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Concept Questions

1. Premium (par, discount) bonds are bonds that sell for more than (the same as, less than) their face or par value.

2. The face value is normally $1,000 per bond. The coupon is expressed as a percentage of face value (the coupon rate), so the annual dollar coupon is calculated by multiplying the coupon rate by $1,000. Coupons are normally paid semi-annually; the semi-annual coupon is equal to the annual coupon divided by two.

3. The coupon rate is the annual dollar coupon expressed as a percentage of face value. The current yield is the annual dollar coupon divided by the current price. If a bond’s price rises, the coupon rate won’t change, but the current yield ...view middle of the document...

For the example given, the coupon rate on the bond is still 10 percent, and the YTM is 8 percent.

8. The yield to maturity is the required rate of return on a bond expressed as a nominal annual interest rate. For noncallable bonds, the yield to maturity and required rate of return are interchangeable terms. Unlike YTM and required return, the coupon rate is not used as the interest rate in bond cash flow valuation, but is a fixed percentage of par over the life of the bond used to set the coupon payment amount. For the example given, the coupon rate on the bond is still 10 percent, and the YTM is 8 percent.

9. a. Bond price is the present value term when valuing the cash flows from a bond; YTM is the interest rate used in valuing the cash flows from a bond. They have an inverse relationship.

b. If the coupon rate is higher than the required return on a bond, the bond will sell at a premium, since it provides periodic income in the form of coupon payments in excess of that required by investors on other similar bonds. If the coupon rate is lower than the required return on a bond, the bond will sell at a discount, since it provides insufficient coupon payments compared to that required by...

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