# finance ch 6

 The coupon value of a bond is the face value of the bond. T OR F False bond is said to mature on the date when the issuer repays its notional value. T or F True Which of the following best illustrates why a bond is a type of loan?A) The issuers of bonds make regular payments to bondholders.B) When a company issues a bond, the buyer of that bond becomes an owner of the issuingcompany.C) Funds raised are used to finance long-term projects.D) When an investor buys a bond from an issuer, the investor is giving money to the issuer,with the assurance that it will be repaid at a date in the future. When an investor buys a bond from an issuer, the investor is giving money to the issuer,with the assurance that it will be repaid at a date in the future. What is the coupon payment of a 25-year \$1000 bond with a 4.5% coupon rate with quarterlypayments? 11.25\$1000 × 0.045 / 4 = \$11.25 What is the coupon payment of a 15-year \$10,000 bond with a 9% coupon rate with semiannualpayments?A) \$150.00B) \$450C) \$900.00D) \$1800.00 450\$10,000 × 0.09/2 = \$450 corporate bond makes payments of \$9.67 every month for ten years with a final payment of\$2009.67. Which of the following best describes this bond?A) a 10-year bond with a face value of \$2,000 and a coupon rate of 4.8% with monthlypaymentsB) a 10-year bond with a face value of \$2,000 and a coupon rate of 5.8% with monthlypaymentsC) a 10-year bond with a face value of \$2,009.67 and a coupon rate of 4.8% with monthlypaymentsD) a 10-year bond with a face value of \$2,009.67 and a coupon rate of 5.8% with monthlypayments a 10-year bond with a face value of \$2,000 and a coupon rate of 5.8% with monthlypayments\$9.67 × 12 / (2,009.67 – 9.67) = 5.802 An investor holds a Ford bond with a face value of \$5000 , a coupon rate of 8.5%, andsemiannual payments that matures on January 15, 2029. How much will the investor receive onJanuary 15, 2029? \$5000 + \$5000 × 0.085 /2 = \$5212.5 A university issues a bond with a face value of \$5000 and a coupon rate of 4.41% that matureson July 15, 2018. The holder of such a bond receives coupon payments of \$110.25 . Howfrequently are coupon payments made in this case?A) monthlyB) quarterlyC) A university issues a bond with a face value of \$5000 and a coupon rate of 4.41% that matureson July 15, 2018. The holder of such a bond receives coupon payments of \$110.25 . Howfrequently are coupon payments made in this case?A) monthlyB) quarterlyC) semiannuallyD) annually semiannually Which of the following statements regarding bonds and their terms is FALSE?A) Bonds are securities sold by governments and corporations to raise money from investorstoday in exchange for a promised future payment.B) By convention, the coupon rate is expressed as an effective annual rate.C) Bonds typically make two types of payments to their holders.D) The time remaining until the repayment date is known as the term of the bond. By convention, the coupon rate is expressed as an effective annual rate A bond certificate includes ________.A) the terms of the bondB) the individual to whom payments will be madeC) the yield to maturity of the bondD) the price of the bond the terms of the bond Which of the following is true about the face value of a bond?A) It is the notional amount we use to compute coupon payments.B) It is the amount that is repaid at maturity.C) It is usually denominated in standard increments, such as \$1,000.D) All of the above are true. All of the above are true. How are the cash flows of a coupon bond different from an amortizing loan? A coupon bond pays interest over the life of the bond and returns the principal at the endof the term. Thus the cash flows are smaller over the life of the bond with a lump-sumpayment at the end. In contrast, an amortizing loan has identical cash flows over its lifewith a part of the cash flow going toward interest and the balance as return of principal The only cash payment an investor in a zero-coupon bond receives is the face value of the bondon its maturity date. T OR F TRUE Prior to its maturity date, the price of a zero-coupon bond is its face value. T OR F FALSE How are investors in zero-coupon bonds compensated for making such an investment?A) Such bonds are purchased at