84, Subordination clauses in bond indentures |A. may restrict the amount of additional borrowing the firm can undertake, 8. are sometimes referred to as "me-first” rules. C. provide higher priority to senior creditors in the event of bankruptcy. D.all of the above are true. €. both Band Care true. Allof the statements correctly describe subordination clauses. £85. Collateralized bonds ‘rely on the general earning power of the firm for the bond's safety. 8. are backed by specific assets of the issuing firm. are considered the safest assets of the firm. Dall of the above are true. E.both B and Care true. Collateralized bonds are considered the safest assets of the firm because they are backed by specific assets ofthe firm, rather than relying on the firm's general earning power. £86. Debt securities are often called fixed-income securities because | the government fixes the maximum rate that can be paid on bonds. 8. they are held predominantly by older people who are living on fixed incomes. they pay a fited amount at maturity D. they promise either a fixed stream of Income or a stream of income determined by a specific formula, they were the first type of investment offered to the public, which allowed them to "fix" their income ata higher level by investing in bonds. This definition is glven in the chapter's introduction. It helps the student understand the nature of bonds. 87. Azero-coupon bond is one that ‘Accffectively has a zero percent coupon rate. 8. pays interest to the investor based on the general level of interest rates, rather than at a specified coupon rate. C. pays interest to the investor without requiring the actual coupon to be mailed to the corporation, Dis issued by state governments because they don't have to pay interest. E fs analyzed primarily by focusing ("zeroing in") on the coupon rate. Zero-coupon bonds pay no interest. Investors receive the face value at maturity ‘88, Swingin’ Soiree, nc. isa firm that has its main office on the Right Bank in Paris. The firm just issued bonds with a final payment amount that depends on whether the Seine River floods. This type of bond is. known as ‘Aa contingency bond B.a catastrophe bond C. an emergency bond D.an incident bond. E. an eventuality bond Catastrophe bonds are used to transfer risk from the firm to the capital markets.89. One year ago, you purchased a newly issued TIPS bond that has a 6% coupon rate, five years to ‘maturity, and a par value of $1,000. The average inflation rate over the year was 4.2% What is the amount of the coupon payment you will eceive and what is the current face value of the bond? A, $60.00, $1,000 8. $42.00, $2,042 c. $60.00, $1,042 $62.52, $1,042 . $102.00, $1,000, ‘The bond price, which is indexed to the inflation rate, becomes $1,000 * 1.042 = $1,042, The interest payment is based on the coupon rate and the new face value. The interest amount equals $1,042 * 06 $62.52. 90. Bond analysts might be more interested in a bond's yield to call if |. the bond's yield to maturity is insufficient. 8. the firm has called some of its bonds in the past. C. the investor only plans to hold the bond until its first call date. D. interest rates are expected to rise. Ev interest rates are expected to fall. If interest rates fall the firm is more likely to cal the issue and refinance at lower rates. Thisis similar to an individual refinancing @ home. The student has to think through each of the reasons given and make the connection between falling rates and the motivation to refinance. 91. What is the relationship between the price of a straight bond and the price of a callable bond? A. The straight bond's price willbe higher than the callable bond's price for low interest rates. 8. The straight bond's price will be lower than the callable bond's price for low interest rates. C. The straight bond's price will change as interest rates change, but the callable bond's price will stay the same, . The straight bond and the callable bond will have the same price. E. There is no consistent relationship between the two types of bonds. For low interest rates, the price difference is due to the value of the firm's option to call the bond at the call price. The firm is more likely to call the issue at low interest rates, so the option is valuable. At higher interest rates the firm is less likely to call and this option loses value. The prices converge for high interest rates. A graphical representation is shown in Figure 14.4, page 463. 92. Three years ago you purchased a bond for $974.69. The bond had three years to maturity, a coupon rate of 8%, paid annually, and a face value of $1,000. Each year you reinvested all coupon interest at the prevailing reinvestment rate shown in the table below. Today is the bond's maturity date. What is your realized compound yield on the bond? Time Prevailing Reinvestment Rate 0 (purchase date) 6.0% 1 5 (maturity date)6.43% 8. 7.96% ©. 8.23% 8.97% £9.13% The investment grows to a total future value of $80 * (1.072) * (1.094) + $80 * (1.094) + $1,080 = $1,261.34 over the three year period. The realized compound yield is the yield that wll compound the original investment to yield the same future value: $974.69 * (L+rcy)? = $1,261.34, (Lercy)’ = 1.29409, 1 + rey = 1.0897, rcy = 8.97%. 93. Which of the following is not a type of international bond? ‘A, Samurai bonds 8. Yankee bonds . bulldog bonds D. Elton bonds E. All of the above are international bonds. ‘Samurai bonds, Yankee bonds, and bulldog bonds are mentioned in the textbook. ‘94. A coupon bond that pays interest annually has a par value of $1,000, matures in 6 years, and has a yield to maturity of 11%. The intrinsic value of the bond today will be A. $712.99 $851.93, c. $1,123.01 D. $886.28 €. $1,000.00 ifthe coupon rate is 7.5%. 