Saturday, October 29, 2011

quiz 3 - bond valuation

A General Co. bond has an 8% coupon and pays interest annually. The face value is $1,000 and the current market price is $1,020.50. The bond matures in 20 years. What is the yield to maturity?


$1,020 = (0.08 x $1,000) x {1- 1/(1+r)20 / r } + $1,000/ (1+ r )20

This can not be solved directly, so it's easiest to just use the calculator method to get an answer. You can then use the calculator answer as the rate in the formula just to verify that your answer is correct.

Enter               20                    -1,020.50         80        1,000
Solve for         N         I/Y       PV                   PMT    FV
Answer is: 7.79%

The value of a 20 year zero-coupon bond when the market required rate of return is 9% (semiannual) is ____.
None of the above

$1,000/(1.045)40 = $171.93

A bond with a face value of $1,000 that sells for $1,000 in the market is called a _____ bond.
floating rate
zero coupon
par value

The newly issued bonds of the Wynslow Corp. offer a 6% coupon with semiannual interest payments. The bonds are currently priced at par value. The effective annual rate provided by these bonds must be:

greater than 3% but less than 4%.
equal to 6%.
equal to 12%.
greater than 6% but less than 7%.
equal to 3%.

An asset characterized by cash flows that increase at a constant rate forever is called a:
growing annuity.
preferred stock.
perpetuity due.
growing perpetuity.
common annuity.

All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon rate.
a discount; higher than
at par; higher than
a premium; equal to
a premium; higher than
at par; less than

The yield to maturity is:
the rate that equates the price of the bond with the discounted cash flows.
the expected rate to be earned if held to maturity.
the rate that is used to determine the market price of the bond.
equal to the current yield for bonds priced at par.
All of the above.

A bond with a 7% coupon that pays interest semi-annually and is priced at par will have a market price of _____ and interest payments in the amount of _____ each.

$1,007; $70
$1,070; $70
$1,000; $35
$1,000; $70
$1,070; $35

The rate of return required by investors in the market for owning a bond is called the:
face value.
yield to maturity.
coupon rate.

The annual coupon of a bond divided by its face value is called the bond's:
coupon rate.
yield to maturity.
face value.

The market price of a bond is equal to the present value of the:
annuity payments plus the future value of the face amount.
face value plus the present value of the annuity payments.
face value plus the future value of the annuity payments.
annuity payments minus the face value of the bond.
face value minus the present value of the annuity payments.

A bond with semi-annual interest payments, all else equal, would be priced _________ than one with annual interest payments.

the same
it is impossible to tell
either higher or the same

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