Ch8 – Bond Valuation And The Structure Of | Full Test Bank

Fundamentals of Corporate Finance, 5e (Parrino)

Chapter 8 Bond Valuation and the Structure of Interest Rates

1) The largest investors in corporate bonds are state government agencies.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

2) The largest investors in corporate bonds are big institutional investors such as life insurance companies and pension funds.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

3) Most secondary market transactions for corporate bonds take place on the New York Stock Exchange.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

4) Most secondary market transactions for corporate bonds take place through dealers in the over-the-counter (OTC) market.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

5) A thin market for a security implies a high frequency of trades for that type of security in the markets.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

6) Corporate bonds have a thin market relative to market for corporate stocks.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

7) Prices in the corporate bond market tend to be more volatile than securities sold in markets with greater trading volumes.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

8) Vanilla bonds have coupon payments that are fixed for the life of the bond, with the principal being repaid at maturity.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

9) The face or par value for most corporate bonds is equal to $1,000 and is the principal amount owed to bondholders at maturity.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

10) Zero coupon bonds sell well above their par value because they offer no coupons.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

11) Convertible bonds can be converted into shares of common stock at some predetermined ratio at the discretion of the bondholder.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

12) The value, or price, of any asset is the present value of its future cash flows.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

13) A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if interest rates are below 10 percent and at a discount if interest rates are greater than 10 percent.

Learning Objective: LO 2

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

14) You can buy a $1,000 par value bond for $800. The coupon rate is 10 percent (with annual payments), and there are 10 years before the bond will mature and pay off its $1,000 par value. The price of the bond suggests that the expected return on bonds with this risk is lower than 10 percent.

Learning Objective: LO 2

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

15) The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

16) Interest rate risk is the risk that bond prices will fluctuate as interest rates change.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Risk Analysis

17) As interest rates fall, the prices of bonds decline.

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

18) Higher coupon bonds have greater interest rate risk.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Risk Analysis

19) All other things being equal, a given change in the interest rates will have a greater impact on the price of a low-coupon bond than a higher-coupon bond with the same maturity.

Learning Objective: LO 4

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

20) Bonds with a call provision pay lower yields than comparable noncallable bonds.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

21) The risk that the lender may not receive payments as promised is called default risk.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

22) U.S. Treasury securities are the best proxy measure for the risk-free rate.

Learning Objective: LO 5

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

23) Upward-sloping yield curves often occur before the beginning of recession.

Learning Objective: LO 6

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

24) If investors believe inflation will be increasing in the future, the prevailing yield curve will be downward sloping.

Learning Objective: LO 6

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

25) The real rate of interest varies with the business cycle, with the highest rates seen at the end of a period of business expansion and the lowest at the bottom of a recession.

Learning Objective: LO 6

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

26) Which of the following statements is true?

A) The largest investors in corporate bonds are small individual investors.

B) The market for corporate stocks is thin compared to the market for corporate bonds.

C) Institutional investors such as life insurance companies tend to not invest in corporate bonds.

D) Prices in the corporate bond market tend to be more volatile than prices of securities sold in markets with greater trading volume.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

27) Which one of the following statements is NOT true?

A) Prices in the corporate bond market tend to be more volatile than the markets for stocks or money market securities.

B) Corporate bonds are more marketable than the securities that have higher daily trading volumes.

C) The market for corporate bonds is thin compared to the market for corporate stocks.

D) The largest investors in corporate bonds are life insurance companies and pension funds.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

28) It is not easy for individuals to trade in the corporate bond market because:

A) the corporate bond market is considered to be very transparent.

B) corporate bonds are more marketable than the securities that have higher daily trading volumes.

C) centralized reporting of deals between buyers and sellers take place.

D) prices in the corporate bond market tend to be less stable.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

29) Which one of the following statements about vanilla bonds is NOT true?

A) They have fixed coupon payments.

B) The face value, or par value, for most corporate bonds is $1,000.

C) Coupon payments are usually made quarterly.

D) The bond's coupon rate is calculated as the annual coupon payment divided by the bond's face value.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

30) Which of the following statements is true of zero coupon bonds?

A) Zero coupon bonds have a yield to maturity of 0%.

