Solved > 7.5   LO5: Coupon Bond Price Properties 1) A:1907318 …

7.5   LO5: Coupon Bond Price Properties

1) A bond sold five weeks ago for $950. The bond is worth $900 in today’s market. The face value of the bond is $1,000. Assuming no changes in risk, which of the following is mostly likely true?

A) The coupon rate increased.

B) Interest rates are lower now than they were five weeks ago.

C) The bond is within one year of maturity.

D) The issuer threatened to call the bond at 110% of par value.

E) Interest rates are higher now than they were five weeks ago.

2) You can buy a bond with a face value of $1,000 and annual coupon payments of $80. The yield to maturity on bonds of similar risk is 7%. This bond should sell

A) at a discount.

B) at a premium.

C) at par.

3) Fortunate Frames Inc. just issued 20-year, 6% coupon bonds at par. Lucky Lenses Inc. has 20-year bonds outstanding that are viewed by investors as having the same risk as Fortunate’s bonds. Lucky’s bonds are selling at a discount. What does this indicate about the coupon rates on these two bonds?

A) Lucky’s coupon rate must be lower than Fortunate’s coupon rate.

B) They must have the same coupon rate.

C) Fortunate’s coupon rate must be lower than Lucky’s coupon rate.

4) Assume that the Microsoft bonds have 5-years to maturity and pay annual coupons of $100. The next coupon is due in one year. The yield on equivalently risky corporate bonds is currently 15%. Assume the yield stays at 15% over the life of the bond. Determine the price of the bond today and after each of the first four coupon payments. Plot those prices on a graph with price on the y-axis and time on the x-axis. (The x-axis starts at time 0 and ends on the date of the fourth coupon.) What do you note about the time path (slope of the line) of the bond price?

A) It is upward sloping.

B) It is downward sloping.

C) It is a horizontal line.

5) Consider a 3-year bond maturing Sept 30, 2019. Assume that you bought the bond on Sept 30, 2016, at a price of $1,074.56 ($1,000 face value). If rates stay as they are for the rest of the year, what percentage change in price do you expect over the next year based on your estimate of the bond price after the second coupon is paid (Sept 30, 2017)? Assume that the bond pays semi-annual coupons (4.5% annual coupon rate) and has a bond equivalent yield of 1.93% per annum.

A) -2.3%

B) 0.88%

C) 0.50%

D) 0.65%

E) 0.76%

6) Assume that the Microsoft bonds have a face value of $1,000, 5-years to maturity and pay annual coupons of $100. The next coupon is due in one year. The yield on equivalently risky corporate bonds is currently 5%. Assume the yield stays at 5% over the life of the bond. Determine the price of the bond today and after each of the first four coupon payments. Plot those prices on a graph with price on the y-axis and time on the x-axis. (The x-axis starts at time 0 and ends on the date of the fourth coupon.) What do you note about the time path (slope of the line) of the bond price?

A) It is upward sloping.

B) It is downward sloping.

C) It is a horizontal line.

7) A bond with an annual coupon of $100 originally sold at par for $1,000. The current yield to maturity on this bond is 9%. Assuming no change in risk, this bond would sell at a ________ in order to compensate ________.

A) discount; the issuer for the higher cost of borrowing

B) discount; the seller for the above market coupon rate

C) premium; the seller for the above market coupon rate

D) premium; the purchaser for the above market coupon rate

E) discount; the purchaser for the above market coupon rate

8) Suppose that you are reviewing a price sheet for bonds and see the following prices (per $100 face value) reported. Without calculating the price of each bond, which bond seems to be reported incorrectly?

Bond

Price

Coupon Rate

Yield

V

100

6%

6%

W

110

8%

6%

X

95

0%

5%

Y

107

7%

9%

Z

90

6%

9%

A) Bond V

B) Bond X

C) Bond Z

D) Bond Y

E) Bond W

9) A $1,000 face value bond has a 9% annual coupon rate. The next coupon is due in one year. The bond matures in 15 years and the yield on the bond is 10%. What is the difference in price if the yield rises to 11%?

A) -$67.76

B) -$6.77

C) $6.77

D) $9.24

E) $67.76

10) A US Government 4% coupon bond has 10 years remaining to maturity. The bond pays annual coupons and the next coupon is due in one year. The face value of the bond is $100. The bond is currently trading for $74.43 and yields 6%. Calculate your capital gain return if you buy the bond today, hold it for one year and sell it after the next coupon. (Assume that yields are expected to remain constant at the current level over the bond’s life.)

A) 0.6%

B) 1.6%

C) 2.6%

D) 4%

E) 6%

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