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Chapter 7 - CHAPTER 7 BONDS AND THEIR VALUATION(Difficulty...

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(Difficulty Levels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard) PART I – New and Revised Carryover Problems and Questions Multiple Choice: Problems Bond valuation Answer: a EASY 1 . The Carter Company's bonds mature in 10 years have a par value of $1,000 and an annual coupon payment of $80. The market interest rate for the bonds is 9%. What is the price of these bonds? a. $935.82 b. $941.51 c. $958.15 d. $964.41 e. $979.53 Bond valuation Answer: c EASY 2 . Ken Williams Ventures' recently issued bonds that mature in 15 years. They have a par value of $1,000 and an annual coupon of 6%. If the current market interest rate is 8%, at what price should the bonds sell? a. $801.80 b. $814.74 c. $828.81 d. $830.53 e. $847.86 Yield to maturity Answer: e EASY 3 . Brown Enterprises’ bonds currently sell for $1,025. They have a 9-year maturity, an annual coupon of $80, and a par value of $1,000. What is their yield to maturity? a. 6.87% b. 7.03% c. 7.21% d. 7.45% e. 7.61% Chapter 7: Bonds and Their Valuation Page 77 CHAPTER 7 BONDS AND THEIR VALUATION
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Yield to maturity Answer: b EASY 4 . Bauer Inc's bonds currently sell for $1,275 and have a par value of $1,000. They pay a $120 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,120. What is their yield to maturity (YTM)? a. 8.78% b. 8.99% c. 9.15% d. 9.33% e. 9.41% Yield to call Answer: d EASY 5 . Highfield Inc's bonds currently sell for $1,275 and have a par value of $1,000. They pay a $120 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,120. What is their yield to call (YTC)? a. 7.00% b. 7.13% c. 7.28% d. 7.31% e. 7.42% Current yield Answer: a EASY/MEDIUM 6 . Brown Enterprises’ bonds currently sell for $1,025. They have a 9-year maturity, an annual coupon of $80, and a par value of $1,000. What is their current yield? a. 7.80% b. 7.90% c. 9.00% d. 9.10% e. 9.20% Yields to maturity and call Answer: c MEDIUM 7 . Kholdy Inc's bonds currently sell for $1,275. They pay a $120 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,120. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. What is the difference between the bond's YTM and its YTC? a. 1.48% b. 1.54% c. 1.68% d. 1.82% e. 1.91% Page 78 Chapter 7: Bonds and Their Valuation
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Yields to maturity and call Answer: a MEDIUM 8 . Travis Corp.'s bonds currently sell for $1,050. They have an 8% annual coupon rate and a 20-year maturity, but they can be called in 5 years at $1,120. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. Under these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds? a. 7.51% b. 7.71% c. 8.04% d. 8.47% e. 8.74% Bond valuation Answer: b MEDIUM 9 . Leggio Corporation issued 20-year, 7% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds has dropped to 6%. What is the new price of the bonds, given that they now have 19 years to maturity?
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