their face value and sold at a premium on a later date.B) Such bonds make regular interest payments.C) Such bonds are purchased at a discount, below their face value.D) Such bonds have a lower face value as compared to other bonds of similar term. Such bonds are purchased at a discount, below their face value. What is the yield to maturity of a one-year, risk-free, zero-coupon bond with a \$10,000 facevalue and a price of \$9400 when released?A) 3.191%B) 6.000%C) 6.383%D) 0.009% 6.383% Why is the yield to maturity of a zero-coupon, risk-free bond that matures at the end of a givenperiod the risk-free interest rate for that period?A) Since such a bond provides a risk-free return over that period, the Law of One Priceguarantees that the risk-free interest rate equals the yield to maturity.B) Since a bondʹs price will converge on its face value as the bond approaches the maturitydate, the Law of One Price dictates that the risk-free interest rate will reflect thisconvergence.C) Since interest rates will rise and fall in response to the movement in bond prices.D) Since there is, by definition, no risk in investing in such bonds, the return from such bondsis the best that can be expected from any investment over the period Since such a bond provides a risk-free return over that period, the Law of One Priceguarantees that the risk-free interest rate equals the yield to maturity The current zero-coupon yield curve for risk-free bonds is shown above. What is the price of azero-coupon, four-year, risk-free bond of \$100? 87.99 The current zero-coupon yield curve for risk-free bonds is shown above. What is the risk-freeinterest rate on a 4-year maturity 3.25% A risk-free, zero-coupon bond with a face value of \$10,000 has 15 years to maturity. If the YTMis 6.1%, which of the following would be closest to the price this bond will trade at?A) \$4937B) \$5760C) \$6582D) \$4114 4114 A risk-free, zero-coupon bond has 15 years to maturity. Which of the following is closest to theprice per \$1000 of face value that the bond will trade at if the YTM is 6.1%?A) \$663.78B) \$774.42C) \$553.15D) \$885.05 553.15 A risk-free, zero-coupon bond with a \$5000 face value has 15 years to maturity. The bondcurrently trades at \$3750 . What is the yield to maturity of this bond? 1.936 Which of the following risk-free, zero-coupon bonds could be bought for the lowest price?A) one with a face value of \$1,000, a YTM of 4.8%, and 5 years to maturityB) one with a face value of \$1,000, a YTM of 3.2%, and 8 years to maturityC) one with a face value of \$1,000, a YTM of 6.8%, and 10 years to maturityD) one with a face value of \$1,000, a YTM of 5.9%, and 20 years to maturity one with a face value of \$1,000, a YTM of 5.9%, and 20 years to maturity Which of the following statements regarding bonds and their terms is FALSE?A) The bond certificate typically specifies that the coupons will be paid periodically until thematurity date of the bond.B) The bond certificate indicates the amounts and dates of all payments to be made.C) The only cash payments the investor will receive from a zero-coupon bond are the interestpayments that are paid up until the maturity date.D) The face value of a bond is repaid at maturity. The only cash payments the investor will receive from a zero-coupon bond are the interestpayments that are paid up until the maturity date Which of the following statements regarding bonds and their terms is FALSE?A) The amount of each coupon payment is determined by the coupon rate of the bond.B) Prior to its maturity date, the price of a zero-coupon bond is always greater than its facevalue.C) The zero-coupon bond has no periodic interest payments.D) Treasury bills are U.S. government bonds with a maturity of up to one year. Prior to its maturity date, the price of a zero-coupon bond is always greater than its facevalue. Which of the following statements regarding bonds and their terms is FALSE?A) One advantage of quoting the yield to maturity rather than the price is that the yield isindependent of the face value of the bond.B) Unlike the case of bonds that pay coupons, for zero-coupon bonds, there is no formula tosolve for the yield to maturity.C) Because we can convert any bond price into a yield, and vice