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Chapter 7

Valuation and Characteristics of Bonds

True/False

1. Bonds cannot be worth less than their book value.

Difficulty: Easy

Keywords: book value

2. So long as a bond sells for an amount above its par value, the coupon interest rate and yield to maturity remain equal.

Difficulty: Moderate

Keywords: coupon interest rate, yield to maturity

3. A bond’s value equals the present value of interest and principal the owner will receive.

Difficulty: Moderate

Keywords: bond value

4. As market interest rates increase, bond prices decrease.

Difficulty: Easy

Keywords: bonds and interest rates

5. The higher the bond rating, the more default risk associated with the bond.

Difficulty: Easy

Keywords: bond ratings

6. Bonds that sell at a discount have a coupon rate lower than the market interest rate.

Difficulty: Moderate

Keywords: bonds and interest rates

7. The liquidation value of an asset is determined from the firm’s overall market value.

Difficulty: Easy

Keywords: liquidation value

8. Debentures are unsecured long-term debt.

Difficulty: Easy

Keywords: debenture

9. Book value represents the sum of an asset’s market value and liquidation value.

Difficulty: Moderate

Keywords: book value

10. If a firm went out of business and sold its assets to the highest bidder, the sale price of those assets would be equal to their book value.

Difficulty: Moderate

Keywords: book value, market value

11. An efficient market may be defined as one in which the values of all securities at any instant in time fully reflect all available information.

Difficulty: Easy

Keywords: efficient market

12. Unlike market value, the intrinsic value of an asset is estimated independently of risk.

Difficulty: Moderate

Keywords: intrinsic value

13. Bond ratings measure the interest rate risk of a given bond issue.

Difficulty: Easy

Keywords: bond ratings

14. The par value of a corporate bond indicates the level of interest payments that will be paid to investors.

Difficulty: Easy

Keywords: par value

15. When referring to bonds, expected rate of return and yield to maturity are often used interchangeably.

Difficulty: Easy

Keywords: expected rate of return, yield to maturity

16. The present value of an investment’s expected future cash flows is also known as the intrinsic value.

Difficulty: Moderate

Keywords: intrinsic value

17. The intrinsic value should necessarily be below the market value in order to make it desirable in the eyes of an investor.

Difficulty: Moderate

Keywords: intrinsic value

18. Bonds with high durations have less interest rate risk.

Difficulty: Easy

Keywords: duration, interest rate risk

19. Any unsecured long-term debt instrument is a debenture.

Difficulty: Easy

Keywords: debenture

20. A mortgage bond is always secured by a lien on real property.

Difficulty: Easy

Keywords: mortgage bond

21. Junk bonds are rated BB or higher.

Difficulty: Easy

Keywords: junk bond

22. Zero coupon bonds are disadvantageous to the issuing firm if interest rates fall.

Difficulty: Moderate

Keywords: zero coupon bond

23. Eurobonds are bonds issued in a country different from the one in whose currency the bond is denominated.

Difficulty: Easy

Keywords: Eurobonds

24. The current yield of a bond will equal its coupon rate when the bond is selling at par value.

Difficulty: Hard

Keywords: current yield, coupon rate

25. The debenture is the legal agreement between the firm issuing a bond and the bond trustee who represents the bondholders.

Difficulty: Easy

Keywords: indenture

26. The better the bond rating, the lower the rate of return demanded in the capital markets.

Difficulty: Moderate

Keywords: bond rating

27. The longer the time to maturity, the more sensitive a bond’s price to changes in market interest rates.

Difficulty: Moderate

Keywords: bonds and interest rates

28. The book value of an asset is determined by current supply and demand forces in the marketplace.

Difficulty: Easy

Keywords: book value, market value

29. As investors’ required rate of return on a bond increases, the value of the bond increases also.

Difficulty: Moderate

Keywords: bond value and interest rates

30. As the maturity date of a bond approaches, the bond’s market value approaches its par value.

Difficulty: Moderate

Keywords: bond value and maturity

31. Shorter-term bonds have greater interest rate risk than do longer-term bonds.

Difficulty: Moderate

Keywords: interest rate risk

32. The sensitivity of a bond’s value to changing interest rates depends on both the bond’s time to maturity and its pattern of cash flows.

