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BADM 710 Test 2 Questions with COMPLETE SOLUTIONS 2022

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A bond with a face value of $1,000 that sells for less than $1,000 in the market is called a _____ bond. A) Par B) discount C) Premium D) Zero Coupon E) Floating rate - ✔✔B) discount The _____ premium is that portion of the bond yield that represents compensation for potential difficulties that might be encountered should the bond holder wish to sell the bond prior to maturity. A) default risk B) taxability C) infaltion D) liquidity E) interest rate risk - ✔✔D) liquidity All else constant, a coupon bond that is selling at a premium, must have: A) a coupon rate that is equal to the yield to maturity. B) a market price that is less than par value. C) semiannual interest payments. D) a yield to maturity that is less than the coupon rate. E) a coupon rate that is less than the yield to maturity. - ✔✔D) a yield to maturity that is less than the coupon rate.Aspens is preparing a bond offering with a coupon rate of 5.5 percent. The bonds will be repaid in 10 years. The company plans to issue the bonds at par value and pay interest semiannually. Which one of the following statements is correct? A) The bonds will pay 19 interest payments and one principal payment. B) The bonds will initially sell at a discount. C) At maturity, the bonds will pay a final payment of $1,055. D) The bonds will pay ten equal coupon payments. E) At issuance, the bond's yield to maturity is 5.5 percent. - ✔✔Answer is the bond's yield to maturity is 5.5 percent. Explnation:A bond's coupon rate is equal to its yield to maturity if its purchase price is equal to its par value. For example , Par value of bond is $ 1000, Terminal value =$ 1000, coupon rate=5.5% YTM formula ={Interest +Terminal value -Face value)/No of years to maturity}/Initial investment ={1000*5.5% +(1000-1000)/10 }/1000 =(1000*5.5%+0)/1000 =1000*5.5%/1000 YTM =5.5% What is the value of a 20-year, zero-coupon bond with a face value of $1,000 when the market required rate of return is 9.6 percent, compounded semiannually?

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