hinsafdar

An investor plans to buy a 10-year, $1,000 par value, 8% semiannual coupon bond. If the yield to maturity of the bond is 9%, the bond’s value is:

A) $934.96.

B) $1,067.95.

C) $935.82.

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N = 20, I = 9/2 = 4.5, PMT = 80/2 = 40, FV = 1,000, compute PV = $934.96

hinsafdar

Using the following spot rates for pricing the bond, what is the present value of a three-year security that pays a fixed annual coupon of 6%?

• Year 1: 5.0%
• Year 2: 5.5%
• Year 3: 6.0%

A) 95.07.

B) 102.46.

C) 100.10.

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This value is computed as follows: Present Value = 6/1.05 + 6/1.0552 + 106/1.063 = 100.10
The value 95.07 results if the coupon payment at maturity of the bond is neglected.

hinsafdar

A coupon bond that pays interest annually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 10%. What is the value of the bond today if the coupon rate is 8%?

A) $2,077.00.

B) $924.18.

C) $1,500.00.

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FV = 1,000
N = 5
I = 10
PMT = 80
Compute PV = 924.18.

hinsafdar

A bond with a 12% coupon, 10 years to maturity and selling at 88 has a yield to maturity of:

A) between 13% and 14%.

B) over 14%.

C) between 10% and 12%.

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PMT = 120; N = 10; PV = -880; FV = 1,000; CPT → I = 14.3

hinsafdar

Today an investor purchases a $1,000 face value, 10%, 20-year, semi-annual bond at a discount for $900. He wants to sell the bond in 6 years when he estimates the yields will be 9%. What is the estimate of the future price?

A) $1,079.

B) $1,152.

C) $946.

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In 6 years, there will be 14 years (20 − 6), or 14 × 2 = 28 semi-annual periods remaining of the bond's life So, N = (20 − 6)(2) = 28; PMT = (1,000 × 0.10) / 2 = 50; I/Y = 9/2 = 4.5; FV = 1,000; CPT → PV = 1,079.
Note: Calculate the PV (we are interested in the PV 6 years from now), not the FV.

hinsafdar

Which of the following characteristics would create the least difficulty in estimating a bond’s cash flows?

A) Sinking fund provisions.

B) Conversion privilege.

C) Fixed coupon rate.

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Normally, estimating the cash flow stream is straightforward for a high quality, option-free bond due to the high degree of certainty in the timing and amount of the payments. The following four conditions could lead to difficulty in forecasting the bond’s future cash flow stream:

• increased credit risk;
• the presence of embedded options (i.e., call/put features or sinking fund provisions);
• the use of variable rather than fixed coupon rate; and
• the presence of a conversion or exchange privilege.

hinsafdar

Which of the following characteristics would create the most difficulty in estimating a bond's cash flows?

A) Fixed coupon rate.

B) Noncallable bond.

C) Exchange privilege.

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Normally, estimating the cash flow stream is straightforward for a high quality, option-free bond due to the high degree of certainty in the timing and amount of the payments. The following four conditions could lead to difficulty in forecasting the bond’s future cash flow stream: (1) increased credit risk, (2) the presence of embedded options (i.e., call/put features or sinking fund provisions), (3) the use of variable rather than fixed coupon rate, and (4) the presence of a conversion or exchange privilege.

hinsafdar

Which of the following characteristics would create the least difficulty in estimating a bond’s cash flows?

A) Noncallable bond.

B) Variable coupon rate.

C) Putable bond.

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Normally, estimating the cash flow stream is straightforward for a high quality, option-free bond due to the high degree of certainty in the timing and amount of the payments. The following four conditions could lead to difficulty in forecasting the bond’s future cash flow stream:

• increased credit risk;
• the presence of embedded options (i.e., call/put features or sinking fund provisions);
• the use of variable rather than fixed coupon rate; and
• the presence of a conversion or exchange privilege.

hinsafdar

It is easier to value bonds than to value equities because:

A) the future cash flows of bonds are more stable.

B) Both of these choices are correct.

C) there is no maturity value for common stock.

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Bonds pay out a specified periodic cash flow (coupon payment) throughout the life of the bond and pay out a lump sum at the maturity date.  Common stocks don't have a maturity date and have more volatility than bonds.

hinsafdar

A bond is issued with the following data:

• $10 million face value.
• 9% coupon rate.
• 8% market rate.
• 3-year bond with semiannual payments.

What is the present value of the bond?

A) $10,138,754.

B) $10,000,000.

C) $10,262,107.

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FV = 10,000,000; PMT = 450,000; I/Y = 4; N = 6; CPT → PV = -10,262,107