versa, bond prices and yieldsare often used interchangeably.D) The internal rate of return (IRR) of a bond is given a special name, the yield to maturity Unlike the case of bonds that pay coupons, for zero-coupon bonds, there is no formula tosolve for the yield to maturity Which of the following statements regarding bonds and their terms is FALSE?A) The internal rate of return (IRR) of an investment in a zero-coupon bond is the rate ofreturn that investors will earn on their money if they buy a default-free bond at its currentprice and hold it to maturity.B) The yield to maturity of a bond is the discount rate that sets the future value (FV) of thepromised bond payments equal to the current market price of the bond.C) Financial professionals also use the term spot interest rates to refer to the default-freezero-coupon yields.D) When we calculate a bondʹs yield to maturity by solving the formula,Price of an n-period bond = Coupon(1 + YTM)1+ Coupon(1 + YTM)2+ … + Coupon + Face(1 + YTM)n,the yield we compute will be a rate per coupon interval. The yield to maturity of a bond is the discount rate that sets the future value (FV) of thepromised bond payments equal to the current market price of the bond Which of the following statements regarding bonds and their terms is FALSE?A) Zero-coupon bonds are also called pure discount bonds.B) The internal rate of return (IRR) of an investment opportunity is the discount rate at whichthe net present value (NPV) of the investment opportunity is equal to zero.C) The yield to maturity for a zero-coupon bond is the return you will earn as an investorfrom holding the bond to maturity and receiving the promised face value payment.D) When prices are quoted in the bond market, they are conventionally quoted in incrementsof \$1,000. When prices are quoted in the bond market, they are conventionally quoted in incrementsof \$1,000 Consider a zero-coupon bond with \$100 face value and 15 years to maturity. If the YTM is7.4%, this bond will trade at a price closest to ________.A) \$41.13B) \$34.27C) \$47.98D) \$54.83 \$34.27 Consider a zero-coupon bond with a \$1000 face value and 10 years left until maturity. If theYTM of this bond is 10.2%, then the price of this bond is closest to ________.A) \$1000B) \$454.32C) \$530.04D) \$379 379 Consider a zero-coupon bond with a \$1000 face value and 15 years left until maturity. If thebond is currently trading for \$431 , then the yield to maturity on this bond is closest to ________. 5.77 Under what situation can a zero-coupon bond be selling at a premium? Unlike a coupon bond, a zero-coupon bond does not have a periodic cash flow with onelump-sum payment of the face value at its maturity. Consequently, a zero-coupon bondwill be always selling at a price less than its face value. If it does then the time value ofmoney concepts will be violated, which never happens. Under what situation can a zero-coupon bond be selling at par to its face value? Unlike a coupon bond, a zero-coupon bond does not have a periodic cash flow with onelump-sum payment of the face value at its maturity. Consequently, a zero-coupon bondwill be always selling at a price less than its face value and can never sell at par with itsface value. If it does then the time value of money concepts will be violated, which neverhappens. How are the cash flows of a zero-coupon bond different from those of a coupon bond? A zero-coupon bond has only two cash flows over its life. The first one is associated withthe issues borrowing the money and the second when the issuer returns the principal. Acoupon bond, on the other hand, has several cash flows over its life. The first cash flow ofboth these types of bonds, zero-coupon and coupon are similar as they denote the issuerborrowing the money. However, for a coupon bond the subsequent cash flows over itslife correspond to the interest payment promised by the issuer with a final payment equalto the return of principal Treasury bonds have original maturities from one to ten years, while Treasury notes haveoriginal maturities of more than ten years. T OR F FALSE Bond traders generally quote bond yields rather than bond prices, since yield to maturitydepends on the face value of the bond. T OR F FALSE What is the yield to maturity of a(n) eight-year, \$5000 bond with a 4.4% coupon rate andsemiannual coupons if this bond is currently trading for a price of \$4723.70 ? 