Financial Management 7

Which of the following events would make it more likely that a company would call its outstanding callable bonds?

Market interest rates decline sharply.

Under normal conditions, which of the following would be most likely to increase the coupon rate required for a bond to be issued at par?

Adding a call provision.

Tucker Corporation is planning to issue new 20-year bonds. The current plan is to make the bonds non-callable, but this may be changed. If the bonds are made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

The required rate of return would increase because the bond would then be more risky to a bondholder.

Which of the following statements is CORRECT?

All else equal, if a bond’s yield to maturity increases, its price will fall.

A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT?

If the yield to maturity remains at 8%, then the bond’s price will decline over the next year.

Which of the following bonds would have the greatest percentage increase in value if all interest rates in the economy fall by 1%?

20-year, zero coupon bond.

Which of the following statements is CORRECT?

Relative to a coupon-bearing bond with the same maturity, a zero-coupon bond has more price risk but less reinvestment risk.

Which of the following statements is CORRECT?

If a coupon bond is selling at par, its current yield equals its yield to maturity.

Which of the following statements is CORRECT?

All else equal, bonds with larger coupons have less price risk than bonds with smaller coupons.

Bonds A, B, and C all have a maturity of 10 years and a yield to maturity of 7%. Bond A’s price exceeds its par value, Bond B’s price equals its par value, and Bond C’s price is less than its par value. None of the bonds can be called. Which of the following statements is CORRECT?

If the yield to maturity on each bond increases to 8%, the prices of all three bonds will decline.

Which of the following statements is CORRECT?

If a bond’s yield to maturity exceeds its coupon rate, the bond’s price must be less than its maturity value.

Bond A has a 9% annual coupon, while Bond B has a 7% annual coupon. Both bonds have the same maturity, a face value of $1,000, an 8% yield to maturity, and are noncallable. Which of the following statements is CORRECT?

Bond A’s current yield is greater than that of Bond B.

Which of the following statements is CORRECT?

If their maturities and other characteristics were the same, a 5% coupon bond would have more price risk than a 10% coupon bond.

Morin Company's bonds mature in 8 years, have a par value of $1,000, and make an annual coupon interest payment of $65. The market requires an interest rate of 6.7% on these bonds. What is the bond's price?

$987.92

Radoski Corporation's bonds make an annual coupon interest payment of 7.35% every year. The bonds have a par value of $1,000, a current price of $1,470, and mature in 12 years. What is the yield to maturity on these bonds?

2.71%

Malko Enterprises’ bonds currently sell for $1,150. They have a 6-year maturity, an annual coupon of $75, and a par value of $1,000. What is their current yield?

6.52%

Grossnickle Corporation issued 20-year, noncallable, 7.1% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 19 years to maturity?

$1,185.72

A 25-year, $1,000 par value bond has an 8.5% annual payment coupon. The bond currently sells for $825. If the yield to maturity remains at its current rate, what will the price be 5 years from now?

$835.17

Dyl Inc.'s bonds currently sell for $970 and have a par value of $1,000. They pay a $65 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to maturity (YTM)?

6.83%

Adams Enterprises’ noncallable bonds currently sell for $1,480. They have a 15-year maturity, an annual coupon of $85, and a par value of $1,000. What is their yield to maturity?

4.14%