Chapter 08: Bond Valuation and the Structure of Interest Rates

Zero coupon bonds have no coupon payments over its life and only offer a single payment at maturity.

Which of the following statements is true of zero-coupon bonds?

Convertible bonds can be converted into shares of common stock at some predetermined ratio at the discretion of the bondholder.

Which of the following statements is true?

Less frequent trading activity, leading to lower market liquidity

Which market characteristic is true for corporate bonds compared to stocks?

$1,000

What is the typical face value of a corporate bond?

greater than the bond's coupon rate.

Bonds sell at a discount when the market rate of interest is:

less than the bond's coupon rate.

Bonds sell at a premium when the market rate of interest is:

Yes, the bond is worth more at $951.

Jane Thorpe has been offered a seven-year bond issued by Barone, Inc., for a price of $943.22. The bond has a coupon rate of 9 percent and pays the coupon semiannually. Similar bonds in the market have a yield to maturity of 10 percent today. Should she buy the bonds at the offered price? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

$1,195

Jeremy Kohn is planning to invest in a 10-year bond that pays a 12 percent coupon. The current market rate for similar bonds is 9 percent. Assume semiannual coupon payments. What is the maximum price that should be paid for this bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

$726.27

Highland Corp., a U.S. company, has a five-year bond whose yield to maturity is 6.5 percent. The bond has no coupon payments. What is the price of this zero-coupon bond? (Assume semiannual compounding for these zero-coupon bonds.)

The bond's price increases, selling at a premium

What happens to the price of a bond if interest rates fall below the bond's coupon rate?

equal to the price of the bond.

The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments:

12.2%

Shawna Carter wants to invest her recent bonus in a four-year bond that pays a coupon of 11 percent semiannually. The bonds are selling at $962.13 today. If she buys this bond and holds it to maturity, what would be her yield? (Round to the closest answer.)

9.6%

Huan Zhang bought a 10-year bond that pays 8.25 percent semiannually for $911.10. What is the yield to maturity on this bond? (Round your percentage answer to two decimal places.)

13.21%

Suppose an investor earned a semiannual yield of 6.4 percent on a bond paying coupons twice a year. What is the effective annual yield (EAY) on this investment? (Round to two decimal places.)

The chance that bond prices will move when rates change

What does interest rate risk refer to for bond investors?

Their prices are more sensitive to interest rate changes due to longer cash flow durations

Why do long-term bonds generally exhibit greater interest rate risk than short-term bonds?

It increases the bond's yield to compensate investors for the call risk

How does a call provision typically affect the yield on a bond?

The possibility that the bond issuer might not make the scheduled payments

What does default risk refer to in the context of bonds?

Long-term bonds are yielding more than short-term bonds

What can be inferred if the yield curve is upward sloping?

At the end of a period of economic expansion

When are real interest rates typically the highest?

to sell a security quickly, at a low transaction cost, and at a price close to its fair market value.

Marketability is the ability of an investor:

Investors must pay a premium to purchase a security that exposes them to default risk.

Which of the following statements is NOT true?

The longer the maturity of a security, the greater its interest rate risk.

Which of the following statements is true?