B) Zero coupon bonds tend to sell above their face value.

C) The most frequent and regular issuer of zero coupon securities are non-governmental agencies.

D) Zero coupon bonds have no coupon payments over its life and only offer a single payment at maturity.

Learning Objective: LO 1

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

31) Which of the following statements is true?

A) To secure the conversion option on a bond, bondholders would pay a reduced (i.e. discounted) bond price.

B) Typically, the conversion ratio is set so that the firm's stock price must appreciate at least 40 percent before it is profitable to convert bonds into stock.

C) A convertible bond is issued by government agencies rather than a firm with stock.

D) Convertible bonds can be converted into shares of common stock at some predetermined ratio at the discretion of the bondholder.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

32) Which of the following statements is true of convertible bonds?

A) The most significant disadvantage to a corporation of issuing convertible bonds is that they increase the cash that the firm must use to make interest payments.

B) The typical conversion ratio is set so that the firm's stock price must appreciate 5 percent or less before it is profitable for the holder to convert the bond to stock.

C) Firms that issue convertible bonds can do so at a lower interest rate.

D) The typical issue of convertible bonds allows the holder of the bond to convert it to preferred stock.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

33) Which of the following statements is true about zero coupon bonds?

A) They typically sell at a premium over par when they are first issued.

B) They typically sell for a higher price than similar coupon bonds.

C) They are always convertible to common stock.

D) They typically sell at a deep discount below par when they are first issued.

Learning Objective: LO 1

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

34) Which one of the following statements about bonds is NOT true?

A) To compute a bond's price, one needs to calculate the present value of the bond's expected cash flows.

B) The value, or price, of any asset is the future value of its cash flows.

C) The required rate of return, or discount rate, for a bond is the market interest rate called the bond's yield to maturity.

D) The expected future cash flows are estimated using the coupons that the bond will pay and the maturity value to be received.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

35) If a bond's coupon rate is equal to the market rate of interest, then the bond will sell:

A) at a price equal to its face value.

B) at a price greater than its face value.

C) at a price less than its face value.

D) There is no relation between the coupon rate and market rate of interest.

Learning Objective: LO 2

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

36) Bonds sell at a discount when the market rate of interest is:

A) less than the bond's coupon rate.

B) greater than the bond's coupon rate.

C) equal to the bond's coupon rate.

D) There is no relation between the coupon rate and market rate of interest.

Learning Objective: LO 2

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

37) Bonds sell at a premium when the market rate of interest is:

A) less than the bond's coupon rate.

B) greater than the bond's coupon rate.

C) equal to the bond's coupon rate.

D) There is no relation between the coupon rate and market rate of interest.

Learning Objective: LO 2

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

38) In calculating the current price of a bond paying semiannual coupons, one needs to:

A) use the annual discount rate for discounting the par payment at maturity.

B) use double the annual coupon value.

C) use the semiannual rate only for discounting the annual coupons.

D) use double the number of years for the number of payments made.

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

39) Which one of the following statements about zero coupon bonds is NOT true?

A) Zero coupon bonds have no coupon payments but promise a single payment at maturity.

B) Zero coupon bonds must sell for less than similar bonds that make periodic coupon payments.

C) Zero coupon bonds make coupon payments but no principal payment at maturity.

D) Zero coupon bonds differ from vanilla bonds in terms of face value.

Learning Objective: LO 2

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

40) Briar Corp is issuing a 10-year bond with a coupon rate of 7 percent. The interest rate for similar bonds is currently 9 percent. Assuming annual payments, what is the present value of the bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

A) $872

B) $1,066

C) $990

D) $945

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

41) Regatta, Inc., has six-year bonds outstanding that pay an 8.25 percent coupon rate. Investors buying the bond today can expect to earn a yield to maturity of 6.875 percent. How much will you be willing to pay for Regatta's bond today? Assume annual coupon payments. (Do not round intermediate computations. Round your final answer to the nearest dollar.)

