1. Suppose the Beck Corporation wants to borrow $1,000 for 30 years. The interest rate on similar debt issued by similar corporations is 12 percent. Beck will thus pay 0.12*$1,000 = $120 in interest every year for 30 years. At the end of 30 years, Beck will repay the $1,000. In this example, please state the values for coupon, face value, coupon rate, and maturity.
2. What is difference between coupon rate and yield-to-maturity (YTM) on a bond?
3. What is discount bond? What is premium bond?
4. If an ordinary bond has a coupon rate of 14 percent and pays semi-annually. The bond maturities in seven years. The yield to maturity is quoted at 16 percent. What is the bonds price? What is the effective annual yield on this bond? (Assume the face value is $1,000)
5. What is current yield? Is it the same as yield to maturity?
6. Is it true that only risk associated with owning a bond is that the issuer will not make all the payments? Explain.
7. Price Risk. Which has greater price risk, a 30-year Treasury bond or a 30-year BB corporate bond?
8. Coupon Rate. How does a bond issuer decide on the appropriate coupon rate to set on its bonds? Explain the difference between the coupon rate and the required return on a bond.
9. Real and Nominal Returns. Are there any circumstances under which an investor might be more concerned about the nominal return on an investment than the real return?
10. Bond Ratings. Companies pay rating agencies such as Moodys and S&P to rate their bonds, and the costs can be substantial. However, companies are not required to have their bonds rated in the first place; doing so is strictly voluntary. Why so you think they do so?