HW3 - econ PDF

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Homework 3: Chapters 7 & 9 Due date: April 30, 2019 1. Mary just purchased a bond which pays $60 a year in interest. What is this $60 called? A. coupon B. face value C. discount D. yield 2. Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called? A. Face (par) value B. coupon C. discount D. yield 3. A bond's coupon rate is equal to the annual interest amount divided by _________. A. call price B. current price C. face value D. market price 4. The specified date on which the principal amount of a bond is payable is referred to as ____. A. coupon date B. yield date C. maturity D. clean date 5. The current yield is defined as the annual interest on a bond divided by ________. A. coupon B. face value C. market price D. call price 6. An indenture is: A. another name for a bond's coupon. B. the written record of all the holders of a bond issue. C. a bond that is past its maturity date but has yet to be repaid. D. a bond that is secured by the inventory held by the bond's issuer. E. the legal agreement between the bond issuer and the bondholders. 7. The Leeward Company just issued 15-year, 8 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms? A. note B. discounted C. zero-coupon D. debenture 7. A bond that can be paid off early at the issuer's discretion is referred to as being _______. A. zero coupon B. callable C. senior D. collateralized 8. A bond that has only one payment, which occurs at maturity, is called as ________. A. debenture B. callable C. junk D zero coupon 9. Which one of the following is the price a dealer will pay to purchase a bond? A. call price B. asked price C. bid price D. par value 10. You want to buy a bond from a dealer. Which one of the following prices will you pay? A. call price B. auction price C. bid price D. asked price 11. The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the: A. (bid-ask) spread. B. premium. C. discount. D. call price.

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12. Real rates are defined as nominal rates that have been adjusted for which of the following? A. accrued interest B. inflation C. default risk D. interest rate risk 13. Interest rates that include an inflation premium are referred to as: A. effective annual rates. B. stripped rates. C. real rates. D. nominal rates. 14. The Fisher effect is defined as the relationship between which of the following variables? A. default risk premium, inflation risk premium, and real rates B. nominal rates, real rates, and interest rate risk premium C. interest rate risk premium, real rates, and default risk premium D. real rates, inflation rates, and nominal rates E. real rates, interest rate risk premium, and nominal rates 16. All else constant, a bond will sell at ____ when the coupon rate is ____ the yield to maturity. A. a premium; less than B. a premium; equal to C. a discount; less than D. a discount; higher than 15. The Walthers Company has a semi-annual coupon bond outstanding. An increase in the market rate of interest will have which one of the following effects on this bond? A. increase the coupon rate B. decrease the coupon rate C. increase the market price D. decrease the market price 16. Which of the following are characteristics of a premium bond? I. coupon rate < yield-to-maturity III. coupon rate < current yield

II. coupon rate > yield-to-maturity IV. coupon rate > current yield

A. I and III only

C. II and III only

B. I and IV only

D. II and IV only

17. Which of the following relationships apply to a par value bond? I. coupon rate < yield-to-maturity III. market price = call price

II. current yield = yield-to-maturity IV. market price = face value

A. I and II only

C. II and IV only

B. I and III only

D. I, II, and III only

18. A 6 percent, annual coupon bond is currently selling at a premium and matures in 7 years. The bond was originally issued 3 years ago at par. Which one of the following statements is accurate in respect to this bond today? A. The face value of the bond today is greater than it was when the bond was issued. B. The bond is worth less today than when it was issued. C. The yield-to-maturity is less than the coupon rate. D. The coupon rate is greater than the current yield. E. The yield-to-maturity equals the current yield.

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21. A "fallen angel" is a bond that has moved from: A. being publicly traded to being privately traded. B. being a long-term obligation to being a short-term obligation. C. having a yield-to-maturity in excess of the coupon rate to having a yield-to- maturity that is less than the coupon rate. D. senior status to junior status for liquidation purposes. E. investment grade to speculative grade. 22. Bonds issued by the U.S. government: A. are considered to be free of interest rate risk. B. generally have higher coupons than those issued by an individual state. C. are considered to be free of default risk. D. pay interest that is exempt from federal income taxes. E. are called "munis". 23. The Fisher Effect primarily emphasizes the effects of ___ on an investor's rate of return. A. default B. interest rate C. inflation D. maturity 19. The equilibrium value of a financial asset is the ________. A. present value of all of the future cash flows that will be received B. sum of all previous cash flows received C. future value of just the capital gains but not the dividends D. present value of just the capital gains but not the dividends 25. The bonds issued by Stainless Tubs bear an 8 percent coupon, payable annually. The bonds mature in 11 years and have a $1,000 face value. Currently, the bonds sell for $952. What is the yield to maturity?

20. Form the previous question: what if coupons are paid semiannually.

21. Greenbrier Industrial Products' bonds have a 7.60 percent coupon and pay interest annually. The face value is $1,000 and the current market price is $1,062.50 per bond. The bonds mature in 16 years. What is the yield to maturity?

22. Collingwood Homes has a bond issue outstanding that pays an 8.5 percent coupon and matures in 16.5 years. The bonds have a par value of $1,000 and a market price of $944.30. Interest is paid semiannually. What is the yield to maturity?

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23. Oil Well Supply offers 7.5 percent coupon bonds with semiannual payments and a yield to maturity of 7.68 percent. The bonds mature in 6 years. What is the market price per bond if the face value is $1,000?

24. Redesigned Computers has 6.5 percent coupon bonds outstanding with a current market price of $832. The yield to maturity is 16.28 percent and the face value is $1,000. Interest is paid semiannually. How many years is it until these bonds mature?

25. You are purchasing a 20-year, zero-coupon bond. The yield to maturity is 8.68 percent and the face value is $1,000. What is the current market price?