A) $972

B) $1,066

C) $1,014

D) $923

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

42) Triumph Corp. issued five-year bonds that pay a coupon of 6.375 percent annually. The current market rate for similar bonds is 8.5 percent. How much will you be willing to pay for Triumph's bond today? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

A) $1,023

B) $1,137

C) $916

D) $897

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

43) Your friend recommends that you invest in a three-year bond issued by Trimer, Inc., that will pay annual coupons of 10 percent. Similar investments today will yield 6 percent. How much should you pay for the bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

A) $1,024

B) $979

C) $886

D) $1,107

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

44) Kevin Rogers is interested in buying a five-year bond that pays a coupon of 10 percent on a semiannual basis. The current market rate for similar bonds is 8.8 percent. What should be the current price of this bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

A) $1,048

B) $965

C) $1,099

D) $982

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

45) Giant Electronics is issuing 20-year bonds that will pay coupons semiannually. The coupon rate on this bond is 7.8 percent. If the market rate for such bonds is 7 percent, what will the bonds sell for today? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

A) $1,037

B) $1,085

C) $861

D) $923

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

46) Jane Thorpe has been offered a seven-year bond issued by Barone, Inc., for a price of $943.22. The bond has a coupon rate of 9 percent and pays the coupon semiannually. Similar bonds in the market have a yield to maturity of 10 percent today. Should she buy the bonds at the offered price? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

A) Yes, the bond is worth more at $1,015.

B) No, the bond is only worth $921.

C) Yes, the bond is worth more at $951.

D) No, the bond is only worth $912.

Learning Objective: LO 2

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

47) Kevin Oh is planning to sell a bond that he owns. This bond has four years to maturity and pays a coupon of 10 percent on a semiannual basis. Similar bonds in the current market have a yield to maturity of 12 percent. What will be the price that he will get for his bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

A) $1,044

B) $938

C) $970

D) $1,102

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

48) Jeremy Kohn is planning to invest in a 10-year bond that pays a 12 percent coupon. The current market rate for similar bonds is 9 percent. Assume semiannual coupon payments. What is the maximum price that should be paid for this bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

A) $951

B) $882

C) $1,033

D) $1,195

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

49) Highland Corp., a U.S. company, has a five-year bond whose yield to maturity is 6.5 percent. The bond has no coupon payments. What is the price of this zero coupon bond? (Assume semiannual compounding for these zero-coupon bonds.)

A) $927.83

B) $726.27

C) $729.88

D) $1,113.23

Learning Objective: LO 2

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

50) Shana Norris wants to buy five-year zero coupon bonds with a face value of $1,000. Her yield to maturity is 8.5 percent. Assuming annual compounding, what would be the current market price of these bonds? (Round your answer to the nearest dollar.)

A) $1,023

B) $665

C) $890

D) $1,113

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

51) The U.S. Treasury has issued 10-year zero coupon bonds with a face value of $1,000. Assume that the bond compounds interest semiannually. What will be the current market price of these bonds if the yield to maturity for similar investments in the market is 6.75 percent? (Round your answer to the nearest dollar.)

A) $520

B) $860

C) $515

D) $604

Learning Objective: LO 2

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

52) Robertsons, Inc., is planning to expand its specialty stores into five other states and finance the expansion by issuing 15-year zero coupon bonds with a face value of $1,000. If your opportunity cost is 8 percent and similar bonds pay coupons semiannually, what will be the price at which you will be willing to purchase these bonds? (Round your answer to the nearest dollar.)

A) $308

B) $315

C) $803

D) $866

Learning Objective: LO 2

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

53) Jarmine Corp., is planning to fund a project by issuing 10-year zero coupon bonds with a face value of $1,000. Assuming semiannual compounding of interest, what will be the price of these bonds if the appropriate discount rate is 14 percent? (Round your answer to the nearest dollar.)

A) $852

B) $258

C) $270

D) $841

Learning Objective: LO 2

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

54) Which one of the following statements is true of a bond's yield to maturity?

A) The yield to maturity of a bond is the same as the coupon rate assuming the bond price is below par value.

B) If the yield to maturity is less than the coupon rate, the bond will sell above par value.

C) A bond's yield to maturity is the same as the bond's realized yield if the bond is held to maturity.

D) The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond.

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

55) The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments:

A) exceed the price of the bond.

B) equal to zero.

C) equal to the price of the bond.

D) less than the price of the bond.

