Problem Set # 12 Solutions - University of New Mexico

[Pages:4]Problem Set # 12

Solutions

1. A convertible bond has a par value of $1,000, but its current market price is $950. The current price of the issuing company's stock is $19, and the conversion ratio is 40 shares. The bond's conversion premium is _________.

A. $50 B. $190 C. $200 D. $240

Conversion premium = 950 - 40(19) = 190

2. A coupon bond that pays interest semiannually has a par value of $1,000, matures in 8 years, and has a yield to maturity of 6%. If the coupon rate is 7%, the intrinsic value of the bond today will be __________.

A. $1,000 B. $1,062.81 C. $1,081.82 D. $1,100.03

Calculator entries are N = 16, I/Y = 3, PMT = 35, FV = 1,000, CPT PV -1,062.81

3. To earn a high rating from the bond rating agencies, a company would want to have: I. A low times-interest-earned ratio II. A low debt-to-equity ratio III. A high quick ratio

A. I only B. II and III only C. I and III only D. I, II, and III

4. A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________ today.

A. $458.11 B. $641.11 C. $789.11 D. $1,100.11

PV0 = Calculator entries are N = 16, I/Y = 5, PMT = 0, FV = 1,000, CPT PV 458.11

5. A bond has a par value of $1,000, a time to maturity of 10 years, and a coupon rate of 8% with interest paid annually. If the current market price is $750, what is the capital gain yield of this bond over the next year?

A. .72% B. 1.85% C. 2.58% D. 3.42%

Calculator entries to find the YTM are N = 10, PV = -750, PMT = 80, FV = 1,000, CPT = I/Y 12.52

The current yield = 80/750 = 10.67% Then we use the relationship YTM = Current yield + Capital gain yield 12.52% = 10.67% + Capital gain yield, so Capital gain yield = 1.85%

6. A __________ bond gives the bondholder the right to cash in the bond before maturity at a specific price after a specific date.

A. callable B. coupon C. puttable D. Treasury

7. You buy an 8-year $1,000 par value bond today that has a 6% yield and a 6% annual payment coupon. In 1 year promised yields have risen to 7%. Your 1-year holding-period return was ___.

A. .61% B. -5. 39% C. 1.28% D. -3.25%

This year's price is 1,000. since the YTM equals the coupon rate. Calculator entries for next year's price are N = 7, I/Y = 7, PMT = 60, FV = 1,000,

CPT PV -46.11 At the end of 1 year you'll have 946.11 + 60 = 1,006.11 HPR = 1,006.11/1,000 - 1 = .6107%

8. A bond pays a semiannual coupon, and the last coupon was paid 61 days ago. If the annual coupon payment is $75, what is the accrued interest? (Assume 182 days in the 6-month period.)

A. $13.21 B. $12.57 C. $15.44 D. $16.32

(75/2) ? (61/182) = $12.57

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