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Exam 7: Valuing Bonds

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Question 1

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Sally is choosing between two bonds both of which mature in 15 years and have the same level of risk.Bond A is a municipal bond that yields 5.75 percent.Bond B is a corporate bond that yields 7.75 percent.If Sally is in the 28 percent tax bracket,which bond should she select and why?

A) Sally should select Bond A because its interest income is not taxable.
B) Sally will be indifferent between Bond A and B since the taxable equivalent yield of Bond A equals the yield of Bond B.
C) Sally should select Bond A because its TEY is greater than the yield of Bond B.
D) Sally should select Bond B because the TEY of Bond A is less than the yield of Bond B.

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Question 2

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Compute the price of a 6 percent coupon bond with 10 years left to maturity and a market interest rate of 8.75 percent.(Assume interest payments are semi-annual and par value is $1,000.) Is this a discount or premium bond?

A) Discount
B) Premium

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Question 3

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A 15-year bond with a 10 percent coupon has a yield to maturity of 8 percent.The bond could be called in four years and if called would generate a yield to call of 6 percent.What is this bond's call premium? Assume the coupon payments are made semi-annually and par value is $1,000.

If Zeus Energy bonds are upgraded from BBB- to BBB+,which of the following statements is true?

A 2.5 percent TIPS has an original reference CPI of 170.4.If the current CPI is 205.7,what is the current interest payment and par value of the TIPS? (Assume semi-annual interest payments and $1,000 par value.)

Which of the following are main issuers of bonds?

Determine the interest payment for the following three bonds: 2.5 percent coupon corporate bond (paid semi-annually) ,3.15 percent coupon Treasury note,and a corporate zero coupon bond maturing in 10 years.(Assume a $1,000 par value.)

Calculate the price of a zero coupon bond that matures in 20 years if the market interest rate is 8.5 percent.(Assume annual compounding and a par value of $1,000.)

Bonds are issued by which of the following?

What is the taxable equivalent yield on a municipal bond with a yield to maturity of 4 percent for an investor in the 28 percent tax bracket?

Which of the following would NOT be an example of an agency bond?

Under which conditions will an investor demand a larger return (yield) on a bond?

A 4.15 percent TIPS has an original reference CPI of 182.1.If the current CPI is 188.3,what is the par value of the TIPS?

Many bonds are not callable,but for those that are,which of following is a common feature?

Which of the following bonds makes no interest payments?

Which of the following statements is correct?

A 5.5 percent coupon bond with 18 years left to maturity is priced to offer a 6.25 percent yield to maturity.You believe that in one year,the yield to maturity will be 5.75 percent.What is the change in price the bond will experience in dollars? (Assume semi-annual interest payments and $1,000 par value.)

A 5 percent coupon bond has 10 years to maturity and could be called in two years.If the bond is called,investors will earn 6.2 percent.The call premium is one year of coupon payments.If coupon payments are made semi-annually and par value is $1,000,what is the bond's yield to maturity?

Determine the interest payment for the following three bonds: 5.5 percent coupon corporate bond (paid semi-annually) ,6.45 percent coupon Treasury note,and a corporate zero coupon bond maturing in 10 years.(Assume a $1,000 par value.)

A corporate bond with an 8.5 percent coupon has 10 years left to maturity.It has had a credit rating of A and a yield to maturity of 10 percent.The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BBB.The new appropriate discount rate will be 11.5 percent.What will be the change in the bond's price in dollars? Assume interest payments are paid semi-annually and par value is $1,000.