Question : EarthCOM On October 4th, 2000, long distance company, EarthCOM, issued bonds : 1325672

 

 

EarthCOM

On October 4th, 2000, long distance company, EarthCOM, issued bonds to finance a new wireless product. The bonds were issued for 30 years (mature on October 4th, 2030), with a face value of $1,000, and semi-annual coupons. The coupon rate on these bonds is 8% APR. Over the last 4 years, the company has experienced financial difficulty as the long distance market has grown more competitive.

 

78.Refer to EarthCOM. The risk associated with EarthCOM bonds has increased dramatically, as investors now want a 15% APR return to hold the bonds. What price should the bonds trade at TODAY (October 4th, 2004)?

a.$544.19

b.$545.66

c.$794.99

d.$800.15

 

 

 

79.Refer to EarthCOM. Suppose that today (October 4th, 2002), EarthCOM admits to fraud in reporting revenues over the last 3 years. The price of EarthCOM immediately tumbles to $500. What is the new yield-to-maturity on EarthCOM bonds? (Express as an APR)

a.16.04%

b.16.21%

c.18.12%

d.20.77%

 

 

 

80.Which of the following statements are CORRECT?

 

Statement I:A change in a bond’s interest rate risk has a greater price impact on bonds with longer maturities.

Statement II:Government bonds have lower default risk than corporate bonds or municipal bonds.

Statement III:Trading volume is greater for corporate bonds than government bonds.

 

a.Statement I only

b.Statement II only

c.Statements I and II only

d.Statements II and III only

 

 

 

81.A bond pays $60 interest payments twice a year. What is the coupon rate for the bond if the par value of the bond is $1,000?

a.6.00%

b.9.00%

c.12.00%

d.15.00%

 

 

 

82.Which of the following statements is false?

a.The valuation process involves linking an asset’s past benefits and uncertainty to determine a fair present value.

b.Holding future benefits in the form of cash flows constant, the riskier the benefits the higher the estimated present value.

c.Finance theory focuses primarily on intangible benefits expected from an asset.

d.All of the above statements are true.

e.All of the above statements are false.

 

 

 

83.The required rate of return:

a.is used as the discount rate when valuing an asset’s expected cash flows.

b.is increased when an asset’s cash flows are considered to be riskier.

c.is a fixed rate that remains the same for all investors regardless of changes in the market.

d.Both (a) and (b)

e.All of the above

 

 

 

84.Additional features offered by bonds may include:

a.a call feature which allows the issuer to redeem the bond at a predetermined price prior to maturity.

b.the issuer’s right to forgo interest payments to the bondholders without repercussion in the event that the firm is undergoing financial difficulty.

c.the ability of the bondholder to convert to a predetermined number of shares of the issuer’s common stock.

d.All of the above

e.Both (a) and (c)

 

 

 

85.The holding period yield (HPY) calculation differs from the yield to maturity (YTM) calculation in that:

a.the future value for the HPY calculation is always the par value of the bond

b.the future value for the HPY calculation is the sale price of the bond

c.the time period for the HPY calculation is the number of time periods until the bond matures

d.the time period for the HPY calculation is the number of time periods the bond was actually held

e.Both (b) and (d)

 

 

 

86.Assuming a 28% lender’s affordability ratio, estimated monthly property taxes and insurance of $250, a 25% down payment (of the purchase price), and an annual gross income of $84,800, calculate the maximum purchase price based on monthly income. The monthly payment will occur at the end of the month and you plan to pay off the mortgage over a 30-year period at a 6.25% annual interest rate.

a.$374,343

b.$280,757

c.$282,219

d.$321,360

e.None of the above

 

 

 

87.Which of the following statements is true?

a.As time passes and a bond approaches its maturity date the price will converge to par value plus the final interest payment.

b.The most important factor having an impact on a bond’s price is the current yield on the bond.

c.Bond prices and interest rates move in the same direction.

d.Shorter-term bonds are more sensitive to changes in interest rates than longer-term bonds.

e.None of the above statements is true.

 

 

 

88.Bond ratings:

a.have no impact on a bond’s price.

b.are based upon the bond rating agencies’ assessment of the borrower’s default risk

c.result in yield spreads between different quality bonds.

d.Both (b) and (c)

e.All of the above

 

 

 

89.Yield spreads are quoted in terms of basis points. Which of the following is true for basis points?

a.10 basis points = 10%

b.100 basis points = 1%

c.1 basis point = 1%

d.100 basis points = 100%

 

 

 

90.The yield curve:

a.is a graph showing the term structure of interest rates.

b.generally shows that longer-term bonds offer lower yields than shorter-term bonds.

c.generally slopes down

d.Both (a) and (b)

e.Both (b) and (c)

 

 

 

91.The expectations theory ignores several factors including the idea that:

a.investors may have a preference for investing in longer-term bonds due to the added risk they offer over shorter-term bonds.

b.investors may have a preference for investing in shorter-term bonds due to the added risk offered by longer-term bonds.

c.some investors such as pension funds have a desire to match the maturity of their liabilities.

d.All of the above

e.both (b) and (c)