Difficulty: Moderate

Keywords: duration

33. The duration of a zero coupon bond is the same as the bond’s maturity.

Difficulty: Moderate

Keywords: duration

Multiple Choice

34. The yield to maturity on a bond:

a. is fixed in the indenture.

b. is lower for higher-risk bonds.

c. is the required return on the bond.

d. is generally equal to the coupon interest rate.

Difficulty: Moderate

Keywords: yield to maturity

35. A $1,000 par value 10-year bond with a 10% coupon rate recently sold for $900. The yield to maturity:

a. is 10%.

b. is greater than 10%.

c. is less than 10%.

d. cannot be determined.

Difficulty: Moderate

Keywords: yield to maturity

36. All of the following affect the value of a bond except:

a. investors’ required rate of return.

b. the recorded value of the firm’s assets.

c. the coupon rate of interest.

d. the maturity date of the bond.

Difficulty: Easy

Keywords: bond valuation

37. Eurobonds are:

a. issued in a country different from the one in whose currency the bond is denominated.

b. issued only in Europe.

c. the European equivalent of a junk bond.

d. none of the above.

Difficulty: Easy

Keywords: Eurobond

38. Sterling Corp. bonds pay 10% annual interest and are selling at 97. The market rate of interest:

a. is less than 10%.

b. is greater than 10%.

c. equals 10%.

d. cannot be determined.

Difficulty: Moderate

Keywords: market rate of interest, yield to maturity

39. The Blackwell Group has recently issued 20-year, unsecured bonds rated BB by Moody’s. These bonds are:

a. low-risk bonds.

b. debentures.

c. premium bonds.

d. mortgage bonds.

Difficulty: Easy

Keywords: debenture

40. The par value of a bond:

a. never equals its market value.

b. is determined by the investor.

c. generally is $1,000.

d. is never returned to the bondholder.

Difficulty: Easy

Keywords: par value

41. In an efficient securities market, the market value of a security is equal to:

a. its liquidation value.

b. its book value.

c. its intrinsic value.

d. none of the above.

Difficulty: Moderate

Keywords: intrinsic value

42. The liquidation value of a firm is equal to:

a. the firm’s net worth.

b. the firm’s value as an ongoing concern.

c. the book value of its plant and equipment.

d. none of the above.

Difficulty: Moderate

Keywords: liquidation value

43. The interest on corporate bonds is typically paid:

a. semiannually.

b. annually.

c. quarterly.

d. monthly.

Difficulty: Easy

Keywords: coupon interest, semiannual interest

44. If the market price of a bond increases, then:

a. the yield to maturity decreases.

b. the coupon rate increases.

c. the yield to maturity increases.

d. none of the above.

Difficulty: Moderate

Keywords: market value, yield to maturity

45. If current market interest rates rise, what will happen to the value of outstanding bonds?

a. It will rise.

b. It will fall.

c. It will remain unchanged.

d. There is no connection between current market interest rates and the value of outstanding bonds.

Difficulty: Moderate

Keywords: market interest rates and bond values

46. If current market interest rates fall, what will happen to the value of outstanding bonds?

a. It will rise.

b. It will fall.

c. It will remain unchanged.

d. There is no connection between current market interest rates and the value of outstanding bonds.

Difficulty: Moderate

Keywords: market interest rates and bond values

47. What is the name given to the value placed on an asset that is based upon the future cash flows of the investment, the investors’ required rates of return, and the risk of the asset?

a. Book value

b. Liquidation value

c. Market value

d. Intrinsic value

Difficulty: Moderate

Keywords: intrinsic value

48. Market efficiency implies which of the following?

a. Book value = liquidation value

b. Book value = market value

c. Liquidation value = market value

d. None of the above

Difficulty: Moderate

Keywords: market efficiency

49. Market efficiency implies which of the following?

a. Book value = intrinsic value

b. Market value = intrinsic value

c. Book value = market value

d. Liquidation value = book value

Difficulty: Moderate

Keywords: market efficiency

50. Which of the following affect an asset’s value to an investor?

a. Amount of an asset’s expected cash flow

b. The risk of the cash flows

c. Timing of an asset’s cash flows

d. Investors’ required rate of return

e. All of the above

Difficulty: Moderate

Keywords: determinants of bond value

51. Colby & Company bonds pay semiannual interest of $50. They mature in 15 years and have a par value of $1,000. The market rate of interest is 8%. The market value of Colby bonds is (round to the nearest dollar):

a. $1,173.

b. $743.

c. $1,000.

d. $827.

