2. For each of the following situation, identify whether a bond would be considered a premium bond, a discounted bond, or a par bond. a. A bond's current market price is greater than its face value. b. A bond's coupon rate is equal to its yield to maturity. c. A bond's coupon rate is less than its required rate of return. d. A bond's coupon rate is less than its yield to maturity. e. A bond's coupon rate is greater than its yield to maturity. f. A bond's fair present value is less than its face value. Answer:

2. For each of the following situation, identify whether a bond would be considered a premium bond, a discounted bond, or a par bond. a. A bond's current market price is greater than its face value. b. A bond's coupon rate is equal to its yield to maturity. c. A bond's coupon rate is less than its required rate of return. d. A bond's coupon rate is less than its yield to maturity. e. A bond's coupon rate is greater than its yield to maturity. f. A bond's fair present value is less than its face value. Answer:

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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An option free bond’s value/price has an inverse relationship with interest rates/yield. If yields increase, the value of a bond decreases
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b. How is the duration of a bond affected by the amount of its coupon, when its other characteristics remain constant? (Hint: Answer without acting).
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The theoretical floor value for a convertible bond is its A. pure bond value. B. onversion price. C. conversion value. D. par value.
The process of bond valuation is based on the fundamental concept that the current price of a security can be determined by calculating the present value of the cash flows that the security will generate in the future. There is a consistent and predictable relationship between a bond’s coupon rate, its par value, a bondholder’s required return, and the bond’s resulting intrinsic value. Trading at a discount, trading at a premium, and trading at par refer to particular relationships between a bond’s intrinsic value and its par value. This also results from the relationship between a bond’s coupon rate and a bondholder’s required rate of return. (1) Remember, a bond’s coupon rate partially determines the interest-based return that a bond ________ pay, and a bondholder’s required return reflects the return that a bondholder (2) ___________to receive from a given investment. The mathematics of bond valuation imply a predictable relationship between the bond’s coupon rate, the bondholder’s…
a) All things being equal If a bond's coupon rate is higher than its yieldto maturity (YTM), is the bond selling at a discount, premium or par?b) All things being equal If a bond's coupon rate is lower than its yield tomaturity (YTM), is the bond selling at a discount, premium or par?c) All things being equal If a bond's coupon rate is equal to its yield tomaturity (YTM), then is the bond selling at a discount, premium or par?d) All else being equal, the longer the term to maturity, the greater orthe lower the duration?f) All else being equal, the higher the coupon rate on the bond, theshorter or the longer the duration of the bond?
Consider two pairs of bonds; A and B, and C and D. A and B are both coupon bonds, they have the same coupon rate, but A has a longer time-to-maturity than B, and at the prevailing rate they sell at the same price. C is a coupon bond and D is a zero coupon bond, they both have the same time-to-maturity, and at the prevailing rate they sell at the same price. If interest rates rise by the same amount for all of the bonds, which bond in each pair will fall by the greater amount in price? A and D OB and C O If bonds are priced in an efficient market, their price is not altered by transitory events. OB and D OA and C 4
Which of the following statements is correct assuming same market rates for all maturities (flat yield curve)? e a Extendible bonds allow bond issuer to extend the maturity date. O b. Callable bonds give the bond issuer an option to call the bond back before the maturity date at a predetermined price. Oc. When the market yield is equal to a bond's stated coupon rate, the bond's current yield is greater than its coupon yield. Od. The cash price plus the accrued interest on the bond is the quoted price of the bond. Current yield is the ratio of annual coupon payment divided by the par value. o e.

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