Question 1

Describe the three major international credit markets.

Accepted Answer

Floating-rate bank loans are called Eurocredits. They are tied to LIBOR as the reference rate and tend to be issued for a fixed term with no early repayment. Eurocredits are available in most major trading currencies. The Eurobond market is the medium- to long-term international market for both fixed- and floating-rate debt. A Eurobond is an international bond underwritten by an international bank syndicate and sold to investors in countries other than the one in whose money unit the bond is denominated. Lastly, foreign bonds are issued in the domestic capital market of the country in whose currency the bond is denominated and is underwritten by investment banks from the same country. For example, foreign bonds in the United States are Yankee bonds.

Question 2

Eurobonds differ from foreign bonds in all the following ways except

Accepted Answer

A)  Eurobonds are traded in international capital markets but foreign bonds are traded in domestic capital markets. 
B)  Eurobonds are denominated in a currency other than the one used as a money unit in the countries in which it is traded but a foreign bond must be denominated in the money unit of the country in which it is issued. 
C)  Both eurobonds and foreign bonds are underwritten by international consortia of investment banks from the countries in which they are traded. 
D)  Eurobonds are international in many different ways but the only thing "foreign" about foreign bonds is the nationality of the borrower. 
E)  All of the statements above are correct. 
A)  Eurobonds are traded in international capital markets but foreign bonds are traded in domestic capital markets. 
B)  Eurobonds are denominated in a currency other than the one used as a money unit in the countries in which it is traded but a foreign bond must be denominated in the money unit of the country in which it is issued. 
C)  Both eurobonds and foreign bonds are underwritten by international consortia of investment banks from the countries in which they are traded. 
D)  Eurobonds are international in many different ways but the only thing "foreign" about foreign bonds is the nationality of the borrower. 
E)  All of the statements above are correct. C

Question 3

Will a non-callable bond's price change over time or will it stay the same? Explain.

Accepted Answer

Whenever interest rates or the issuer's credit quality change (or are thought to change), the bond's price will likely change. The true path of the bond's price can fluctuate wildly, but as the bond approaches maturity, the bond price will converge to its par (face) value. If interest rates and credit quality are assumed to remain constant, we can plot out the bond's price a little more accurately. If the level of interest rates is above (below) the coupon rate, the bond is selling at a discount (premium), which means the price is below (above) the par value. If interest rates equal the coupon rate, the bond is said to sell at par. Over time, the bond's price will converge to the par value. So, in the case of the discount (premium) bond, the price will constantly increase (decrease) until maturity.

Question 4

Assume that you are considering the purchase of a $1,000 par value bond that pays interest of $60 each six months and has 10 years before maturity. If you purchase this bond, you expect to hold it for 5 years and then to sell it in the market. You (and other investors) currently require a nominal annual rate of 14 percent, but you expect the market to require a nominal rate of only 10 percent when you sell the bond due to a general decline in interest rates. How much should you be willing to pay for this bond today?

Accepted Answer

First, we must find the find the price f

Question 5

Assume that a company issues a U.S. dollar floating-rate bond with a maturity of 10 years, an interest rate of LIBOR + 2 percent, and a six-month reset period. The bond is issued at par. Which of the following statements is incorrect?

Accepted Answer

A)  The default risk premium on the bond is equal to 2 percent and is constant over the life of the bond. 
B)  The market value of the bond must be equal to the par value on the day the interest rate is reset because the new value of LIBOR is the market's required return. 
C)  One cannot calculate the yield to maturity before the bond matures because the future value of LIBOR is not known for sure. 
D)  This bond is financially equivalent to 20 bonds of six months maturity issued sequentially with a guaranteed rollover at a fixed risk premium. 
E)  All of the statements above are correct. 
A)  The default risk premium on the bond is equal to 2 percent and is constant over the life of the bond. 
B)  The market value of the bond must be equal to the par value on the day the interest rate is reset because the new value of LIBOR is the market's required return. 
C)  One cannot calculate the yield to maturity before the bond matures because the future value of LIBOR is not known for sure. 
D)  This bond is financially equivalent to 20 bonds of six months maturity issued sequentially with a guaranteed rollover at a fixed risk premium. 
E)  All of the statements above are correct.

Question 6

Identify and describe some key characteristics of bonds.

Accepted Answer

A bond is a long-term contract under whi

Question 7

Where do most long-term corporate bonds trade, and who owns most of them?

Accepted Answer

In the United States, long-term corporat

Question 8

What is the difference between the yield to maturity and the yield to call, and which should investors expect to earn?