Difficulty: Moderate

Keywords: bond value

52. Caldwell, Inc. sold an issue of 30-year, $1,000 par value bonds to the public. The bonds carry a 10.85% coupon rate and pay interest semiannually. It is now 12 years later. The current market rate of interest on the Caldwell bonds is 8.45%. What is the current market price (intrinsic value) of the bonds? Round off to the nearest $1.

a. $751

b. $1,177

c. $1,220

d. $976

Difficulty: Moderate

Keywords: bond value

53. MI has a $1,000 par value, 30-year bond outstanding that was issued 20 years ago at an annual coupon rate of 10%, paid semiannually. Market interest rates on similar bonds are 7%. Calculate the bond’s price.

1. $956.42
2. $1,000.00
3. $1,168.31
4. $1,213.19

Difficulty: Moderate

Keywords: bond value

54. Davis & Davis issued $1,000 par value bonds at 102. The bonds pay 12% interest annually and mature in 30 years. The market rate of interest is (round to the nearest hundredth of a percent):

a. 12.00%.

b. 11.76%.

c. 10.12%.

d. 11.29%.

Difficulty: Moderate

Keywords: market interest rate

55. On any given day, a bond can be issued at:

a. a discount.

b. a premium.

c. par.

d. all of the above.

Difficulty: Easy

Keywords: bond prices

56. Mortgage bonds:

a. are a type of debenture.

b. are secured by a lien on real property.

c. usually pay little or no interest.

d. can only be issued by financial institutions.

Difficulty: Easy

Keywords: mortgage bonds

57. Bondholders have a priority claim on assets ahead of:

a. common stockholders.

b. preferred stockholders.

c. both a and b.

d. none of the above.

Difficulty: Easy

Keywords: claim on assets

58. What is the yield to maturity of a nine-year bond that pays a coupon rate of 20% per year, has a $1,000 par value, and is currently priced at $1,407? Round your answer to the nearest whole percent and assume annual coupon payments.

a. 5%

b. 14%

c. 12%

d. 11%

Difficulty: Moderate

Keywords: yield to maturity

59. What is the expected rate of return on a bond that matures in seven years, has a par value of $1,000, a coupon rate of 14%, and is currently selling for $911? Round your answer to the nearest whole percent and assume annual coupon payments.

a. 13%

b. 14%

c. 15%

d. 16%

Difficulty: Moderate

Keywords: expected rate of return

60. What is the expected rate of return on a bond that pays a coupon rate of 9%, has a par value of $1,000, matures in five years, and is currently selling for $714? Round your answer to the nearest whole percent and assume annual coupon payments.

a. 18%

b. 13%

c. 16%

d. 17%

Difficulty: Moderate

Keywords: expected rate of return

61. What is the value of a bond that has a par value of $1,000, a coupon rate of $80 (annually), and matures in 11 years? Assume a required rate of return of 11%, and round your answer to the nearest $10.

a. $320

b. $500

c. $810

d. $790

Difficulty: Moderate

Keywords: bond value

62. What is the value of a bond that matures in three years, has an annual coupon payment of $110, and a par value of $1,000? Assume a required rate of return of 11%, and round your answer to the nearest $10.

a. $970

b. $1,330

c. $330

d. $1,000

Difficulty: Moderate

Keywords: bond value

63. Which type of value is shown on the firm’s balance sheet?

a. Book value

b. Liquidation value

c. Market value

d. Intrinsic value

Difficulty: Easy

Keywords: book value

64. When the intrinsic value of an asset exceeds the market value:

a. the asset is undervalued to the investor.

b. the asset is overvalued to the investor.

