1. The Carter Company's bonds mature in 10 years have a par value of $1,000 and an annual coupon payment of $80. The market interest rate for the bonds is 9%. What is the price of these bonds? (Points: 6)
2. Rollincoast Incorporated issued BBB bonds two years ago that provided a yield to maturity of 11.5%. Long-term risk-free government bonds were yielding 8.7% at that time. The current risk premium on BBB bonds versus government bonds is half of what it was two years ago. If the risk-free long-term government bonds are currently yielding 7.8%, then at what rate should Rollincoast expect to issue new bonds? (Points: 6)
7.8%
8.7%
9.2%
10.2%
12.9%
3. A 10-year, $1,000 face value bond has an 8.5% annual coupon. The bond has a current yield of 8%. What is the bond’s yield to maturity? (Points: 6)
8.25%
8.86%
7.59%
8.50%
8.00%
4. You wish to purchase a 20-year, $1,000 face value bond that makes semiannual interest payments of $40. If you require a 10% nominal yield to maturity, what price should you be willing to pay for the bond? (Points: 6)
$619
$674
$761
$828
$902
5. Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds? (Points: 4)
Market interest rates decline sharply.
The company’s bonds are downgraded.
Market interest rates rise sharply.
Inflation increases significantly.
The company's financial situation deteriorates significantly.
6. Leggio Corporation issued 20-year, 7% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds has dropped to 6%. What is the new price of the bonds, given that they now have 19 years to maturity? (Points: 6)
$1,046.59
$1,111.58
$1,133.40
$1,177.78
$1,189.04
7. Brown Enterprises’ bonds currently sell for $1,025. They have a 9-year maturity, an annual coupon of $80, and a par value of $1,000. What is their yield to maturity? (Points: 6)
6.87%
7.03%
7.21%
7.45%
7.61%
8. Assume that you have a short investment horizon (less than one year). You are considering two investments: a one-year Treasury security and a 20-year Treasury security. Which of the two investments would you view as being more risky? Explain your answer.
9. You purchased a $1,000 five percent coupon bond that matures in 10 years.
How much would your bond be worth if interest rates fall to 4% the day after you purchase the bond? What would the bond be worth in one year if interest rates fell to 4% at that point?
CLICK HERE FOR SOLUTION
