Question

1 In general, bonds with callable feature will have:

a) higher YTM than bonds without call feature.

b) lower YTM than bonds without call feature.

c) higher YTM than bonds with put feature.

d) lower YTM than unsecured debentures.

e) lower YTM than T-Bills.

2 A bond has a $1,000 face value, a market price of $1,115, and pays interest payments of $90 every year. What is the coupon rate?

a) 4.50 percent

b) 6.75 percent

c) 7.39 percent

d) 8.25 percent

e) 9.00 percent

3 A corporate bond pays 8 percent interest. You are in the 30 percent tax bracket. What is your aftertax yield on this bond?

a) 3 percent

b) 5.6 percent

c) 7.23 percent

d) 10.39 percent

e) 8 percent

Answer 1

1.

higher YTM than bonds without call feature

This is because there is premium that issuer pays to the bond holder for callable feature.

2.

Coupon Rate = 90/1,000

Coupon Rate = 9.00%

3.

After-tax yield = (1 -0.30)(0.08)

After-tax yield = 5.6%