Question

Beautiful New Homes, Inc., has a bond issue with a coupon rate of 5.5 percent that matures in 8.5 years. The bonds have a par value of $1,000 and a market price of $945. Interest is paid semiannually. The yield to maturity on bonds of comparable risk have yields to maturity of 5.5%. Is this bond a good investment? A. No, because the bond is worth less than the price. B. No, because the bond's yield to maturity is less than the required yield. C. No, because the bond's current yield is too low.. D. Yes, because the bond's price is less than it's value. E. Maybe, because the bond's price equals its value. Protective covenants: A. Apply to short-term debt issues but not to long-term debt issues B. Only apply to privately issued bonds. C. Are a feature found only in government-issued bond indentures. D. Only apply to bonds that have a deferred call provision. E. Are primarily designed to protect bondholders from borrower default risk A floating rate bond A. Typically pays interest that varies periodically with changes in some specified market interest rate like the yield to maturity on 1-year Treasury bonds B. Typically floats with the dollar against other currencies C. Will always have higher returns required by investors than fixed-rate bonds D. Always has a market price that floats with the stock market E. Typically has a put feature that enables investors to buy it at a floating price

Answer 1

1.
Option D
As yield is equal to coupon, price should be equal to par=1000

But the price is less than 1000, so this is good investment

2.
Option E
Protective covenants protect investors or bondholders from borrower default risk

3.
Option A
Floating rate bond pays interest which changes periodically with change in reference rate