5.26 What is the yield to maturity of a ten-year, \$10,000 bond with a 5.4% coupon rate andsemiannual coupons if this bond is currently trading for a price of \$9207.93 ?A) 7.79%B) 9.08%C) 6.49%D) 3.24% 6.49% A bond has five years to maturity, a \$1000 face value, and a 5.5% coupon rate with annualcoupons. What is its yield to maturity if it is currently trading at \$846.11 ?A) 11.41%B) 13.31%C) 7.61%D) 9.51 9.51 What must be the price of a \$10,000 bond with a 6.1% coupon rate, semiannual coupons, andfive years to maturity if it has a yield to maturity of 10% APR?A) \$8494.26B) \$10,193.11C) \$11,891.97D) \$6795.41 8494.26 What must be the price of a \$1000 bond with a 5.8% coupon rate, annual coupons, and 20 yearsto maturity if YTM is 7.8% APR? 800.68 A \$1000 bond with a coupon rate of 6.2% paid semiannually has eight years to maturity and ayield to maturity of 8.3%. If interest rates rise and the yield to maturity increases to 8.6%, whatwill happen to the price of the bond?A) The price of the bond will fall by \$18.93 .B) The price of the bond will fall by \$15.78 .C) The price of the bond will rise by \$15.78 .D) The price of the bond will not change. The price of the bond will fall by \$15.78 A \$5000 bond with a coupon rate of 5.7% paid semiannually has ten years to maturity and ayield to maturity of 6.4%. If interest rates fall and the yield to maturity decreases by 0.8%, whatwill happen to the price of the bond?A) The price of the bond will fall by \$293.50 .B) The price of the bond will fall by \$352.20 .C) The price of the bond will rise by \$410.90 .D) The price of the bond will rise by \$293.50 The price of the bond will rise by \$293.50 What is the coupon rate of an eight-year, \$10,000 bond with semiannual coupons and a price of\$9006.6568 , if it has a yield to maturity of 6.5%? 4.88% The Sisyphean Company has a bond outstanding with a face value of \$5000 that matures in 10years. The bond certificate indicates that the stated coupon rate for this bond is 8.9% and thatthe coupon payments are to be made semiannually. How much will each semiannual couponpayment be?A) \$445.0B) \$222.5C) \$667.5D) \$890.0 222.5 Shown above is information from FINRA regarding one of Bank of Americaʹs bonds. How muchwould the holder of such a bond earn each coupon payment for each \$100 in face value ifcoupons are paid semiannually?A) \$1.49B) \$2.15C) \$2.32D) \$4.30 2.15 The Sisyphean Company has a bond outstanding with a face value of \$1000 that reachesmaturity in 10 years. The bond certificate indicates that the stated coupon rate for this bond is8.2% and that the coupon payments are to be made semiannually.Assuming the appropriate YTM on the Sisyphean bond is 7.3%, then the price that this bondtrades for will be closest to ________. \$1063 The Sisyphean Company has a bond outstanding with a face value of \$1000 that reachesmaturity in 5 years. The bond certificate indicates that the stated coupon rate for this bond is10.0% and that the coupon payments are to be made semiannually.Assuming the appropriate YTM on the Sisyphean bond is 7.5%, then this bond will trade at________.A) parB) a discountC) a premiumD) none of the above a premium The Sisyphean Company has a bond outstanding with a face value of \$1000 that reachesmaturity in 10 years. The bond certificate indicates that the stated coupon rate for this bond is8.0% and that the coupon payments are to be made semiannually.Assuming the appropriate YTM on the Sisyphean bond is 11.1%, then the price that this bondtrades for will be closest to ________. \$816 The Sisyphean Company has a bond outstanding with a face value of \$1000 that reachesmaturity in 5 years. The bond certificate indicates that the stated coupon rate for this bond is8.1% and that the coupon payments are to be made semiannually.Assuming the appropriate YTM on the Sisyphean bond is 10.6%, then this bond will trade at________.A) a premiumB) a discountC) parD) none of the above a discount The Sisyphean Company has a bond outstanding with a face value of \$1000 that reachesmaturity in five years. The bond certificate indicates that the stated coupon rate for this bond is8.5% and that the coupon payments are to be made semiannually. Assuming that this bondtrades for \$1081.73 , then the YTM for this bond is closest to ________.A) 5.2%B) 7.87%C) 6.56%D) 9.18% 6.56 The Sisyphean Company has a bond outstanding with a face value of \$5000 that reachesmaturity in 8 years. The bond certificate indicates that the stated coupon rate for this bond is8.2% and that the coupon payments are to be made semiannually. Assuming that this bondtrades for \$4541.53 , then the YTM for this bond is closest to ________. 