1. market value and intrinsic value are the same; therefore, this could not happen.
2. none of the above.

Difficulty: Moderate

Keywords: intrinsic value

65. Bond ratings are usually not affected by:

a. the company’s fiscal year end.

b. profitable operations.

c. variability in earnings.

d. firm size.

Difficulty: Moderate

Keywords: bond ratings

66. The discount rate used to value a bond is:

a. the coupon interest rate.

b. determined by the issuing company.

c. fixed for the life of the bond.

d. the market rate of interest.

Difficulty: Moderate

Keywords: discount rate, market rate of interest

67. Which of the following is generally not a characteristic of a bond?

a. Voting rights

b. Par value

c. Claims on assets and income

d. Indenture

Difficulty: Easy

Keywords: bond characteristics

68. The present value of the expected future cash flows of an asset represents the asset’s:

a. liquidation value.

b. book value.

c. intrinsic value.

d. par value.

Difficulty: Easy

Keywords: intrinsic value

69. As interest rates, and consequently investors’ required rates of return, change over time, the ____________ of outstanding bonds will also change.

a. maturity date

b. coupon interest payment

c. par value

d. price

Difficulty: Moderate

Keywords: bond price and interest rates

70. Zoro Sword Company bonds pay an annual coupon rate of 9 1/2%. They have eight years to maturity and face value, or par, of $1,000. Compute the value of Zoro bonds if investors’ required rate of return is 10%.

a. $1,516.18

b. $973.33

c. $1,027.17

d. $950.00

Difficulty: Moderate

Keywords: bond value

71. Cassel Corp. bonds pay an annual coupon rate of 10%. If investors’ required rate of return is now 8% on these bonds, they will be priced at:

a. par value.

b. a premium to par value.

c. a discount to par value.

d. cannot be determined from information given.

Difficulty: Moderate

Keywords: premium bond

72. Terminator Bug Company bonds have a 14% coupon rate. Interest is paid semiannually. The bonds have a par value of $1,000 and will mature 10 years from now. Compute the value of Terminator bonds if investors’ required rate of return is 12%.

a. $1,114.70

b. $1,149.39

c. $894.06

d. $1,000.00

Difficulty: Moderate

Keywords: bond value

73. Brookline, Inc. just sold an issue of 30-year bonds for $1,107.20. Investors require a rate of return on these bonds of 7.75%. The bonds pay interest semiannually. What is the coupon rate of the bonds?

a. 7.750%

b. 11.072%

c. 9.375%

d. 8.675%

Difficulty: Hard

Keywords: coupon rate

74. Applebee sold an issue of 30-year, $1,000 par value bonds to the public. The coupon rate of 8.75% is payable annually. It is now five years later, and the current market rate of interest is 7.25%. What is the current market price (intrinsic value) of the bonds? Round off to the nearest $1.

a. $715

b. $1,171

c. $1,225

d. $697

Difficulty: Moderate

Keywords: bond value, bond price

75. Six years ago, Colt, Inc. sold an issue of 30-year, $1,000 par value bonds. The coupon rate of 5.25% is payable annually. Investors presently require a rate of return of 8.375%. What is the current market price (intrinsic value) of the bonds? Round off to the nearest $1.

a. $1,050

b. $932

c. $681

d. $1,111

Difficulty: Moderate

Keywords: bond value, bond price

76. Frazier Fudge has a $1,000 par value bond that is currently selling for $1,300. It has an annual coupon rate of 7%, paid semiannually, and has nine years remaining until maturity. What is the annual yield to maturity on the bond? (Round to the nearest whole percentage.)