Learning Objective: LO 3

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

56) Which one of the following statements is NOT true of realized yield?

A) The realized yield is the return earned on a bond given the cash flows actually received by the investor.

B) The realized yield is equal to the yield to maturity even if the bond is sold prior to maturity.

C) It is the interest rate at which the present value of the actual cash flows generated by the investment equals the bond's price at the time of sale of the bond.

D) The realized yield allows investors to see the return they actually earned on their investment.

Learning Objective: LO 3

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

57) Jenny LePlaz is looking to invest in a five-year bond that pays annual coupons of 6.25 percent and currently sells at $912.34. What is the current market yield on such bonds? (Round to the closest answer.)

A) 9.5%

B) 8.5%

C) 6.5%

D) 7.5%

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

58) Nathan Akpan is planning to invest in a seven-year bond that pays annual coupons at a rate of 7 percent. It is currently selling at $927.23. What is the current market yield on this bond? (Round to the closest answer.)

A) 10.4%

B) 9.5%

C) 8.4%

D) 7.5%

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

59) Jane Almeda is interested in a 10-year bond issued by Roberts Corp. that pays a coupon of 10 percent annually. The current price of this bond is $1,174.45. What is the yield that Jane would earn by buying it at this price and holding it to maturity? (Round to the closest answer.)

A) 7.1%

B) 7.5%

C) 8.9%

D) 8.5%

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

60) Shawna Carter wants to invest her recent bonus in a four-year bond that pays a coupon of 11 percent semiannually. The bonds are selling at $962.13 today. If she buys this bond and holds it to maturity, what would be her yield? (Round to the closest answer.)

A) 11.5%

B) 11.8%

C) 12.5%

D) 12.2%

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

61) Alice Trang is planning to buy a six-year bond that pays a coupon of 10 percent semiannually. Given the current price of $878.21, what is the yield to maturity on these bonds? (Round to the closest answer.)

A) 11%

B) 12%

C) 13%

D) 14%

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

62) John Wong purchased a five-year bond today at $1,034.66. The bond pays 6.5 percent semiannually. What will be his yield to maturity? (Round to the closest answer.)

A) 6.7%

B) 6.2%

C) 3.25%

D) 5.7%

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

63) Huan Zhang bought a 10-year bond that pays 8.25 percent semiannually for $911.10. What is the yield to maturity on this bond? (Round your percentage answer to two decimal places.)

A) 7.6%

B) 8.6%

C) 9.6%

D) 10.6%

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

64) Five years ago, Shirley Harper bought a 10-year bond that pays 8 percent semiannually for $981.10. Today, she sold it for $1,067.22. What is the realized yield on her investment? (Round to the nearest percent.)

A) 7%

B) 8%

C) 11%

D) 10%

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

65) Rachel McGovern bought a 10-year bond for $921.77 seven years ago. The bond pays a coupon of 15 percent semiannually. Today, the bond is priced at $961.22. If she sold the bond today, what would be her realized yield? (Round to the nearest percent.)

A) 17%

B) 18%

C) 9%

D) 10%

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

66) Jorge Cabrera paid $980 for a 15-year bond 10 years ago. The bond pays a coupon of 10 percent semiannually. Today, the bond is priced at $1,054.36. If he sells the bond today, what will be his realized yield? (Round to the nearest percent.)

A) 12%

B) 8%

C) 11%

D) 9%

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

67) Suppose an investor earned a semiannual yield of 6.4 percent on a bond paying coupons twice a year. What is the effective annual yield (EAY) on this investment? (Round to two decimal places.)

A) 12.80%

B) 6.40%

C) 6.50%

D) 13.21%

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

68) Which of the following statements is true?

A) Long-term bonds have lower price volatility than short-term bonds of similar risk.

B) As interest rates decline, the prices of bonds rise and as interest rates rise, the prices of bonds decline.

C) All other things being equal, short-term bonds are riskier than long-term bonds.

D) Interest rate risk decreases as maturity increases.

Learning Objective: LO 4

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

69) Which one of the following statements is NOT true?

A) Interest rate risk is the risk that bond prices will change as interest rates change.

B) Interest rate changes and bond prices are inversely related.

C) As interest rates increase, bond prices increase.

