Question Details

If the yield to maturity remains at its current rate, what will the price 



1.	Which of the following statements is CORRECT?

a.	One disadvantage of zero coupon bonds is that the issuing firm cannot realize any tax savings from the use of debt until the bonds mature.
b.	Other things held constant, a callable bond should have a lower yield to maturity than a noncallable bond.
c.	Once a firm declares bankruptcy, it must be liquidated by the trustee, who uses the proceeds to pay bondholders, unpaid wages, taxes, and legal fees.
d.	Income bonds must pay interest only if the company earns the interest.  Thus, these securities cannot bankrupt a company prior to their maturity, and this makes them safer to the issuing corporation than "regular" bonds.
e.	A firm with a sinking fund that gives it the choice of calling the required bonds at par or buying the bonds in the open market would generally choose the open market purchase if the coupon rate exceeded the going interest rate.
	
2.	Which of the following statements is CORRECT?

a.	The total return on a bond during a given year is based only on the coupon interest payments received.
b.	All else equal, a bond that has a coupon rate of 10% will sell at a discount if the required return for bonds of similar risk is 8%.
c.	The price of a discount bond will increase over time, assuming that the bond- yield to maturity remains constant.
d.	For a given firm, its debentures are likely to have a lower yield to maturity than its mortgage bonds.
e.	When large firms are in financial distress, they are almost always liquidated, whereas smaller firms are generally reorganized.
	
3.	Which of the following statements is CORRECT?

a.	All else equal, secured debt is more risky than unsecured debt.
b.	The expected return on a corporate bond must be greater than its promised return if the probability of default is greater than zero.
c.	All else equal, senior debt has more default risk than subordinated debt.
d.	A company- bond rating is affected by its financial ratios but not by provisions in its indenture.
e.	Under Chapter 11 of the Bankruptcy Act, the assets of a firm that declares bankruptcy must be liquidated, and the sale proceeds must be used to pay off claims against it according to the priority of the claims as spelled out in the Act.
	

4.	Grossnickle Corporation issued 20-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000 one year ago.  Today, the market interest rate on these bonds is 5.5%.  What is the current price of the bonds, given that they now have 19 years to maturity? 

a.	$1,113.48
b.	$1,142.03
c.	$1,171.32
d.	$1,201.35	
e.	$1,232.15	
	
5.	A 25-year, $1,000 par value bond has an 8.5% annual payment coupon.  The bond currently sells for $925.  If the yield to maturity remains at its current rate, what will the price be 5 years from now?

a.	$884.19
b.	$906.86
c.	$930.11
d.	$953.36
e.	$977.20
	
6.	Moerdyk Corporation's bonds have a 15-year maturity, a 7.25% semiannual coupon, and a par value of $1,000.  The going interest rate (rd) is 6.20%, based on semiannual compounding.  What is the bond- price?

a.	$1,047.19
b.	$1,074.05
c.	$1,101.58
d.	$1,129.12
e.	$1,157.35
	
7.	In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures from historical book values to market values.  KJM Corporation's balance sheet (book values) as of today is as follows:

Long-term debt (bonds, at par)	$23,500,000
Preferred stock		2,000,000
Common stock ($10 par)		10,000,000
Retained earnings		  4,000,000
Total debt and equity		$39,500,000

	The bonds have a 7.0% coupon rate, payable semiannually, and a par value of $1,000.  They mature exactly 10 years from today.  The yield to maturity is 11%, so the bonds now sell below par.  What is the current market value of the firm's debt?

a.	$17,436,237
b.	$17,883,320
c.	$18,330,403
d.	$7,706,000
e.	$7,898,650



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