1. A bond with a $100 annual interest payment with five years to maturity (not e

Question

1.

A bond with a $100 annual interest payment with five years to maturity (not expected to default) would sell for a premium if interest rates were below 9% and would sell for a discount if interest rates were greater than 11%.

False

2.

One disadvantage of using common stock as a source of funds is that common stock legally obligates the firm to make dividend payments to common stockholders every quarter.

False

3.

The legal contract describing the bond characteristics and the bondholder and issuer rights is called:

4.

Which of the following ratings by Standard & Poor's represent bonds that are at least investment grade?

B

5.

Due to a number of lawsuits related to toxic wastes, a major chemical manufacturer has recently experienced a market reevaluation. The firm has a bond issue outstanding with 15 years to maturity, $1,000 par value, annual coupon rate of 8 percent, with interest being paid semiannually. The required rate (YTM) on this debt has now risen to 16 percent. What is the current value of this bond?

$450

6.

You have just purchased a 10-year, $1,000 par value bond. The coupon rate on this bond is 8 percent annually, with interest being paid semiannually. If you expect to earn a 10 percent rate of return (YTM) on this bond, how much did you pay for it?

$812.15

7.

A 12-year bond that has a 12 percent coupon rate is currently selling for $1,000, which equals the bond's face value. If interest is paid semiannually, the bond's yield to maturity is

Explanation / Answer

1. True

2. False

3. Indenture agreement

4. BBB

5. $550

6. $875.38

7. equal to 12 percent

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