9.95 The Sisyphean Company has a bond outstanding with a face value of \$1000 that reaches maturity in 15 years.The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon paymentsare to be made semiannually.How much are each of the semiannual coupon payments? Assuming the appropriate YTM onthe Sisyphean bond is 8.8%, then at what price should this bond trade for? Coupon= \$40PV=\$934.07 Assuming that this bond trades for \$1,035.44, then the YTM for this bond is equal to ________. 7.6% What care, if any, should be taken regarding the sign of the cash flows while drawing thetimeline and associated cash flows of a coupon bond? A typical coupon bond will have the first cash flow in the opposite direction as comparedto all the rest of the cash flows over its life. The first cash corresponds to the issuerborrowing the money, while all the rest of the cash flows are payments by the issuer tothe bondholder either in the form of interest or principal. What care, if any, should be taken regarding the timing of the cash flows while drawing thetimeline and associated cash flows of a coupon bond? There are two issues that one has to be careful of in marking the timing of cash flowsassociated with a coupon bond. The first is to be cognizant of the periodicity of thecoupon payment, as most coupons are not paid annually. The second is to make sure thatthe return of principal at the end of the life also has a last coupon payment associatedwith it. How can the financial calculator be used to calculate the price of a coupon bond from its yield tomaturity Most popular financial calculators can help compute the price of a coupon bond inseveral ways. Two such ways may be using ʹʺtime value of moneyʺ (TVM) keys and ʺcashflowʺ (CF) keys What issues should one be careful of when calculating the bond price from its yield to maturityusing the ʺtime value of moneyʺ (TVM) keys of a financial calculator It is quite simple to transfer the bond cash flow timeline to a financial calculator. Care hasto be taken when using the TVM keys in understanding that the last cash flow, i.e., thereturn of principal by the issuer, is automatically augmented by the last coupon paymentand no special steps are needed for that What issues should one be careful of when calculating the bond price from its yield to maturityusing the ʺcash flowʺ (CF) keys of a financial calculator There are two issues that one has to be careful about when using the CF keys incomputing the price of coupon bonds from its yield to maturity. Since the couponpayments are generally identical over the life of the bond, it might be prudent to use thefrequency key while entering this cash flow. That is the first pitfall to be aware of as thefrequency to be entered into the calculator has to be reduced by one to account for the lastcoupon payment that gets added to the return of principal. Similarly, the last cash flowhas to be the sum of principal and the last coupon payment. Before it matures, the price of any bond is always less than its face value. T OR F FALSE bond will trade at a discount if its coupon rate is less than its yield to maturity. T OR F TRUE Which of the following bonds is trading at par?A) a bond with a \$2,000 face value trading at \$1,987B) a bond with a \$1,000 face value trading at \$999C) a bond with a \$1,000 face value trading at \$1,000D) a bond with a \$2,000 face value trading at \$2,012 a bond with a \$1,000 face value trading at \$1,000 A company releases a five-year bond with a face value of \$1000 and coupons paidsemiannually. If market interest rates imply a YTM of 6%, what should be the coupon rateoffered if the bond is to trade at par? 6% A company releases a five-year bond with a face value of \$1000 and coupons paidsemiannually. If market interest rates imply a YTM of 8%, which of the following coupon rateswill cause the bond to be issued at a premium? 