95. A coupon bond that pays interest annually has a par value of $1,000, matures in 8 years, and has a yield to maturity of 9%, The intrinsic value of the bond today will be if the coupon rate is 6%, A. $833.96 8. $620.92 c. $1,123.01 D. $886.28 €. $1,000.00 7 1000, PMT = 60, n= 8,96. A coupon bond that pays interest semi-annually has a par value of $1,000, matures in 6 years, and hhas a yleld to maturity of 9%. The intrinsic value of the bond today will be__if the coupon rate is 9%. A. $922.78 8. $924.16 $1,075.80 1,000.00 E. none of the above FV = 1000, PMT = 45,n = 12, |= 4.5, PV= 1000.00 97. A coupon bond that pays interest semi-annually has a par value of $1,000, matures in 7 years, and hhas a yield to maturity of 11%. The intrinsic value of the bond today will be ifthe coupon rate is 8.8%. A. $922.78 B. $894.51 c. $1,075.80 . $1,077.20 E. none of the above 1000, PMT = 44, n= 14, = 5.5, PV= 894.51 ‘98. A coupon bond that pays interest of $90 annually has a par value of $1,000, matures in 9 years, and is selling today at a $66 discount from par value. The yield to maturity on this bond is A, 9.00% B. 10.15% 11.25% 0D, 12.32% E.none of the above 7 1000, PMT = 90, n = 9, PV: 134,1= 10.15% 99. A coupon bond that pays interest of $40 semi annually has a par value of $1,000, matures in 4 years, and is selling today at a $36 discount from par value. The yield to maturity on this bond is. A, 8.699% 89.09% 10.43% D.9.76% E.none of the above 1000, PMT 9.09% 10, n= 8, PV =-964,1100. You purchased an annual interest coupon bond one year ago that now has 18 years remaining until ‘maturity. The coupon rate of interest was 11% and par value was $1,000. At the time you purchased the bond, the yield to maturity was 10%, The amount you paid for this bond one year ago was A. $1,057.50 8. $1,075.50 $1,083.65 D. $1,092.46 $1,104.13 083.65 1000, PMT = 110, 1101. You purchased an annual interest coupon bond one year ago that had 9 years remaining to maturity at that time. The coupon interest rate was 10% and the par value was $1,000. At the time you purchased the bond, the yield to maturity was 8%. If you sold the bond after receiving the first interest payment and the yield to maturity continued to be 8%, your annual total rate of return on holding the bond for that year would have been, A. 8.00% 8. 7.82% ©. 7.00% D. 11.95% E.none of the above FV = 1000, PMT = 100, n=9,i=8, PV = 1124.94; FV= 1000, PMT = 100, n=8, (1114.93 - 1124.94 + 100) / 1126.94 = 8% PV = 1114.93; HPR= 102. Consider two bonds, F and G. Both bonds presently are seling at their par value of $1,000. Each pays interest of $90 annually. Bond F will mature in 15 years while bond G will mature in 26 years. Ifthe yields to maturity on the two bonds change from 9% to 10%, A both bonds will increase in value, but bond F will increase more than bond G 8. both bonds will increase in value, but bond G will increase more than bond F C. both bonds will decrease in value, but bond F will decrease more than bond G both bonds will decrease in value, but bond G will decrease more than bond F E.none of the above The longer the maturity the greater the price change when interest rates change. 1103, A zero-coupon bond has a yield to maturity of 12% and a par value of $1,000. If the bond matures in 18 years, the bond should sell for a price of today, A.A22.41 8. $501.87 c. $513.16 D.$130.04 E.none of the above $1,000/(1.12)"" = $130.041104, A zero-coupon bond has a yield to maturity of 11% and a par value of $1,000. If the bond matures in 27 years, the bond should sell for a price of today. A.$59.74 8. $501.87 c. $513.16 $483.49 E.none of the above {$1,000/(1.11)" = $59.74 1105. You have just purchased a 12-year zero-coupon bond with a yield to maturity of 9% and a par value ‘of $1,000. What would your rate of return at the end of the year be if you sell the bond? Assume the yield to maturity on the bond is 10% at the time you sel A, 10.00% 8, 20.42% 1.4% 0.14% E.none of the above $1,000/(1.09) 385,53; $1,000/(1.10)" = $350.49; ($350.49 - $355.53)/$355.53 = -1.4%, 1106. You have just purchased a 7-year zero-coupon bond with a yield to maturity of 11% and a par value (of $1,000. What would your rate of return at the end of the year be if you sell the bond? Assume the yleld to maturity on the bond is 9% at the time you sel. A, 10.00% B.23.8% ©. 13.8% 0. 1.4% E.none of the above $1,000/(1.11)" $481.66; $1,000/(1.09)° = $596.27; ($596.27 -$481.66)/$481.6 3.8%. 1107. A convertible bond has a par value of $1,000 and a current market price of $975. The current price of the issuing firm's stock is $42 and the conversion ratio Is 22 shares. The bond's market conversion value is A. $729 B.$924 c.$870 0. $1,000 E.none of the above 22 shares X $42/share = $924.1108. A convertible bond has a par value of $1,000 and a current market price of $1105. The current price of the issuing firm's stock is $20 and the conversion ratio Is 35 shares. The bond's market conversion value is ‘A,$700 8. $810 c.$870 0. $2,000, none of the above 35 shares X $20/share = $700. 109. A convertible bond has a par value of $1,000 and a current market value of $950. The current price of the issuing firm's stock is $22 and the conversion ratio is 40 shares. The bond's conversion premium is. A $40 B.$70 $190 .$200 E.none of the above $950 - $880 = $70, 1110. A convertible bond has a par value of $1,000 and a current market value of $1250. The current price of the issuing firm's stock is $65 and the conversion ratio is 15 shares. The bond's conversion premium is. A. $40 8. $150 $175 0. $200 E.none of the above $1150 - $975 = $175. 111. if 7% coupon bond that pays interest every 182 days paid interest 32 days ago, the accrued Interest would be A567 8.7.35 6.35 D615 Taz $35 * (32/182) = $6.15,