Help Please!! Making flashcards: The Outlet needs to raise $3.2 million for an e
ID: 2739743 • Letter: H
Question
Help Please!! Making flashcards:
The Outlet needs to raise $3.2 million for an expansion project. The firm wants to raise this money by selling zero coupon bonds with a par value of $1,000 that mature in 20 years. The market yield on similar bonds is 7.8 percent. How many bonds must The Outlet sell to raise the money it needs? (Assume semi-annual compounding.) Select one: a. 3,200 bond b. 11,508 bond c. 3,450 bond d. 13,797 bond e. 14,783 bonds
The term structure of interest rates represents the relationship between which of the following? Select one: a. Real rates on risk-free and risky bonds b. Nominal rates on risk-free and risky bonds c. Nominal and real rates on default-free, pure discount bonds d. Market and coupon rates on default-free, pure discount bonds e. Nominal rates on default-free, pure discount bonds and time to maturity
When a bond's yield to maturity is less than the bond's coupon rate, the bond: Select one: a. is selling at a premium. b. had to be recently issued. c. has reached its maturity date. d. is priced at par. e. is selling at a discount.
Which one of the following statements is true? Select one: a. The current yield on a premium bond is equal to the bond's coupon rate. b. The current yield on a par value bond will exceed the bond's yield-to-maturity. c. A discount bond has a coupon rate that is less than the bond's yield to maturity. d. A premium bond has a current yield that exceeds the bond's coupon rate. e. The yield to maturity on a premium bond exceeds the bond's coupon rate.
Explanation / Answer
1)
Compute price per bond.
Given
FV= 1000
N=20 x2 =40
R= 7.80/2 = 3.90%
Price per bond:
PV = FV/ (1+r)^n
= 1000 / (1+0.039)^40
= 1000/ 4.619786467
= 216.46
No. of bonds to be issued = amount to raise / price per bond
= 3,200,000 / 216.46
= 14,783.33 bonds
2)
e. Nominal rates on default free, pure discount bonds and time maturity
3)
a. is selling at a premium.
4)
c) A discount bond has a coupon rate that is less than the bond's yield to maturity.
Explanation-
If the bond coupon rate is less than the bond yield than that type of bond called discount bond.
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