Questions and Answers
An increase in the market rate of interest will have what effect on The Walthers Company's semi-annual coupon bond?
What is the expected relationship of the quoted Yield to Maturities (YTM) among a treasury bond, an investment-grade corporate bond, and a junk-grade corporate bond?
junk grade corporate > investment grade corporate > treasury
Will the actual realized yields be equal to the expected yields if interest rates change for Pelzer Printing Inc.'s bonds?
No
What is the expected current yield for Pelzer Printing Inc.'s bonds with a price of $908.30?
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What is the coupon rate for Kaiser Industries' bonds given their yield and price?
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What is the yield to maturity for Pelzer Printing Inc.'s bonds?
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Should Jane Thorpe buy the seven-year bond offered by Barone, Inc. at $943.22 if similar bonds yield 10 percent today?
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Which event makes it more likely that a company would call its outstanding callable bonds?
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For a 15-year bond with a face value of $1,000 currently selling for $850, what statement is CORRECT?
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What is the yield to maturity (YTM) for Dyl Inc.'s bonds selling for $870?
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For a 12-year bond with an annual coupon of 9% and a yield to maturity of 7%, which statement is CORRECT?
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What is McCue Inc.'s bond's Yield to Call if called in 5 years?
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Study Notes
Bond Pricing and Interest Rates
- An increase in market interest rates decreases a bond's market price.
- Bonds are typically affected inversely by changes in market interest rates.
Yield to Maturity Comparisons
- Junk-grade corporate bonds generally offer higher yields than investment-grade corporate bonds, which in turn offer higher yields than treasury bonds.
Capital Gains Yield and Realized Returns
- Changes in interest rates can lead to variations in bonds' end-of-year prices, affecting actual realized yields compared to expected yields.
Current Yield Calculation
- Current yield is calculated as the annual coupon payment divided by the bond's current market price. For Pelzer Printing, it is approximately 8.81%.
Coupon Rate Determination
- The coupon rate can be calculated using the annual payment and the bond's par value. For Kaiser Industries, the coupon rate is 12%.
Yield to Maturity Calculation
- For bonds with a current price below par, the yield to maturity is usually higher than the coupon rate. Pelzer Printing's bonds yield approximately 9.56%.
Bond Valuation
- The present value of a bond can be determined by comparing market yields to coupon rates. Jane Thorpe's offered bond is undervalued at $943.22 compared to its calculated value.
Callable Bonds and Market Interest Rates
- Companies are more likely to call callable bonds when market interest rates decline sharply, as it allows them to refinance at lower rates.
Bond Characteristics
- A bond that sells below par has a yield to maturity greater than its coupon rate; for example, a bond selling for $850 will have a YTM that exceeds its stated coupon rate.
Yield to Maturity Example
- Dyl Inc.'s bonds have a yield to maturity of approximately 8.02%, calculated from their selling price, annual coupon, and maturity.
Price Assessment Relative to Par Value
- Bonds selling for above par value indicate that their coupon rates exceed the current market yields. A bond with a 9% coupon and a 7% YTM is priced above par.
Yield to Call Calculation
- The Yield to Call (YTC) can be determined when a bond is callable before maturity. For McCue Inc.'s bonds, the YTC is approximately 5.76% if called in 5 years.
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Description
Test your understanding of finance concepts with these flashcards covering Chapters 6-8. From bond markets to Yield to Maturities, these terms and definitions will help reinforce your knowledge. Perfect for students studying finance fundamentals.
