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1.
award:
4 points
2.
award:
4 points
3.
award:
4 points
Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond
issuer might not pay the interest and/or principal payments as expected?
Interest rate risk premium
Inflation premium
Liquidity premium
Taxability premium
→
None of these is correct.
Refer to section 6.7.
Topic: Default risk premium
The Lo Sun Corporation offers a 6 percent bond with a current market price of $879.36. The yield to maturity is 7.34 percent.
The face value is $1,000. Interest is paid semiannually. How many years is it until this bond matures?
23 years
17 years
→
15 years
16 years
None of these answers is correct.
Semiannual interest rate = .0734 / 2 = .0367
(Note: t is the number of semiannual periods)
Dividing by $30, you get:
29.312 = {[1 – 1 / 1.0367
t
]/ .0367} + 33.3333 / 1.0367
t
Multiplying by .0367, you get:
1.0758 = 1 – 1 / 1.0367
t
+ 1.2233 / 1.0367
t
.0758 = .2233 / 1.0367
t
1.0367
t
= .2946
t = ln.2946 / ln1.0367 =
1.2221 / .0360 = 30 semiannual periods = 15 years
Which one of the following bonds is the least sensitive to changes in market interest rates?
→
8 percent annual coupon, 4 year
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award:
4 points
5.
award:
8 points
6 percent annual coupon, 4 year
Zerocoupon, 10 year
Zerocoupon, 4 year
6 percent annual coupon, 10 year
Refer to section 6.1.
Topic: Interest rate risk
App Store Co. issued 15year bonds one year ago at a coupon rate of 7.1 percent. The bonds make
semiannual payments.
Required:
If the YTM on these bonds is 5.4 percent, what is the current bond price?
(Do not include the dollar
sign ($). Round your answer to 2 decimal places (e.g., 32.16).)
Current bond price
$
1,165.51 ± 1%
Explanation:
To find the price of this bond, we need to realize that the maturity of the bond is 14 years. The bond was
issued one year ago, with 15 years to maturity, so there are 14 years left on the bond. Also, the coupons
are semiannual, so we need to use the semiannual interest rate and the number of semiannual periods.
The price of the bond is:
P = $35.50(PVIFA
2.70%,28
) + $1,000(PVIF
2.70%,28
)
P = $1,165.51
Calculator Solution:
Enter
14 × 2
5.4% / 2
±$71 / 2
±$1,000
N
I/Y
PV
PMT
FV
Solve for
$1,165.51
Suppose the following bond quote for IOU Corporation appears in the financial page of today’s
newspaper. Assume the bond has a face value of $1,000,
and the current date is April 15,
2010
.
Company
(Ticker)
Coupon
Maturity
Last
Price
Last
Yield
EST Vol
(000s)
IOU (IOU)
9.50
Apr 15, 2030
91.615
??
1,835
Requirement 1:
What is the yield to maturity of the bond?
(Do not include the percent sign (%). Round your answer to
2 decimal places (e.g., 32.16).)
Yield to maturity
10.51 ± 1%
%
Requirement 2:
What is the current yield?
(Do not include the percent sign (%). Round your answer to 2 decimal
places (e.g., 32.16).)
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