Accepted Answer

The yield to maturity is the promised ra

Question 9

A $1,000 par value bond pays interest of $30 each quarter and will mature in 12 years. If your nominal annual required rate of return is 16 percent with quarterly compounding, how much should you be willing to pay for this bond?

Accepted Answer

Using a financial calculator,

Question 10

What is interest rate and reinvestment rate risk, and which bonds are most exposed to these risks?

Accepted Answer

Interest rate risk is the risk of a decl

Question 11

Harrison Hotels has 8-year, $1,000 face value bonds outstanding that pay an 11 percent semiannual coupon. If your nominal annual required rate of return is 9 percent with semiannual compounding, how much should you be willing to pay for one of these bonds?

Accepted Answer

Using a financial calculator,

Question 12

Abilene Electric has 13-year, $1,000 face value bonds outstanding that pay an 8 percent semiannual coupon. If your nominal annual required rate of return is 11 percent with semiannual compounding, what is the current yield on the bonds?

Accepted Answer

Using a financial calculator, the bond's

Question 13

Boyd Advertising has bonds outstanding that have a 9 percent annual coupon and a face value of $1,000. The bonds will mature in 10 years, although they can be called before maturity at a call price of $1,050. The bonds have a yield to call of 6.5 percent and a yield to maturity of 7.4 percent. If interest rates remain at their current level, how long until these bonds may first be called?

Accepted Answer

A)  3.16 years 
B)  3.45 years 
C)  3.62 years 
D)  3.79 years 
E)  4.02 years 
A)  3.16 years 
B)  3.45 years 
C)  3.62 years 
D)  3.79 years 
E)  4.02 years

Question 14

Who issues bonds?

Accepted Answer

The three main types of domestic bonds a

Question 15

Piven Construction's bonds mature in 13 years. The bonds have a 7 percent semiannual coupon and a par value of $1,000. The bonds are callable in five years at a call price of $1,035. The price of the bonds today is $1,080. Assuming that interest rates remain at the same level they are today, what yield can investors expect to earn on these bonds?

Accepted Answer

The bonds are currently selling at a pre

Question 16

A bond with 12 years to maturity has a 7 percent semiannual coupon and a face value of $1,000. (That is, the bond pays a $35 coupon every six months.) The bond currently sells for $1,000. What should be the price of a bond that pays a 7 percent annual coupon and has a face value of $1,000 with the same risk and maturity as the semiannual bond?

Accepted Answer

A)  $970.16 
B)  $975.82 
C)  $981.34 
D)  $985.23 
E)  $990.33 
A)  $970.16 
B)  $975.82 
C)  $981.34 
D)  $985.23 
E)  $990.33

Question 17

Benik Properties' bonds mature in 14 years. The bonds have an 8 percent semiannual coupon and a par value of $1,000. The bonds are callable in five years at a call price of $1,050. The price of the bonds today is $1,075. Assuming that interest rates remain at the same level they are today, what yield can investors expect to earn on these bonds?

Accepted Answer

A)  6.86% 
B)  7.05% 
C)  7.14% 
D)  7.39% 
E)  7.45% 
A)  6.86% 
B)  7.05% 
C)  7.14% 
D)  7.39% 
E)  7.45%

Question 18

A bond with 12 years to maturity has a 7 percent semiannual coupon and a face value of $1,000. (That is, the bond pays a $35 coupon every six months.) The bond currently sells for $1,010. What should be the price of a bond that pays a 7 percent annual coupon and has a face value of $1,000 with the same risk and maturity as the semiannual bond?

Accepted Answer

First, we have to solve for the first bo

Question 19

Holmia Tech's non-callable bonds have a face value of $1,000, and pay a 10 percent semiannual coupon. In other words, there is a coupon payment of $50 every six months. Each bond has 12 years until maturity, and sells at a price of $1,080. What is the bond's nominal yield to maturity?

Accepted Answer

A)  8.60% 
B)  8.75% 
C)  8.90% 
D)  9.15% 
E)  9.30% 
A)  8.60% 
B)  8.75% 
C)  8.90% 
D)  9.15% 
E)  9.30%

Question 20

Willis Ski Equipment has 10-year, $1,000 face value bonds outstanding that pay a 12 percent semiannual coupon. If your nominal annual required rate of return is 10 percent with semiannual compounding, how much should you be willing to pay for one of these bonds?

Accepted Answer

A)  $835.83 
B)  $986.53 
C)  $1,091.55 
D)  $1,124.62 
E)  $1,425.99 
A)  $835.83 
B)  $986.53 
C)  $1,091.55 
D)  $1,124.62 
E)  $1,425.99

Describe the three major international credit markets.

Eurobonds differ from foreign bonds in all the following ways except

Will a non-callable bond's price change over time or will it stay the same? Explain.

