a. An investment in a coupon bond will provide the investor with a return equal to the bond’s yield to maturity at the time of purchase if:i. The bond is not called for redemption at a price that exceeds its par value.ii. All sinking fund payments are made in a prompt and timely fashion over the life of the issue.iii. The reinvestment rate is the same as the bond’s yield to maturity and the bond is held until maturity.iv. All of the above.b. A bond with a call feature:i. Is attractive because the immediate receipt of principal plus premium produces a high return.ii. Is more apt to be called when interest rates are high because the interest savings will be greater.iii. Will usually have a higher yield to maturity than a similar noncallable bond.iv. None of the above.c. In which one of the following cases is the bond selling at a discount?i. Coupon rate is greater than current yield, which is greater than yield to maturity.ii. Coupon rate, current yield, and yield to maturity are all the same.iii. Coupon rate is less than current yield, which is less than yield to maturity.iv. Coupon rate is less than current yield, which is greater than yield to maturity.d. Consider a 5-year bond with a 10% coupon that has a present yield to maturity of 8%. If interest rates remain constant, one year from now the price of this bond will be:i. Higherii. Loweriii. The sameiv. Par
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
a. An investment in a coupon bond will provide the investor with a return equal to the bond’s yield to maturity at the time of purchase if:
i. The bond is not called for redemption at a price that exceeds its par value.
ii. All sinking fund payments are made in a prompt and timely fashion over the life of the issue.
iii. The reinvestment rate is the same as the bond’s yield to maturity and the bond is held until maturity.
iv. All of the above.
b. A bond with a call feature:
i. Is attractive because the immediate receipt of principal plus premium produces a high return.
ii. Is more apt to be called when interest rates are high because the interest savings will be greater.
iii. Will usually have a higher yield to maturity than a similar noncallable bond.
iv. None of the above.
c. In which one of the following cases is the bond selling at a discount?
i. Coupon rate is greater than current yield, which is greater than yield to maturity.
ii. Coupon rate, current yield, and yield to maturity are all the same.
iii. Coupon rate is less than current yield, which is less than yield to maturity.
iv. Coupon rate is less than current yield, which is greater than yield to maturity.
d. Consider a 5-year bond with a 10% coupon that has a present yield to maturity of 8%. If interest rates remain constant, one year from now the price of this bond will be:
i. Higher
ii. Lower
iii. The same
iv. Par
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