10% Which of the following bonds is trading at a premium?A) a five-year bond with a \$2,000 face value whose yield to maturity is 7.0% and coupon rateis 7.2% APR paid semiannuallyB) a ten-year bond with a \$4,000 face value whose yield to maturity is 6.0% and coupon rateis 5.9% APR paid semiannuallyC) a 15-year bond with a \$10,000 face value whose yield to maturity is 8.0% and coupon rateis 7.8% APR paid semiannuallyD) a two-year bond with a \$50,000 face value whose yield to maturity is 5.2% and couponrate is 5.2% APR paid monthly a five-year bond with a \$2,000 face value whose yield to maturity is 7.0% and coupon rateis 7.2% APR paid semiannually Which of the following statements is true of bond prices?A) A fall in bond prices causes interest rates to fall.B) A fall in interest rates causes a fall in bond prices.C) A rise in interest rates causes bond prices to fall.D) Bond prices and interest rates are not connected. A rise in interest rates causes bond prices to fall A bond is currently trading below par. Which of the following must be true about that bond?A) The bondʹs yield to maturity is less than its coupon rate.B) The bond is a zero-coupon bond.C) The bondʹs yield to maturity is greater than its coupon rate.D) B or C above The bond is zero coupon AND the bonds yield to maturity is greater than its coupon rate If the yield to maturity of all of the following bonds is 6%, which will trade at the greatestpremium per \$100 face value?A) a bond with a \$10,000 face value, four years to maturity and 6.2% semiannual couponpaymentsB) a bond with a \$500 face value, seven years to maturity and 5.2% annual coupon paymentsC) a bond with a \$5,000 face value, seven years to maturity and 5.5% annual couponpaymentsD) a bond with a \$1,000 face value, five years to maturity and 6.3% annual coupon payments a bond with a \$1,000 face value, five years to maturity and 6.3% annual coupon payments A bond has a \$10,000 face value, ten years to maturity, and 8% semiannual coupon payments.What would be the expected difference in this bondʹs price immediately before and immediatelyafter the next coupon payment?A) \$800B) \$400C) \$1200D) \$200 400 ten-year, zero-coupon bond with a yield to maturity of 4% has a face value of \$1000 . Aninvestor purchases the bond when it is initially traded, and then sells it four years later. What isthe rate of return of this investment, assuming the yield to maturity does not change 4% Which of the following bonds will be most sensitive to a change in interest rates?A) a ten-year bond with a \$2,000 face value whose yield to maturity is 5.8% and coupon rateis 5.8% APR paid semiannuallyB) a 15-year bond with a \$5,000 face value whose yield to maturity is 7.4% and coupon rate is6.2% APR paid annuallyC) a 20-year bond with a \$3,000 face value whose yield to maturity is 6.0% and coupon rate is5.4% APR paid semiannuallyD) a 30-year bond with a \$1,000 face value whose yield to maturity is 5.5% and coupon rate is6.4% APR paid annually a 30-year bond with a \$1,000 face value whose yield to maturity is 5.5% and coupon rate is6.4% APR paid annually An investor purchases a 30-year, zero-coupon bond with a face value of \$5000 and a yield tomaturity of 8.4%. He sells this bond ten years later. What is the rate of return on his investment,assuming yield to maturity does not change?A) 6.72%B) 5.04%C) 8.40%D) 4.20% 8.40% Which of the following bonds will be least sensitive to a change in interest rates?A) a ten-year bond with a \$2,000 face value whose yield to maturity is 5.8% and coupon rateis 5.8% APR paid semiannuallyB) a 15-year bond with a \$5,000 face value whose yield to maturity is 7.4% and coupon rate is6.2% APR paid annuallyC) a 20-year bond with a \$3,000 face value whose yield to maturity is 6.0% and coupon rate is5.4% APR paid semiannuallyD) a 30-year bond with a \$1,000 face value whose yield to maturity is 5.5% and coupon rate is6.4% APR paid annually a ten-year bond with a \$2,000 face value whose yield to maturity is 5.8% and coupon rateis 5.8% APR paid semiannually Which