Managerial Finance
Chapter 5, Quiz
Name: Emily Smith
Multiple Choice: Please circle the correct answer choice
. Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds? a. The company’s bonds are downgraded. b. Market interest rates rise sharply. c. Market interest rates decline sharply. d. The company 's financial situation deteriorates significantly. e. Inflation increases significantly. . A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT? a. If the yield to maturity remains constant, the bond’s price one year from now will be higher than its current
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What is their yield to call (YTC)?
. Garvin Enterprises’ bonds currently sell for $1,150. They have a 6-year maturity, an annual coupon of $85, and a par value of $1,000. What is their current yield?
. Assume that you are considering the purchase of a 15-year bond with an annual coupon rate of 9.5%. The bond has face value of $1,000 and makes semiannual interest payments. If you require an 11.0% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?
. If 10-year T-bonds have a yield of 6.2%, 10-year corporate bonds yield 8.5%, the maturity risk premium on all 10-year bonds is 1.3%, and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond?
. 5-year Treasury bonds yield 5.5%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year bonds is 0.4%. What is the real risk-free rate, r*?
. Crockett Corporation 's 5-year bonds yield 6.85%, and 5-year T-bonds yield 4.75%. The real risk-free rate is r* = 2.80%, the default risk
b. What would be the value of each bond if they had annual coupon payments?
Risk free rate is taken to be 4.69% while the market risk premium is 5.01%.
A bond with an annual coupon of $70 and originally sold at par for $1,000. The current market interest rate (yield to maturity) is 8%. This bond will sell at _______. Assuming no change in market interest rates, the bond will present the holder with capital ________ as it matures.
We take Yields to Maturity of U.S.10 Year Treasury Note as the risk-free rate (rf). Long-term government bonds are the least risky among all financial assets. They are issued by the government so they have no default risk. Also, long-term bonds match the duration of Boston Beer’s cash flow better than short-term or medium-term bonds do. Therefore, we use the rate as our risk-free rate, which is 2.17% as of
24. What is the taxable equivalent yield on a municipal bond with a yield to maturity of 4% for an investor in the 28% tax bracket?
1(a) Regular Treasury bonds are purchased at face value in the beginning or an adjusted price prior maturity. And in every period, normally annul or semiannual, investor will receive a coupon as an interest and at the maturity a principal plus coupon.
14. Global Enterprises has just signed a $3 million contract. The contract calls for a payment of $.5 million today, $.9 million one year from today, and $1.6 million two years from today. What is this contract really worth if Global Enterprises can earn 12 percent on its money?
The yield to maturity on a 15-year bond is a true estimate of the cost of 30-year bond
The bonds have 20 years to maturity, pay interest at 9.3%, have a par value of $1,000 and are currently selling for $890.
So, the 20 year corporate bond interest rate associated with the company’s rating is 3.86.
b. Generate a graph or table showing how the bond’s present value changes for semi-annually compounded interest rates between 1% and 15%.
* We assume a risk-free rate of 5.09%. This number comes from the current yield of the 30 year T-bond as shown in Exhibit 5.
2. The discount rate for this bond would be 0.70%. I started with an appropriate discount rate to derive my bond purchase price, since I would not purchase a bond without finding out ahead of time what a good price should be.
All else equal, which bond’s price is more effected by a change in interest rates, a bond with a large coupon or a small coupon? Why?