26. Blackwell bonds have a face value of $1,000 and are currently quoted at 98.4. The bonds have a 5 percent coupon rate. What is the current yield on these bonds?

27. The outstanding bonds of The River Ferry carry a 6.5 percent coupon. The bonds have a face value of $1,000 and are currently quoted at 102.9. What is the current yield on these bonds?

28. A Treasury bond is quoted at a price of 101:14 with a current yield of 7.236 percent. What is the coupon rate?

29. IBM issued a 10-year, 10% semi-annual coupon bond 3 years ago, at a market price of $990. Currently, this bond is traded in the market at a price of $1,100. A. Compute the bond’s current YTM. B. Compute the bond’s YTM when it was just issued.

C. Compute the bond’s current yield.

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36. AT&T issued a series of 30-year bonds at a market price of $1,050 on January 1, 1985 (maturity date is December 31, 2014), with 10% interest (semi-annual payment, June 30 and December 31 each year) for the par value of $1,000. A. What was the YTM of this bond when this bond was just issued? B. What was the price of this bond on January 1, 1995 if the market interest rate has remained constant?

C. What was the price of this bond on January 1, 1995 if the level of interest rates had risen to 12%?

D. On July 1, 2010, this bond is traded at the price of $900. What is the YTM on July 1, 2000? E. What is the current yield on July 1, 2010?

37. If a 6%, 4-year bond with 10% of YTM is currently worth $873.21, how much will it be worth one year from now if interest rates are constant?

30. Two years ago, 7%, 10-year coupon bonds were issued and sold at par. If the yields of the same grade of bond are currently 6.50%, what will be the price of these bonds?

31. What is the rate of return for an investor who pays $1,054.47 for a three-year bond with a 8% coupon payable annually and sells the bond one year later for $1,037.19?

32. What is the total return to an investor who bought a bond for $1,100 when the bond has a 9% coupon rate and 5 years of remaining maturity, then sells the bond after one year for $1,085?

33. What is the current yield of a bond with a 10% coupon payable semiannually, four years until maturity, and a price of $950?

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34. What is the coupon rate for a bond with three years until maturity, a price of $1,053.46, and a yield to maturity of 6%? Coupons are paid annually.

35. What happens to the price of a 3-year and 30-year bond with a 6% coupon payable annually when interest rates increase from 6% to 8%?

Chapter 9 36. The difference between the present value of cash flows from an investment and its cost is the: A) Net present value. B) Internal rate of return. C) Payback period. D) Profitability index. 37. The discount rate that makes the net present value of an investment exactly equal to zero is: A) Payback period. B) Internal rate of return. C) Average accounting return. D) Profitability index. 38. The length of time required for an investment to generate cash flows sufficient to recover its initial cost is A) Net present value. B) Internal rate of return. C) Payback period. D) Profitability index. 39. A situation in which taking one investment prevents the taking of another is called: A) Net present value profiling. B) Operational ambiguity. C) Mutually exclusive investment decisions. D) Multiple rates of return. 40. Net present value _____________. A) is equal to the initial investment in a project B) is equal to the present value of the project benefits C) is equal to zero when the discount rate used is equal to the IRR D) is simplified by the fact that future cash flows are easy to estimate 41. The net present value (NPV) rule can be best stated as: A) An investment should be accepted if, and only if, the NPV is exactly equal to zero. B) An investment should be rejected if the NPV is positive and accepted if it is negative. C) An investment should be accepted if the NPV is positive and rejected if its is negative. D) An investment with greater cash inflows than cash outflows, regardless of when the cash flows occur, will always have a positive NPV and therefore should always be accepted.

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42. Calculate the NPV of the following project using a discount rate (cost of capital) of 10%: Yr 0 = –$800; Yr 1 = –$80; Yr 2 = $100; Yr 3 = $300; Yr 4 = $500; Yr 5 = $500 A) $8.04

B) $87.28

C) $208.04

D) $459.17

43. Suppose a project costs $2,500 and produces cash flows of $400 over each of the following 8 years. What is the IRR of the project? A) 4.55% B) 3.27% C) 5.84% D) 9.61% 44. You are evaluating two mutually exclusive projects, A and B. Project A costs $600 and has cash flows of $400 in each of the next 2 years. Project B also costs $600, and generates cash flows of $500 and $275 for the next 2 years, respectively. What is the crossover rate? A) 10% B) 15% C) 25% D) 40% 45. A project has an initial investment of $25,000, with $6,500 annual inflows for each of the subsequent 5 years. If the cost of capital is 12%, what is the NPV? A) –$6,500.00 B) –$2,447.02 C) –$1,568.95 D) $215.46 46. What is the NPV of the following set of cash flows if an opportunity cost of capital is 15%?

A) negative NPV

B) $408.27

C) $950.44

D) $1,247.90

47. Would you accept a project which is expected to pay $2,500 a year for 6 years if the initial investment is $10,000 and an opportunity cost of capital is 8%? A) Yes; NPV=$1,557 B) Yes; NPV=$928 C) Yes; NPV=$63 D) No; NPV=-$346 48. Your required return is 15%. Should you accept a project with the following cash flows?

A) No, IRR=5.75%. C) Yes, IRR=20.15%.

B) No, IRR=10.25%. D) Yes, IRR=29.97%.

49. For a project with an initial investment of $8,000 and cash inflows of $2,000 each year for 6 years, calculate NPV given an opportunity cost of capital of 13%. A) –$846 B) –$263 C) $461.08 D) $149

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50. You have a choice between 2 mutually exclusive investments. If you require a 15% return, which investment should you choose?

A) Project A, because it has a smaller initial investment. B) Project B, because it has a higher NPV. C) Either one, because they have the same profitability indexes. D) Project A, because it has the higher internal rate of return.

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