Ch 07- Adaptive Test Prep - Bonds and Their Valuation part 2

Delta Corporation has a bond issue outstanding with a 7% coupon, semiannual payments, and 4 years remaining until maturity. The par value of the bond is $1,000. Determine the current value of the bond if present market conditions justify a 14% nominal annual required rate of return.

• $1,126.42

• $1,000.00

• $796.04

• $791.00

• $536.38

A zero coupon bond pays no interest. It is offered at par value, which is where it sells initially. These bonds provide compensation to investors in the form of capital appreciation.

• True

• False

• 6.20%

• 6.53%

• 6.85%

• 7.20%

• 7.55%

Assume that you are considering the purchase of a 20-year, noncallable bond with an annual coupon rate of 9.5%. The bond has a face value of $1,000, and it makes semiannual interest payments. If you require an 8.4% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

• $1,105.69

• $1,133.34

• $1,161.67

• $1,190.71

• $1,220.48

Which of the following statements about bond price risk is CORRECT, assuming that all else is equal?

• High-coupon bonds have less reinvestment risk than low-coupon bonds.

• Long-term bonds have less reinvestment risk than short-term bonds.

• Long-term bonds have less price risk than short-term bonds.

• Low-coupon bonds have less price risk than high-coupon bonds.

• Short-term bonds have less reinvestment risk than long-term bonds.

Which of the following statements is FALSE? In all of the statements, assume that "other things are held constant."

• Price sensitivity—that is, the change in price due to a given change in the required rate of return—increases as a bond's maturity increases.

• For a given bond of any maturity, a given percentage point increase in the going interest rate (rd) causes a larger dollar capital loss than the capital gain stemming from an identical decrease in the interest rate.

• For any given maturity, a given percentage point increase in the interest rate causes a smaller dollar capital loss than the capital gain stemming from an identical decrease in the interest rate.

• From a borrower's point of view, interest paid on bonds is tax deductible.

• A 20-year zero-coupon bond has less reinvestment risk than a 20-year coupon bond.

There is a direct relationship between bond ratings and the required rate of return on bonds; that is, the higher the rating, the higher is the required rate of return.

• True

• False

Delta Corporation has a bond issue outstanding with an annual coupon rate of 7% and 4 years remaining until maturity. The par value of the bond is $1,000. Determine the current value of the bond if present market conditions justify a 14% nominal annual required rate of return.

• $1,126.42

• $1,000.00

• $796.04

• $791.00

• $536.38

• 3.42%

• 3.60%

• 3.79%

• 3.99%

• 4.20%

Of the following, identify the CORRECT statement.

• If a bond sells at par, then its current yield will be less than its yield to maturity.

• A bond's current yield must always be either equal to its yield to maturity or between its yield to maturity and its coupon rate.

• Assume that two bonds have equal maturities and are of equal risk, but one bond sells at par while the other sells at a premium above par. The premium bond must have a lower current yield and a higher capital gains yield than the par bond.

• A discount bond's price declines each year until it matures, when its value equals its par value.