1) A ten-year bond, with par value equals $1000, pays 7% annually. If similar bo
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Question
1) A ten-year bond, with par value equals $1000, pays 7% annually. If similar bonds are currently yielding 6% annually. what is the market value of the bond? Use semi-annual analysis. A) $700.00 B) S927.50 C) S1,074.70 D) $1,520.70 2) If the yield to maturity on a bond is greater than the coupon rate, you can assume: A) interest rates have decreased B) the price is below the par C) the price is above the par D) risk premiums have decreased 3) The legal contract setting forth the terms and provisions of a corporate bond is a(n) A) indenture. B) debenture. C) loan document. D) promissory note. 4) The repurchase bonds at a stated price prior to maturity. A) call B) conversion C) put D) capitalization feature permits the issuer to 5)The bond into a stated number of shares of stock A) call B) conversion C) put D) capitalization feature allows the bondholder to change each A bond generally has an interest rate that is higher than a similar risk generally has an interest rate that is lower than a similar risk bonds, and a bond bond A) callable; non-callable; convertible; non-convertible B) convertible; non-convertible; callable; non-callable C) convertible; callable; non-convertible; non-callable D) callable; non-callable; non-convertible; convertible 7) An issue of preferred stock is paying an annual dividend of $1.50. The growth rate for the firm's common stock is 5%. What is the preferred stock price if the required rate of return is 7%? A) $21.43Explanation / Answer
1. Price of bond = PV of coupon stream discounted at yield + Present Value of Redemption Amount discounted at yield rate
Using semi annual analysis, coupon = .035* 1000 = 35
No. of periods = 10*2 = 20
Yield rate = 6/2 = 3
Price of Bond = 35*PVAF(3%,20) +1000*PVF(3%,20)
= 35*14.8775 + 1000*.55368
= 520.71 + 553.68
= 1074.39
The answer is C
2. The answer is B
When the coupon rate is less than the yield to maturity, this means that the investor can get a higher return by investing in any other bond in market. Thus, to induce investor to purchase our bond, we have to offer it at a price below par price. Without the discount, no investor would be interested in buying the bond at par.
3. The answer is A- indenture
4. The answer is A - call
Basically, a call is an option to buy a security at a stated price. You may or may not exercise the option on or before the strike date.
5. The answer is B- conversion
Conversion allows an investor to convert the bond into shares at a stated price during a stated period.
6. The answer is A
Convertible bonds offer lower coupon rates as compared to non convertible bonds. This is because the value of a convertible bond is composed of the interest earned on the bond and the return accruing on shares after conversion. With non convertible bonds, the return is solely based on the coupon payments, so the company has to offer a higher return.
A callable bond has higher interest rate compared to a non callable bond. This is because the tenure of a callable bond is likely to be smaller than that of a non callable bond. With a longer tenure, the chances of interest movements in the market are high. In order to minimize the risk of paying a higher coupon rate in event of fall in market interest rates, the company will offer a lower rate with non callable bonds.
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