FIN 360 CH. 6

a.

Using the financial calculator:
PV = −75.75
FV = 100
PMT = 0
N = 10
Solve for I/Y then multiply with 2. I/Y = 2.816%; Yield to maturity = 2 × 2.816 = 5.632%
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Terms in this set (20)
a.

Using the financial calculator:
PV = −75.75
FV = 100
PMT = 0
N = 10
Solve for I/Y then multiply with 2. I/Y = 2.816%; Yield to maturity = 2 × 2.816 = 5.632%
16. You buy a principal STRIP maturing in five years. The price quote per hundred of par for the STRIP is 75.75 percent. Using semiannual compounding, what is the promised yield to maturity on the STRIP?

A. 5.632 percent
B. 5.712 percent
C. 2.816 percent
D. 2.945 percent
E. 4.566 percent
c

[97 + (15/32)] × (1,000/100) = 974.6875 which is approximated as $974.69
17. A T-bond with a $1,000 par is quoted at 97:14 bid, 97:15 ask. The clean price for you to buy this bond is

A. $974.38.
B. $975.42.
C. $974.69.
D. $975.77.
E. none of the options.
b

[98 + (15/32)] × (1,000/100) = 984.688
Then, using the financial calculator:
PV = −984.688
FV = 1,000
PMT = 35
N = 28
Solve for I/Y then multiply with 2. I/Y = 3.588%; Yield to maturity = 2 × 3.588% = 7.175%, which is rounded to 7.18%.
18. The quoted ask yield on a 14-year $1,000 par T-bond with a 7 percent semiannual payment coupon and a price quote of 98:15 is

A. 7.00 percent.
B. 7.18 percent.
C. 7.30 percent.
D. 3.59 percent.
E. 3.63 percent.
a
19. A Treasury security in which periodic coupon interest payments can be separated from each other and from the principal payment is called a

A. STRIP.
B. T-note.
C. T-bond.
D. G.O. bond.
E. Revenue bond.
d

There are 18 × 2 = 36 semiannual payments plus the final principal payment = 36 + 1 = 37.
20. An 18-year T-bond can be stripped into how many separate securities?

A. 18
B. 19
C. 36
D. 37
E. 38
b

Find the present value of $550,000 over 8 years with semiannual compounding and 6% interest rate.
FV = −550,000
N = 16
I/Y= 3
PMT = 0
Solve for PV = 342,741.817.
21. A life insurer owes $550,000 in eight years. To fund this outflow, the insurer wishes to buy STRIPS that mature in eight years. The STRIPS have a $5,000 face value per STRIP and pay a 6 percent APR with semiannual compounding. How much must the insurer spend now to fully fund the outflow (to the nearest dollar)?

A. $110,000
B. $342,742
C. $355,224
D. $362,355
E. $370,890
e
23. Which one of the following bonds is likely to have the highest required rate of return, ceteris paribus?

A. AAA-rated non-callable corporate bond with a sinking fund
B. AA-rated callable corporate bond with a sinking fund
C. AAA-rated callable corporate bond with a sinking fund
D. High-quality municipal bond
E. AA-rated callable corporate bond without a sinking fund
a

[(8%/2) × 10,000] × (61 days since last coupon/184) = $132.61
24. On July 1, 2012, you purchase a $10,000 par T-note that matures in five years. The coupon rate is 8 percent and the price quote is 98:6. The last coupon payment was May 1, 2012, and the next payment is November 1, 2012 (184 days total). The accrued interest is

A. $132.61.
B. $101.00.
C. $50.54.
D. $40.65.
E. $35.67.
c
26. Interest income from Treasury securities is ________________, and interest income from municipal bonds is always ________________.

A. exempt from federal taxes; exempt from all taxes
B. taxable at the state level only; exempt from state taxes only
C. taxable at federal level only; exempt from federal taxes
D. taxable at the state level; taxed at the federal level
E. totally tax exempt; exempt from state taxes
b

0.06/[1 − (0.28 + 0.09 + 0.04)]= 10.17
27. An investor is in the 28 percent federal tax bracket and pays a 9 percent state tax rate and 4 percent in local income taxes. For this investor a municipal bond paying 6 percent interest is equivalent to a corporate bond paying _____ interest.

A. 11.79 percent
B. 10.17 percent
C. 9.08 percent
D. 9.68 percent
E. 8.47 percent
b29. Standard revenue bonds are A. backed by the full taxing authority of the municipality. B. collateralized by the earnings from a specific project. C. bonds backed by mortgages. D. backed by the U.S. Treasury. E. always offered with a best efforts offering.c30. When an investment banker purchases an offering from a bond issuer and then resells it to the public, this is known as a A. rights offering. B. private placement. C. firm commitment. D. best efforts. E. standby offering.b32. Which of the following is/are true about callable bonds? I. Must always be called at par II. Will normally be called after interest rates drop III. Can be called by either the bondholder or the bond issuer IV. Have higher required returns than non-callable bonds A. I and II only B. II and IV only C. II and III only D. I, II, and III only E. I, II, III, and IV are truea33. SEC Rule 144 A does which of the following? A. allows privately placed investments to be traded on a limited basis B. allows bond issuers to call their bonds when desired C. determines the limits of responsibility of bond covenants D. requires that bonds traded on the NYSE bond market utilize the ABS system E. none of the optionsd34. Convertible bonds are I. options attached to bonds that give the bondholder the right to purchase stock at a preset price without giving up the bond. II. bonds in which the issue matures (converts) a little each year. III. bonds collateralized with certain types of automobiles. IV. bonds that may be converted to a certain number of shares of stock determined by the conversion ratio. A. I only B. I and II only C. I, II, and III D. IV only E. I and III onlyc36. With respect to private placements of bonds, which of the following is correct? I. Issuers of privately placed bonds tend to be less well known than public bond issues. II. Interest rates on privately placed debt tend to be higher than for similar public issues. III. Purchasers of privately placed debt have assets of at least $1 million. IV. Once bonds have been privately placed, the original buyers must hold the bonds until maturity. A. I only B. I and III only C. I, II, and III only D. I, III, and IV only E. I, II, III, and IVa38. Bearer bonds are bonds A. with coupons attached that are redeemable by whoever has the bond. B. where the registered owner automatically receives bond payments when scheduled. C. in which the issue matures on a series of dates. D. issued in another currency other than the bond issuer's home currency. E. issued in a different country other than the bond issuer's home country.b You will sell it at the bid value. 7/32 = 0.21875 added to 105 gives 105.21875 as the quoted price in percent of par. The dollar value will be $1,052.19.39. A T-bond with a $1,000 par is quoted at a bid of 105:7 and an ask of 105:9. If you sell the bond, you will receive A. $1,052.81. B. $1,052.19. C. $1,057.22. D. $1,059.22. E. none of the options.c ($975/150) = $6.50You purchase a $1,000 face value convertible bond for $975. The bond can be converted into 150 shares of stock. The stock is currently priced at $5.25. At what minimum stock price would you be willing to convert? A. $4.50 B. $5.26 C. $6.50 D. $7.10 E. $7.25A.Which of the following situations would require an increase in the coupon rate for a bond selling at par? A. the addition of a call provision B. the addition of a convertibility option C. the increase in the rating from BBB to AA D. the addition of a sinking fund provision E. all of these choices are correct