Question Details

What is the bond contract feature that allows the issuer to redeem bonds 



1.	You have 2 options to buy a membership. One is to pay $5,000 upfront today and the other one is to pay
$500 each year starting today. If the prevailing discount rate is 8%, how many years do you remain as a member before the $500 annual payment becomes more expensive than the one-time membership? 

a.     14.5 years
b.	17.5 years
c.	18.5 years
d.	19.5 years
e.	21.5 years
	

2.	What is the bond contract feature that allows the issuer to redeem bonds under specified terms prior to maturity and when issuers more likely to redeem the outstanding bonds issue?

a.	Deferred call,		when interest rates are higher than when the bonds are issued
b.	Sinking fund provision,	when interest rates are higher than when the bonds are issued
c.	Indenture,			whenever the buyer wants the issuer to redeem the outstanding bonds
d.	Call provision,		when interest rates are lower than when the bonds are issued
e.	Put provision,		when interest rates are lower than when the bonds are issued

3.	Roen is planning to invest in five-year 15% annual coupon bonds with a face value of $1,000 each. Calculate number to fill the blanks in the table and identify which one is the discount bond if the market is at equilibrium.
		
Bond	Discount Rate	Bond Value	Current Yield
Bond A	10.00%	$1,189.54	(1)
Bond B	15.00%	(2)	15.00%
Bond C	(3)	$954.58	15.71%

a.	10.00%,        $988.76,     14.47%,     bond A
b.	11.00%,     $1,000.00,     15.71%,     bond B
c.	12.61%,     $1,000.00,     16.40%,     bond C
d.	13.24%,     $1,100.00,     16.00%,     bond A
e.	14.00%,     $1,250.00,     16.40%,     bond B
4.	Duff Brewing Co. has 9% annual coupon bonds that are callable and have 18 years left until maturity. The bonds have a par value of $1,000 and their current market price is $1,190.35. However, Duff Brewing Co. may call the bonds in 8 years at a call price of $1,060. What are the YTM and YTC, respectively? Also, if Duff Brewing Co. issues new bonds today, what coupon rate must the bonds to be issued at par?

                      YTM             YTC       Coupon Rate 
a.	6.09%,          5.47%,          6.09%
b.	7.09%,          6.47%,          7.09%
c.	8.09%,          7.47%,          7.47%
d.	8.92%,          8.82%,          8.82%
e.	9.23%,          9.32%,          9.32%
		
5.	The following bond list is from the business section of a newspaper on January 1, 2005 (all are semi-annual bonds). Prices are stated relative to the par value of $100. Calculate what number should be in the blank and indicate which bond is trading at premium.
	
Company	Coupon	Maturity	Last Price	Last Yield	EST
Spread	UST
(Years)	EST
Volume
(1000s)
Schubert, Inc.	8.125%	01-01-2015	$82.25	11.11%	6.20	10	72,070
Chapman, Inc.	9.625%	01-01-2035	$80.48	12.05%	7.15	30	65,275
Rust, Inc.	4.500%	01-01-2010	$95.18	5.62%	1.37	5	59,277
Murphy & Co.	5.375%	01-01-2010	$101.02	5.14%	0.89	5	57,465
Pickman, Inc.	7.750%	    01-01- 
     2015	$93.11		3.89	10	56,305
	Last Price & Last Yield: bond- price and YTM at the end of trading.
	EST Spread: bond- spread above the relevant U.S. Treasury benchmark (percentage).
	UST: relevant maturity of U.S. Treasury benchmark for each bond.
	EST Volume: # of bonds traded during the day.

a.	4.40%,	Murhpy & Co.
b.	6.40%,	Rust, Inc.
c.	8.80%,	Murhpy & Co.
d.	10.40%,	Pickman, Inc.
e.	12.80%,	Schubert, Inc.



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