Question

1. A $1,000 par value corporate bond that pays $60 annually in interest was issued at par last year. The current price of the bond is $996.20.

Pick the correct statement about this bond from below.

• The bond is currently selling at a premium.

• The current yield exceeds the coupon rate.

• The bond is selling at par value.

• The current yield exceeds the yield to maturity.

• The coupon rate has increased to 7 percent.

2. Dot Inns is planning on issuing bonds with coupon rate of 7 percent and face value of $1,000. The bonds will pay coupon semiannually and mature in 10 years. The plan is to sell the bonds at par value.

Pick the correct statement related to the bonds from below.

• The bonds will become discount bonds if the market rate of interest declines.

• The bonds will pay 10 interest payments of $70 each.

• The bonds will sell at a premium if the market rate is 6 percent.

• The bonds will initially sell for $1,035 each.

• The final payment will be in the amount of $1,070.

3. Pick the correct statement from below.

• A deferred call provision requires the bond issuer to pay the current market price, minus any accrued interest, should the bond be called.

• A deferred call provision allows the bond issuer to delay repaying a bond until after the maturity date should the issuer so opt.

• A deferred call provision prohibits the issuer from ever redeeming bonds prior to maturity.

• A deferred call provision prohibits the bond issuer from redeeming callable bonds prior to a specified date.

• A deferred call provision requires the bond issuer pay a call premium that is equal to or greater than one year's coupon should the bond be called.

Answer 1

1.

The current yield exceeds the coupon rate.

Explanation:

As bond is selling at discount to par, so current yield exceeds coupon rate.

2.

The bonds will sell at a premium if the market rate is 6 percent

Explanation:

If market rate is smaller than coupon rate then bond will sell at premium to par value.

3.

A deferred call provision prohibits the bond issuer from redeeming callable bonds prior to a specified date.

Explanation:

Call provision allows bond issuer to redeem bond at a earlier date before maturity, deferred call provision prohibits issuer from redeeming bonds before a specified date.