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##### Davenport FINC week 4 cengage problems

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Question;?;Check My Work(3;remaining);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.;Problem 5-4;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;?;eBook;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.;?;Check My Work(3 remaining);Problem 5-14;Current Yield with Semiannual Payments;?;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?%;?;Check My Work(3;remaining);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.

Paper#45042 | Written in 18-Jul-2015

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