation deteriorates significantly.
D) Inflation increases significantly.
E) The company's bonds are downgraded.

F) D) and E)
G) All of the above

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Question 43

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The desire for floating-rate bonds,and consequently their increased usage,arose out of the experience of the early 1980s,when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.

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

A 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%.

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

McCurdy Co.'s Class Q bonds have a 12-year maturity,$1,000 par value,and a 5.75% coupon paid semiannually (2.875% each 6 months) ,and those bonds sell at their par value.McCurdy's Class P bonds have the same risk,maturity,and par value,but the P bonds pay a 5.75% annual coupon.Neither bond is callable.At what price should the annual payment bond sell?

One year ago Lerner and Luckmann Co.issued 15-year,noncallable,7.5% annual coupon bonds at their par value of $1,000.Today,the market interest rate on these bonds is 5.5%.What is the current price of the bonds,given that they now have 14 years to maturity?

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

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.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Assume that all interest rates in the economy decline from 10% to 9%.Which of the following bonds would have the largest percentage increase in price?

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.

Which of the following statements is CORRECT?

A 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.)

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

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?

CMS Corporation's balance sheet as of today is as follows: $\begin{array} { l r } \text { Long-term debt (bonds, at par) } & \$ 10,000,000 \\\text { Preferred stock } & 2,000,000 \\\text { Common stock ( } \$ 10 \text { par) } & 10,000,000 \\\text { Retained earnings } &\underline{ 4,000,000} \\ \text { Total debt and equity } & \underline{\$ 26,000,000} \\\end{array}$ The bonds have a 4.0% coupon rate,payable semiannually,and a par value of $1,000.They mature exactly 10 years from today.The yield to maturity is 12%,so the bonds now sell below par.What is the current market value of the firm's debt?