Chapter 11
1. What is the main characteristic of money market
transactions which enables it to have active secondary market?
14. Why do commercial paper securities mature within 270 days or less?
15. Why is the banker’s acceptance form of financing ideal for foreign transactions?
Chapter 12
3. What two characteristics make bonds a more popular long-term alternative to investing in stocks?
5. Distinguish between an investment-grade bond and a junk bond.
Quantitative Problems
1. You are considering buying a bond that matures in
10 years from today. The par value of the bond is
$10,000 and the coupon rate is 7%. If the current
market interest rates are 5%, what is the bond price
today if the coupon is paid annually?
3. Suppose there are two bonds you are considering:
Bond A. Bond B
Maturity (years) 20. 30
Coupon rate (%)
(paid semiannually)
12. 8
Par value. $1,000. $1,000
a. If both bonds had a required rate of return of 10%,
what would the bonds’ prices be?
b. Explain what it means when a bond is selling at
a discount, a premium, or at its face amount (par
value). Based on results in part (a), would you
consider both bonds to be selling at a discount,
premium, or at par?
10. Consider two $10,000 face-value corporate bonds.
One is currently selling for $9,980 and matures in 15
years. The other bond sells for $9,350 and matures in
3 years. Calculate the current yield for both bonds if
both have a coupon rate equal to 5%. Which current
yield is a better approximation of the yield to matu-
rity? (Assume a yearly coupon payment.)
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