D) Long-term bonds have more price volatility than short-term bonds of similar risk.

Learning Objective: LO 4

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

70) Which of the following statements is true?

A) The longer the maturity of a security, the greater its interest rate risk.

B) If investors believe inflation will be subsiding in the future, the prevailing yield curve will have a positive slope.

C) The real rate of interest varies with the business cycle, with the lowest rates at the end of a period of business expansion and the highest at the bottom of a recession.

D) The interest rate risk premium always adds a downward bias to the slope of the yield curve.

Learning Objective: LO 4, 6

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

71) Which of the following statements is true?

A) For a given change in market interest rates, the prices of higher-coupon bonds change more than the prices of lower-coupon bonds.

B) If market interest rates rise, a 1-year bond will fall in value more than a 10-year bond.

C) If market interest rates rise, bond prices will rise.

D) If market interest rates rise, a 10-year bond will fall in value more than a 1-year bond.

Learning Objective: LO 4

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

72) Stanley Hart invested in a municipal bond that promised an annual yield of 6.7 percent. The bond pays coupons twice a year. What is the effective annual yield (EAY) on this investment? (Round percentage to two decimal places.)

A) 13.4%

B) 6.81%

C) 6.70%

D) 4.89%

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

73) Marketability is the ability of an investor:

A) to sell a security quickly, at a low transaction cost, and at a price close to its fair market value.

B) to sell at a profit under all circumstances.

C) to sell the security above its par value.

D) to sell a security with the highest profit.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

74) Which of the following statements is true?

A) The lower the transaction costs are, the less marketable a security becomes.

B) The interest rate, or yield, on a security does not affect its marketability.

C) U.S. Treasury bonds are considered to be the most marketable of all debt securities.

D) U.S. Treasury bills have the largest and most active secondary market and are considered to be the most marketable of all debt securities.

Learning Objective: LO 5

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

75) Which of the following statements is NOT true?

A) The risk that the lender may not receive payments as promised is called default risk.

B) Investors must pay a premium to purchase a security that exposes them to default risk.

C) U.S. Treasury securities are the best proxy measure for the risk-free rate.

D) A bond's yield to maturity is inversely related to its price.

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

76) Downward-sloping yield curves usually occur:

A) when the economy is growing.

B) when the economy is stagnant.

C) before the beginning of a recession.

D) after the beginning of a recession.

Learning Objective: LO 6

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

77) Which one of the following statements is NOT true?

A) The relationship between yield to maturity and marketability is known as the term structure of interest rates.

B) The shape of the yield curve is not constant over time.

C) As the general level of interest rises and falls over time, the yield curve shifts up and down and has different slopes.

D) Yield curves show graphically how market yields vary as term to maturity changes.

Learning Objective: LO 6

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

78) The three economic factors that affect the shape of the yield curve are:

A) the real rate of interest, the expected rate of inflation, and marketability.

B) the real rate of interest, the expected rate of inflation, and interest rate risk.

C) the nominal rate of interest, the expected rate of inflation, and default risk.

D) the real rate of interest, the nominal rate of interest, and currency risk.

Learning Objective: LO 6

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

79) Which of the following statements is true?

A) Investment grade bonds are those rated single B and higher.

B) Federal laws typically allow insurance companies and pension funds to purchase non-investment grade bonds.

C) Because investors are risk averse, they require a premium to purchase a security that exposes them to default risk.

D) All else equal, the higher a bond's rating, the higher the coupon rate.

Learning Objective: LO 6

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

80) Which of the following statements is true?

A) Downward-sloping yield curves typically appear in the early to mid-period of a business expansion.

B) The interest rate risk premium always adds an upward bias to the slope of the yield curve.

C) If investors believe that inflation will be increasing in the near future, the yield curve will be downward sloping.

D) The yield curve most commonly observed is downward-sloping.

Learning Objective: LO 6

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

81) What is the marketability risk premium? Why should an issuing firm consider paying this premium?

Learning Objective: LO 5

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

82) Why does the default risk premium vary over the business cycle?

Learning Objective: LO 5

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

83) What economic factors affect the level and the shape of the yield curve? Explain.

Learning Objective: LO 6

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

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