29 Jun uestion · Check My Work(3 remaining)
uestion
· 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 n
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