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Question;[i]. Listed below are some;provisions that are often contained in bond indentures;1. Fixed assets may be used as;security.;2. The bond may be subordinated;to other classes of debt.;3. The bond may be made;convertible.;4. The bond may have a sinking;fund.;5. The bond may have a call;provision.;6. The bond may have;restrictive covenants in its indenture.;Which;of the above provisions, each viewed alone, would tend to reduce the yield to maturity investors would otherwise;require on a newly issued bond?;a. 1, 2, 3, 4, 5, 6;b. 1, 2, 3, 4, 6;c. 1, 3, 4, 5, 6;d. 1, 3, 4, 6;e. 1, 4, 6;[ii]. Suppose a new company;decides to raise its initial $200 million of capital as $100 million of common;equity and $100 million of long-term debt.;By an iron-clad provision in its charter, the company can never borrow any more money. Which of the following statements is most;correct?;a. If the debt were raised by issuing $50 million;of debentures and $50 million of first mortgage bonds, we could be absolutely;certain that the firm's total interest expense would be lower than if the debt;were raised by issuing $100 million of debentures.;b. If the debt were raised by issuing $50 million;of debentures and $50 million of first mortgage bonds, we could be absolutely;certain that the firm's total interest expense would be lower than if the debt;were raised by issuing $100 million of first mortgage bonds.;c. The higher the percentage of total debt represented by;debentures, the greater the risk of, and hence the interest rate on, the;debentures.;d. The higher the percentage of total debt represented by;mortgage bonds, the riskier both types of bonds will be, and, consequently, the;higher the firm?s total dollar interest charges will be.;e. In this situation, we cannot tell for sure how;or whether, the firm's total interest expense on the $100 million of debt would;be affected by the mix of debentures versus first mortgage bonds. Interest;rates on the two types of bonds would vary as their percentages were changed;but the result might well be such that the firm's total interest charges would;not be affected materially by the mix between the two.;Multiple Choice: Problems;[iii]. Assume that you wish to;purchase a bond with a 30-year maturity, an annual coupon rate of 10 percent, a;face value of $1,000, and semiannual interest payments. If you require a 9 percent nominal yield to;maturity on this investment, what is the maximum price you should be willing to;pay for the bond?;a. $905.35;b. $1,102.74;c. $1,103.19;d. $1,106.76;e. $1,149.63;[iv]. A bond has an annual 8;percent coupon rate, a maturity of 10 years, a face value of $1,000, and makes;semiannual payments. If the price is;$934.96, what is the annual nominal yield to maturity on the bond?;a. 8%;b. 9%;c. 10%;d. 11%;e. 12%;[v]. A bond has an annual 11;percent coupon rate, an annual interest payment of $110, a maturity of 20;years, a face value of $1,000, and makes annual payments. It has a yield to maturity of 8.83;percent. If the price is $1,200, what;rate of return will an investor expect to receive during the next year?;a. -0.33%;b.;8.83%;c.;9.17%;d. 11.00%;e. None;of the above;[vi]. You intend to purchase a;10-year, $1,000 face value bond that pays interest of $60 every 6 months. If your nominal annual required rate of;return is 10 percent with semiannual compounding, how much should you be;willing to pay for this bond?;a. $ 826.31;b. $1,086.15;c. $ 957.50;d. $1,431.49;e. $1,124.62;[vii]. Assume that you wish to;purchase a 20-year bond that has a maturity value of $1,000 and makes;semiannual interest payments of $40. If;you require a 10 percent nominal yield to maturity on this investment, what is;the maximum price you should be willing to pay for the bond?;a. $619;b. $674;c. $761;d. $828;e. $902;[viii]. A $1,000 par value bond pays;interest of $35 each quarter and will mature in 10 years. If your nominal annual required rate of;return is 12 percent with quarterly compounding, how much should you be willing;to pay for this bond?;a. $ 941.36;b. $1,051.25;c. $1,115.57;d. $1,391.00;e. $ 825.49;[ix]. Consider a $1,000 par value;bond with a 7 percent annual coupon. The;bond pays interest annually. There are 9;years remaining until maturity. What is;the current yield on the bond assuming that the required return on the bond is;10 percent?;a. 10.00%;b. 8.46%;c. 7.00%;d. 8.52%;e. 8.37%;[x]. Rollincoast Incorporated;issued BBB bonds two years ago that provided a yield to maturity of 11.5 percent. Long-term risk-free government bonds were;yielding 8.7 percent at that time. The;current risk premium on BBB bonds versus government bonds is half what it was;two years ago. If the risk-free;long-term governments are currently yielding 7.8 percent, then at what rate;should Rollincoast expect to issue new bonds?;a. 7.8%;b. 8.7%;c. 9.2%;d. 10.2%;e. 12.9%.

 

Paper#50969 | Written in 18-Jul-2015

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