SIE: Exercise

Exercise

Circle TRUE or FALSE

1. 1. TRUE or FALSE. Nominal yield is different from coupon rate.
2. 2. TRUE or FALSE. A coupon rate of 4.5% on a corporate bond with a face value of $1,000 means an annual coupon payment of $45.
3. 3. TRUE or FALSE. Bonds rated below BBB- are considered non-investment grade.

 

Answer the following questions

1. 4. The indenture includes all the following except:
2. A. The purpose of the bond issue and its features
3. B. The conditions under which the bonds may be redeemed before maturity
4. C. The procedures and remedies should the issuer default
5. D. Provisions that relieve the trustee from liability for negligence
6. 5. For par bonds, what is the relationship between nominal yield and current yield?
7. 6. If the bid-ask spread of a corporate bond is 97 1/8 – 99 5/8, what is the spread in dollars?
8. 7. If a premium bond is quoted at 102 1/8, what is its market price?
9. 8. If a discount bond is quoted at 96.75, what is its market price?

Answers

1. 1. FALSE. Nominal yield is the same as coupon rate and interest rate.
2. 2. TRUE. That is, 4.5% x $1,000 = 0.045 x $1,000 = $45.
3. 3. TRUE. Bonds rated below BBB- are considered non-investment grade.
4. 4. D. There are no such provisions that relieve the trustee from liability for negligence; such provisions are prohibited by the Trust Indenture Act.
5. 5. They are equal. For par bonds, nominal yield and current yield are equal.
6. 6. $25. If the bid-ask spread of a corporate bond is 97 1/8 – 99 5/8, the bid price is 97 1/8% of $1,000, or 0.97125 x $1,000 = $971.25. The ask price is 99 5/8% of $1,000, o