Q14. An investor gathered the following information on three zero-coupon bonds:

1-year, $600 par, zero-coupon bond valued at $571
2-year, $600 par, zero-coupon bond valued at $544
3-year, $10,600 par, zero-coupon bond valued at $8,901

Given the above information, how much should an investor pay for a $10,000 par, 3-year, 6%, annual-pay coupon bond?

A)   $10,016.

B)   $10,000.

C)   Cannot be determined by the information provided.

Q15. An investor gathered the following information on two zero-coupon bonds:

1-year, $800 par, zero-coupon bond valued at $762
2-year, $10,800 par, zero-coupon bond valued at $9,796

Given the above information, how much should an investor pay for a $10,000 par, 2-year, 8%, annual-pay coupon bond?

A)   $9,796.

B)   $10,558.

C)   $10,000.

Q16. What is the present value of a 7% semiannual-pay bond with a $1,000 face value and 20 years to maturity if similar bonds are now yielding 8.25%?

A)   $879.52.

B)   $878.56.

C)   $1,000.00.

Q17. Given a required yield to maturity of 6%, what is the intrinsic value of a semi-annual pay coupon bond with an 8% coupon and 15 years remaining until maturity?

A)   $1,095.

B)   $1,196.

Q18. Assuming the risk-free rate is 5% and the appropriate risk premium for an A-rated issuer is 4%, the appropriate discount rate for an A-rated corporate bond is:

A)   1%.

B)   9%.

C)   5%.

Q19. Which of the following statements about a bond’s cash flows is most accurate? The appropriate discount rate is a function of:

A)   only the return on the market.

B)   the risk-free rate plus the risk premium.

C)   the risk-free rate plus the return on the market.

Q20. Consider a 10%, 10-year bond sold to yield 8%. One year passes and interest rates remained unchanged (8%). What will have happened to the bond's price during this period?

A)   It will have increased.

B)   It will have decreased.

C)   It will have remained constant.

Q14. An investor gathered the following information on three zero-coupon bonds:fficeffice" />

1-year, $600 par, zero-coupon bond valued at $571
2-year, $600 par, zero-coupon bond valued at $544
3-year, $10,600 par, zero-coupon bond valued at $8,901

Given the above information, how much should an investor pay for a $10,000 par, 3-year, 6%, annual-pay coupon bond?

A)   $10,016.

B)   $10,000.

C)   Cannot be determined by the information provided.

Correct answer is A)

A coupon bond can be viewed simply as a portfolio of zero-coupon bonds. The value of the coupon bond should simply be the summation of the present values of the three zero-coupon bonds. Hence, the value of the 3-year annual-pay bond should be $10,016 (571 + 544 + 8,901).

Q15. An investor gathered the following information on two zero-coupon bonds:

1-year, $800 par, zero-coupon bond valued at $762
2-year, $10,800 par, zero-coupon bond valued at $9,796

Given the above information, how much should an investor pay for a $10,000 par, 2-year, 8%, annual-pay coupon bond?

A)   $9,796.

B)   $10,558.

C)   $10,000.

Correct answer is B)

A coupon bond can be viewed simply as a portfolio of zero-coupon bonds. The value of the coupon bond should simply be the summation of the present values of the two zero-coupon bonds. Hence, the value of the 2-year annual-pay bond should be $10,558 ($762 + $9,796).

Q16. What is the present value of a 7% semiannual-pay bond with a $1,000 face value and 20 years to maturity if similar bonds are now yielding 8.25%?

A)   $879.52.

B)   $878.56.

C)   $1,000.00.

Correct answer is B)

N = 20 × 2 = 40; I/Y = 8.25/2 = 4.125; PMT = 70/2 = 35; and FV = 1,000.

Compute PV = 878.56.

Q17. Given a required yield to maturity of 6%, what is the intrinsic value of a semi-annual pay coupon bond with an 8% coupon and 15 years remaining until maturity?

A)   $1,095.

B)   $1,196.

C)   $1,202.

Correct answer is B)

This problem can be solved most easily using your financial calculator. Using semiannual payments, I = 6/2 = 3%; PMT = 80/2 = $40; N = 15 × 2 = 30; FV = $1,000; CPT → PV = $1,196.

Q18. Assuming the risk-free rate is 5% and the appropriate risk premium for an A-rated issuer is 4%, the appropriate discount rate for an A-rated corporate bond is:

A)   1%.

B)   9%.

C)   5%.

Correct answer is B)

The yield on a risky bond = appropriate risk-free rate + appropriate risk premium.

Q19. Which of the following statements about a bond’s cash flows is most accurate? The appropriate discount rate is a function of:

A)   only the return on the market.

B)   the risk-free rate plus the risk premium.

C)   the risk-free rate plus the return on the market.

Correct answer is B)

The return on the market would be used only when discounting the cash flows of the market. The risk premium reflects the cost of any incremental risk incurred by the investor above and beyond that of the risk-free security.

Q20. Consider a 10%, 10-year bond sold to yield 8%. One year passes and interest rates remained unchanged (8%). What will have happened to the bond's price during this period?

A)   It will have increased.

B)   It will have decreased.

C)   It will have remained constant.

Correct answer is B)

The bond is sold at a premium, as time passes the bond’s price will move toward par. Thus it will fall.

N = 10; FV = 1,000; PMT = 100; I = 8; CPT → PV = 1,134

N = 9; FV = 1,000; PMT = 100; I = 8; CPT → PV = 1,125