1A) Which of the following bonds would offer the lowest coupon rate if they were

Question

1A) Which of the following bonds would offer the lowest coupon rate if they were sold to the public today at par value?

15-year AAA-rated corporate bond

15-year BAA-rated corporate bond

15-year U.S. Treasury bond

15-year CCC-rated corporate bond

1B) Paraground Studios is issuing a 10.5% annual coupon rate bond that matures on December 31, 2022. The face value of the bond is $1,000. If the required rate of return is 9%, what is the current value of the bond assuming the date today is December 31, 2013?

$1,096.26

$1,089.93

$1,000.00

$909.78

1C) Which of the following statements correctly describes the relationship between existing bonds and interest rates?

The price of an existing bond has an inverse relationship with interest rates; bond prices decrease when interest rates increase.

If interest rates do not change, as the time approaches 0 (i.e. the bond approaches maturity) the price of the bond will drop.

There is no relationship between the price of existing bonds and interest rates.

The price of an existing bond has a direct relationship with interest rates; bond prices increase when interest rates increase

1D) What is the yield to maturity for a $10,000, 7% annual coupon bond that pays annually and matures in 8 years if the current price is $9,637.00?

6.67%

7.62%

7.00%

8.64%

15-year AAA-rated corporate bond

15-year BAA-rated corporate bond

15-year U.S. Treasury bond

15-year CCC-rated corporate bond

Explanation / Answer

Question - 1A ............ U.S. Treasury bonds

Question - 1B .........Option - B 1089.93

Price of the bond = coupon * ( 1 - (1+r)-n ) / r + face value * ( 1+r)-n

= 105 * ( 1 - (1.09)-9 ) / 0.09 + 1000 * (1.09)-9 = 1089.93

Question - !C ...... Option - a

The price of an existing bond has an inverse relationship with interest rates; bond prices decrease when interest rates Increase.

Question - !D .......Optiion - b ....... 7.62 %

Computed using YTM calculator.

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