Please select the best choice from the answer choices given.
Which of the following is NOT a type of long-term debt?
a. mortgage bonds
c. debenture bonds
d. commercial paper
answer; commercial paper
What is the current price of a bond issued by Dundee International which pays a
semiannual coupon rate of 6 8/9%? The bond matures in 5 years and the required return
on investments of similar risk is 6.5%.
flow and maturity value= 1000
Current price of the bond = Semi Annual Coupon*(1-(1+r)^-n)/r + Face value/(1+r)^n
r = 6.5%*1/2 = 3.25%
n = 5*2 = 10
Current price of the bond = (1000*(6+8/9)%*1/2)*(1-(1+3.25%)^-10)/3.25% +
Current price of the bond = 1016.38
Maxine Corp has a 5 1/8% coupon bond outstanding in 2004. The bond matures on April
1 in the maturity year. Suppose an investor bought this bond on April 1, 1999 and
assume that interest is paid annually on April 1. Calculate the yield-to-maturity assuming
the investor buys the bond at 105, as quoted in the financial press.
Solving for i=4.26*2=8.52%
A “junk bond” is a term used to describe a bond that
a. is in default
b. is rated Ba or lower
c. is currently paying interest
d. has been downgraded by Moody’s
answer; describes bond that is normally rated Ba or lower
_____________________________are not secured by specific assets.
Debentures are the only one that are not secured by specific assets
Determine the expected inflation rate if the nominal rate of return is 10% and the real rate
of return is 7%.
Expected inflation= nominal rate of return- the real rate of return
You just purchased a bond for 99.35. It matures in 12 years and pays a coupon of 8 3/7%
semiannually. What return can you expect to earn if you hold it until maturity?
Assuming that you hold bond whose par value is $100, then we determine cashflow first
=( (59/7)%* 100)/2= 8.429/2= $4.214
Now we apply this formula $99.35= $4.214*(1-(1/(1+i)^8.4))/i+$100*(1/(1+i)^8.4)
Since the price par value is higher than bond price then this means bond is priced at
discount and the interest will be greater than (59/7)%
So we use % higher than 0.0842 in order to get which corresponds 99.35
The interest is 9.04%
The ____ the investor's required rate of return on a bond, the ____ will be the value of the
bond to the investor.
Answer; the lower, the higher
A sinking fund allows the issuer to
a. redeem an entire debt issue prior to maturity
b. purchase a portion of the debt each year in the open market or call
a portion of the debt for mandatory redemption
c. call the entire debt issue
d. accumulate interest expenses into a sinking fund account
Answer; this sinking fund allows the issuer to purchase a portion of the debt each year in the
open market or call a portion of the debt for mandatory redemption
How many years are left until maturity of a bond that is selling for $916.95? The coupon
rate of the bond is 8 percent, interest is payable semiannually, and the current market rate
of return on a similar risk bond is 10 percent.
You can use try and error or calculator where you feed numbers that can be near $916.95
Interest= 10/2 since is semiannually