Davenport FINC week 4 cengage problems

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A 10-year bond with a 9% annual coupon has a yield to maturity
of 8%. Which of the following statements is CORRECT?

a. The bond is selling below its par value.

b. If the yield to maturity remains constant, the bond’s
price one year from now will be higher than its current price.

c.If the yield to maturity remains constant, the
bond’s price one year from now will be lower than its current price.

d. The bond is selling at a discount.

e. The bond’s current yield is greater than 9%

Which of the following events would make it more likely that a
company would choose to call its outstanding callable bonds?

a. Market interest
rates decline sharply.

b. Market interest rates rise sharply.

c. The company’s bonds are downgraded.

d. The company’s financial situation deteriorates
significantly.

e. Inflation increases significantly

Problem 5-19

Assume that the real risk-free rate, r*, is 2% and that
inflation is expected to be 7% in Year 1, 5% in Year 2, and 4% thereafter.
Assume also that all Treasury securities are highly liquid and free of default
risk. If 2-year and 5-year Treasury notes both yield 10%, what is the
difference in the maturity risk premiums (MRPs) on the two notes; that is, what
is MRP5minus
MRP2? Round your answer to two decimal places.

%

Which of the following statements is CORRECT?

a.
Sinking fund provisions sometimes turn out to adversely affect bondholders,
and this is most likely to occur if interest rates decline after the bond
has been issued.

b. A sinking fund provision makes a bond more risky to
investors at the time of issuance.

c. Sinking fund provisions never require companies to retire
their debt; they only establish “targets” for the company to
reduce its debt over time.

d. If interest rates have increased since a company issued
bonds with a sinking fund, the company is less likely to retire
the bonds by buying them back in the open market, as opposed to calling
them in at the sinking fund call price.

e. Most sinking funds require the issuer to provide funds to
a trustee, who saves the money so that it will be available to pay off
bondholders when the bonds mature.

Determinant of Interest Rates

The real risk-free rate is 4%. Inflation is expected to be 3%
this year and 5% during the next 2 years. Assume that the maturity risk premium
is zero.

What is the yield on 2-year Treasury securities? Round your
answer to two decimal places.
%

What is the yield on 3-year Treasury securities? Round your
answer to two decimal places.
%

Problem 5-7
Bond Valuation with Semiannual Payments

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Renfro Rentals has issued bonds that have a 11% coupon rate,
payable semiannually. The bonds mature in 19 years, have a face value of
$1,000, and a yield to maturity of 9%. What is the price of the bonds? Round
your answer to the nearest cent.

$

Problem 5-1
Bond Valuation with Annual Payments

Jackson Corporation’s bonds have 15 years remaining to maturity.
Interest is paid annually, the bonds have a $1,000 par value, and the coupon
interest rate is 6%. The bonds have a yield to maturity of 8%. What is the
current market price of these bonds? Round your answer to the nearest cent.

$

Problem 5-6
Maturity Risk Premium

The real risk-free rate is 3%, and inflation is expected to be
2% for the next 2 years. A 2-year Treasury security yields 6%. What is the
maturity risk premium for the 2-year security?

%

Assume that all interest rates in the economy decline from 10%
to 9%. Which of the following bonds would have thelargestpercentage
increase in price?

a. An 8-year bond with a 9% coupon.

b. A 10-year bond with a 10% coupon.

c. A 3-year bond with a 10% coupon.

d. A
10-year zero coupon bond.

e. A 1-year bond with a 15% coupon.

Tucker Corporation is planning to issue new 20-year bonds.
Initially, the plan was to make the bonds non-callable. If the bonds were made
callable after 5 years at a 5% call premium, how would this affect their
required rate of return?

a. Because of the call premium, the required rate of return
would decline.

b. The required rate of return would decline because the
bond would then be less risky to a bondholder.

c. There is no reason to expect a change in the required
rate of return.

d. The required rate
of return would increase because the bond would then be more risky to a
bondholder.

e. It is impossible to say without more information.

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Problem 5-14
Current Yield with Semiannual Payments

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A bond that matures in 10 years sells for $1,190.The bond has
a face value of $1,000 and a yield to maturity of 9.7489%. The bond pays
coupons semiannually. What is the bond’s current yield? Round your answer to
two decimal places.

%

Which of the following statements is CORRECT?

a. The longer the time to maturity, the smaller the change
in the value of a bond in response to a given change in interest rates.

b. You hold two bonds. One is a 10-year, zero coupon, bond
and the other is a 10-year bond that pays a 6% annual coupon. The same
market rate, 6%, applies to both bonds. If the market rate rises from the
current level, the zero coupon bond will experience the smaller percentage
decline.

c. You
hold two bonds. One is a 10-year, zero coupon, issue and the other is a
10-year bond that pays a 6% annual coupon. The same market rate, 6%,
applies to both bonds. If the market rate rises from the current level, the
zero coupon bond will experience the larger percentage
decline.

d. The time to maturity does not affect the change in the
value of a bond in response to a given change in interest rates.

e. The shorter the time to maturity, the greater the change
in the value of a bond in response to a given change in interest rates.

Problem 5-8
Yield to Maturity and Call with Semiannual Payments

Thatcher Corporation’s bonds will mature in 16 years. The bonds
have a face value of $1,000 and an 7.5% coupon rate, paid semiannually. The
price of the bonds is $1,100. The bonds are callable in 5 years at a call price
of $1,050. Round your answers to two decimal places.

What is their yield to maturity?
%

What is their yield to call?
%

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Bond A has a 9% annual coupon, while Bond B has a 7% annual
coupon. Both bonds have the same maturity, a face value of $1,000, and an 8%
yield to maturity. Which of the following statements is CORRECT?

a. If the yield to maturity for both bonds remains at 8%,
Bond A’s price one year from now will be higher than it is today, but Bond
B’s price one year from now will be lower than it is today.

b. If the yield to maturity for both bonds immediately
decreases to 6%, Bond A’s bond will have a larger percentage increase in
value.

c. Bond A trades at a discount, whereas Bond B trades at a
premium.

d. Bond A’s capital gains yield is greater than Bond B’s
capital gains yield.

e. Bond
A’s current yield is greater than that of Bond B.

Problem 5-2
Yield to Maturity for Annual Payments

Wilson Wonders’s bonds have 7 years remaining to maturity.
Interest is paid annually, the bonds have a $1,000 par value, and the coupon
interest rate is 9%. The bonds sell at a price of $1,095. What is their yield
to maturity? Round your answer to two decimal places.

%

You are considering two bonds. Bond
A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a
7% yield to maturity, and the YTM is expected to remain constant. Which of the
following statements is CORRECT?

a. The prices of both bonds will increase by 7% per year.

b. The
price of Bond A will decrease over time, but the price of Bond B will
increase over time.

c. The prices of both bonds will increase over time, but the
price of Bond A will increase by more.

d. The price of Bond B will decrease over time, but the
price of Bond A will increase over time.

e. The prices of both bonds will remain unchanged.

Which of the following statements is
CORRECT?

a. Assume that two bonds have equal maturities and are of
equal risk, but one bond sells at par while the other sells at a premium
above par. The premium bond must have a lower current yield and a higher
capital gains yield than the par bond.

b. A
bond’s current yield must always be either equal to its yield to maturity
or between its yield to maturity and its coupon rate.

c. If a bond sells at par, then its current yield will be
less than its yield to maturity.

d. If a bond sells for less than par, then its yield to
maturity is less than its coupon rate.

e. A discount bond’s price declines each year until it
matures, when its value equals its par value.

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