Corporate Finance, 5e (Berk/DeMarzo)

Chapter 24 Debt Financing

1) In January 2010, the U.S. Treasury issued a $1000 par, ten-year, inflation-indexed note
with a coupon of 4%. On the date of issue, the consumer price index (CPI) was 200. By
January 2020, the CPI had increased to 300. The coupon payment that is made in January
2020 is closest to:
A) $20.
B) $30.
C) $40.
D) $50.
Answer: B
Explanation: The CPI appreciated by 300/200 = 1.50. Consequently, the principal amount
of the bond increases proportionately so the new principal = $1000 × 1.5 = $1500.
Therefore, with a 4% coupon and semiannual compounding this bond would pay $1500
× .04/2 = $30

2) In January 2010, the U.S. Treasury issued a $1000 par, ten-year, inflation-indexed note
with a coupon of 4%. On the date of issue, the consumer price index (CPI) was 200. By
January 2020, the CPI had increased to 300. The principal payment that is made in January
2020 is closest to:
A) $1000.
B) $1020.
C) $1030.
D) $1500.
Answer: D
Explanation: The CPI appreciated by 300/200 = 1.50. Consequently, the principal amount
of the bond increases proportionately so the new principal = $1000 × 1.5 = $1500

3) In January 2010, the U.S. Treasury issued a $1000 par, five-year, inflation-indexed note
with a coupon of 5%. On the date of issue, the consumer price index (CPI) was 250. By
January 2015, the CPI had decreased to 200. The coupon payment that was made in
January 2015 is closest to:
A) $20.
B) $25.
C) $30.
D) $40.
Answer: A
Explanation: The CPI depreciated by 200/250 = 0.8. Consequently, the principal amount of
the bond decreases (for interest purposes) proportionately so the new principal = $1000 ×
0.8 = $800. Therefore, with a 5% coupon and semiannual compounding this bond would
pay $800 × .05/2 = $20

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4) In January 2010, the U.S. Treasury issued a $1000 par, five-year, inflation-indexed note
with a coupon of 5%. On the date of issue, the consumer price index (CPI) was 250. By
January 2015, the CPI had decreased to 200. The principal payment that was made in
January 2015 is closest to:
A) $800.
B) $1000.
C) $1250.
D) $1500.
Answer: B
Explanation: The CPI depreciated by 200/250 = 0.8. Consequently, the principal amount of
the bond decreases (for interest purposes) proportionately so the new principal (for
interest purposes) = $1000 × 0.8 = $800. However, in the event of depreciation with the
CPI these bonds will repay par, which is $1000 in this case.

22) Suppose that in January 2001, the U.S. Treasury issued a ten-year inflation-indexed
note with a coupon of 3 1/2% (2*3+1/2)=0.035. On the date of issue, the consumer price
index (CPI) was 175.1. In January 2006, the CPI had increased to 198.3. What coupon
payment was made on this bond in January 2006?
Answer: Between January 2001 and January 2006 the CPI appreciated to = 1.132496
Consequently, the principal amount of the bond increased by this amount, that is the
original face value of $1000 increased to $1132.50. Because the bond pays semiannual
coupons, the coupon payment was $1132.50 × .035/2 = $19.82

1) Galt Industries has just issued a callable, $1000 par value, five-year, 6% coupon bond
with semiannual coupon payments. The bond can be called at par in three years or anytime
thereafter on a coupon payment date. If the bond is currently trading for $978.94, then its
yield to maturity is closest to:
A) 3.4%.
B) 6.0%.
C) 6.5%.
D) 6.8%.
Answer: C
Explanation: PV = -978.94, PMT = 60/2 = 30, FV = 1000, N = 5 × 2 = 10, compute i =
3.8250048, then 3.250048% × 2 = 6.5%

2) Galt Industries has just issued a callable, $1000 par value, five-year, 6% coupon bond
with semiannual coupon payments. The bond can be called at par in three years or anytime
thereafter on a coupon payment date. If the bond is currently trading for $978.94, then its
yield to call is closest to:
A) 3.4%.
B) 6.0%.
C) 6.5%.
D) 6.8%.
Answer: D
Explanation: PV = -978.94, PMT = 60/2 = 30, FV = 1000, N = 3 × 2 = 6, compute i =
3.393852, then 3.393852% × 2 = 6.7877%

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