of the following bonds will be most sensitive to a change in interest rates if all bondshave the same initial yield to maturity?A) a ten-year bond with a \$1,000 face value whose coupon rate is 5.8% APR paidsemiannuallyB) a ten-year bond with a \$1,000 face value whose coupon rate is 7.4% APR paidsemiannuallyC) a 20-year bond with a \$1,000 face value whose coupon rate is 5.8% APR paidsemiannuallyD) a 20-year bond with a \$1,000 face value whose coupon rate is 7.4% APR paidsemiannually a 20-year bond with a \$1,000 face value whose coupon rate is 5.8% APR paidsemiannually A company issues a ten-year \$1,000 face value bond at par with a coupon rate of 6.1% paidsemiannually. The YTM at the beginning of the third year of the bond (8 years left to maturity)is 8.1%. What is the new price of the bond?A) \$883.91B) \$1060.69C) \$1237.47D) \$1,000.00 883.91 A company issues a ten-year \$1,000 face value bond at par with a coupon rate of 6.7% paidsemiannually. The YTM at the beginning of the third year of the bond (8 years left to maturity)is 8.1%. What was the percentage change in the price of the bond over the past two years? -8.13% What is the dirty price of a bond?A) the bondʹs price based only on the bondʹs yieldB) the bondʹs actual cash priceC) the bondʹs price based only on coupon paymentsD) the bondʹs price less an adjustment for changes in interest rates the bondʹs actual cash price A five-year bond with a \$1,000 face value has a yield to maturity is 5.0% and itʹs coupon rate is6.0% paid annually. The dirty price of this bond exactly 6 months after its second couponpayment is closest to ________. 1057.23 A 20-year bond with a \$1,000 face value was issued with a yield to maturity of 4.3% and payscoupons semi-annually. After ten years, the yield to maturity is still 4.3% and the clean price ofthe bond is \$959.71 . After three more months go by, what would you expect the dirty price tobe?A) \$978.71B) \$969.21C) \$997.71D) Cannot be determined from information given. 969.21 Under what situation should the clean price, dirty price, and the price calculated by the basicannuity and present value (PV) equations for a bond be equal? Typically, while drawing the timeline for bond cash flows, the price calculated is the priceon the date of coupon payment. Even on this date there would be a pre-coupon paymentprice and a post-coupon payment price. The clean price, dirty price and the pricecalculated by the annuity and present value (PV) equations converge to a single priceright after the coupon has detached from the bond and paid to the holder Bonds with a high risk of default generally offer high yields. T OR F TRUE The credit spread of a bond shrinks if it is perceived that the probability of the issuer defaultingincreases. T OR F FALSE Which of the following best describes a bond rated by Standard & Poorʹs and Moody as B?A) judged to be high quality by all standardsB) considered to be medium grade obligationsC) neither highly protected nor poorly securedD) generally lacks the characteristics of a desirable investment generally lacks the characteristics of a desirable investment Why are the interest rates of U.S. Treasury securities less than the interest rates of equivalentcorporate bonds?A) The U.S. government has a high credit spread.B) There is significant risk that the U.S. government will default.C) U.S. Treasury securities are widely regarded to be risk-free.D) U.S. Treasury securities yield inflation adjusted interest rates. U.S. Treasury securities are widely regarded to be risk-free. A firm issues two-year bonds with a coupon rate of 6.7%, paid semiannually. The credit spreadfor this firmʹs two-year debt is 0.8%. New two-year Treasury notes are being issued at par witha coupon rate of 3.1%. What should the price of the firmʹs outstanding two-year bonds be per\$100 of face value? 105.34 A firm issues 5-year bonds with a coupon rate of 4.7%, paid semiannually. The credit spread forthis firmʹs 5-year debt is 1.2%. New 5-year Treasury notes are being issued at par with acoupon rate of 5.1%. What should the price of the firmʹs outstanding 5-year bonds be if theirface value is \$1,000?A) \$932.28B) \$12.00C) \$1305.19D) \$745.82 932.28
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