Assume that a company issues a U.S. dollar floating-rate bond with a maturity of 10 years, an interest rate of LIBOR + 2 percent, and a six-month reset period. The bond is issued at par. Which of the following statements is incorrect?

Identify and describe some key characteristics of bonds.

Where do most long-term corporate bonds trade, and who owns most of them?

What is the difference between the yield to maturity and the yield to call, and which should investors expect to earn?

A $1,000 par value bond pays interest of $30 each quarter and will mature in 12 years. If your nominal annual required rate of return is 16 percent with quarterly compounding, how much should you be willing to pay for this bond?

What is interest rate and reinvestment rate risk, and which bonds are most exposed to these risks?

Harrison Hotels has 8-year, $1,000 face value bonds outstanding that pay an 11 percent semiannual coupon. If your nominal annual required rate of return is 9 percent with semiannual compounding, how much should you be willing to pay for one of these bonds?

Abilene Electric has 13-year, $1,000 face value bonds outstanding that pay an 8 percent semiannual coupon. If your nominal annual required rate of return is 11 percent with semiannual compounding, what is the current yield on the bonds?

Who issues bonds?

Holmia Tech's non-callable bonds have a face value of $1,000, and pay a 10 percent semiannual coupon. In other words, there is a coupon payment of $50 every six months. Each bond has 12 years until maturity, and sells at a price of $1,080. What is the bond's nominal yield to maturity?

Willis Ski Equipment has 10-year, $1,000 face value bonds outstanding that pay a 12 percent semiannual coupon. If your nominal annual required rate of return is 10 percent with semiannual compounding, how much should you be willing to pay for one of these bonds?

An Introduction to International Financial Management

The Global Financial Environment: Markets, Institutions, Interest Rates, and Exchange Rates

Exchange Rate Analysis

International Trade and Foreign Direct Investment

Risk and Return

Financial Statement Analysis

Translating and Consolidating Subsidiary Financial Statements

Stocks and Stock Markets

The Cost of Capital

Capital Budgeting: The Basics

Capital Budgeting: Risk Analysis and Real Options

Capital Structure and Distribution Policy

Working Capital Management and Global Cash Flow Integration

Derivatives and Risk Management

International Tax Planning

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Exam 8: Debt Instruments and Markets

Describe the three major international credit markets.

Eurobonds differ from foreign bonds in all the following ways except

Will a non-callable bond's price change over time or will it stay the same? Explain.

Assume that a company issues a U.S. dollar floating-rate bond with a maturity of 10 years, an interest rate of LIBOR + 2 percent, and a six-month reset period. The bond is issued at par. Which of the following statements is incorrect?

Identify and describe some key characteristics of bonds.

Where do most long-term corporate bonds trade, and who owns most of them?

What is the difference between the yield to maturity and the yield to call, and which should investors expect to earn?

A $1,000 par value bond pays interest of $30 each quarter and will mature in 12 years. If your nominal annual required rate of return is 16 percent with quarterly compounding, how much should you be willing to pay for this bond?

What is interest rate and reinvestment rate risk, and which bonds are most exposed to these risks?

Harrison Hotels has 8-year, $1,000 face value bonds outstanding that pay an 11 percent semiannual coupon. If your nominal annual required rate of return is 9 percent with semiannual compounding, how much should you be willing to pay for one of these bonds?

Abilene Electric has 13-year, $1,000 face value bonds outstanding that pay an 8 percent semiannual coupon. If your nominal annual required rate of return is 11 percent with semiannual compounding, what is the current yield on the bonds?

Who issues bonds?

Holmia Tech's non-callable bonds have a face value of $1,000, and pay a 10 percent semiannual coupon. In other words, there is a coupon payment of $50 every six months. Each bond has 12 years until maturity, and sells at a price of $1,080. What is the bond's nominal yield to maturity?

Willis Ski Equipment has 10-year, $1,000 face value bonds outstanding that pay a 12 percent semiannual coupon. If your nominal annual required rate of return is 10 percent with semiannual compounding, how much should you be willing to pay for one of these bonds?

An Introduction to International Financial Management

The Global Financial Environment: Markets, Institutions, Interest Rates, and Exchange Rates

Exchange Rate Analysis

International Trade and Foreign Direct Investment

Risk and Return

Financial Statement Analysis

Translating and Consolidating Subsidiary Financial Statements

Stocks and Stock Markets

The Cost of Capital

Capital Budgeting: The Basics

Capital Budgeting: Risk Analysis and Real Options

Capital Structure and Distribution Policy

Working Capital Management and Global Cash Flow Integration

Derivatives and Risk Management

International Tax Planning

Filters