1. 3%
2. 5%
3. 7%
4. 9%

Difficulty: Moderate

Keywords: yield to maturity

77. You are considering the purchase of Hytec bonds that were issued 14 years ago. When the bonds were originally sold, they had a 30-year maturity and a 14.375% coupon interest rate that is payable semiannually. The bond is currently selling for $1,508.72. What is the yield to maturity on the bonds?

a. 8.50%

b. 14.38%

c. 11.11%

d. 7.67%

Difficulty: Moderate

Keywords: yield to maturity

78. Aurand, Inc. has outstanding bonds with an 8% annual coupon rate paid semiannually. The bonds have a par value of $1,000, a current price of $904, and will mature in 14 years. What is the annual yield to maturity on the bond?

a. 15.80%

b. 10.47%

c. 9.24%

d. 7.90%

1. 4.62%

Difficulty: Moderate

Keywords: yield to maturity

79. Marshall Manufacturing has a bond outstanding that was issued 20 years ago at a coupon rate of 9%. The $1,000 par value bond pays interest semiannually and was originally issued with a term of 30 years. If today’s interest rate is 14%, what is the value of the bond today?

a. $654.98

b. $735.15

c. $814.42

d. $941.87

Difficulty: Moderate

Keywords: bond value

80. Which of the following statements about debentures is false?

a. The earning ability of the issuing corporation is of great concern to the bondholder.

b. Debentures are viewed as less risky than secured bonds.

c. Debentures must provide investors with a higher yield than secured bonds.

d. Debentures allow the firm to issue debt and still preserve some future borrowing power.

Difficulty: Moderate

Keywords: debenture

81. Which of the following statements is true?

a. A bond that has a rating of AA is considered to be a junk bond.

b. A bond will sell at a premium if the prevailing required rate of return is less than the bond’s coupon rate.

c. A zero coupon is a bond that is secured by a lien on real property.

d. The legal document that describes all of the terms and conditions of a bond issue is called a debenture agreement.

Difficulty: Moderate

Keywords: bond characteristics

82. Which of the following statements about zero coupon bonds is false?

a. When the bonds mature, the issuing firm is faced with a small cash outflow relative to the cash inflow the firm receives when the bonds are initially issued.

b. Zero coupon bonds are disadvantageous to the issuing firm if interest rates fall.

c. Yields tend to be bid down on zero coupon bonds due to investor demand for the bonds.

d. Zero coupon bonds provide a positive annual cash flow to the issuing firm over the life of the bonds.

Difficulty: Moderate

Keywords: bond characteristics

83. Eurobonds:

a. are registered with the SEC.

b. are frequently offered to U.S. citizens and residents during their initial distribution.

c. take relatively longer periods of time to issue.

d. have none of the above characteristics.

Difficulty: Easy

Keywords: Eurobonds

a. that you can buy the bond for $92.125.

b. that you can buy the bond for $921.25.

c. that if you purchase the bond today, you will receive $921.25 when the bond matures.

d. none of the above.

Difficulty: Easy

Keywords: bond price, bond quote

85. Common indenture provisions include:

a. restrictions on the issuance of common stock dividends.

b. restrictions on the sale or purchase of fixed assets.

c. constraints on additional borrowing.

d. all of the above.

Difficulty: Easy

Keywords: indenture

86. You paid $865.50 for a corporate bond that has a 6.75% coupon rate. What is the bond’s current yield?

a. 8.375%

b. 7.800%

c. 15.001%

d. 6.667%

Difficulty: Moderate

Keywords: current yield

87. A $1,000 par value bond with a 12% coupon rate currently selling for $825 has a current yield of:

a. 14.55%.

b. 12.44%.

c. 7.27%.

d. 5.61%.

Difficulty: Moderate

Keywords: current yield

88. Bond ratings are favorably affected by:

a. a greater reliance on equity in financing the firm.

b. high variability in past earnings.

c. large firm size.

d. both a and c.

Difficulty: Moderate

Keywords: bond ratings

89. A security:

a. is undervalued in the eyes of an investor if the intrinsic value is greater than the market value.

b. is viewed as overvalued if the intrinsic value is greater than the market value.

c. will have the same intrinsic value and market value regardless of whether the securities market is working efficiently.

d. will provide an opportunity for an investor to make extra profits if markets are efficient.

Difficulty: Moderate

Keywords: market versus intrinsic value

90. Miller Motorworks has a $1,000 par value, 8% annual coupon bond with interest payable semiannually with a remaining term of 15 years. The annual market yield on similar bonds is 6%. What is the bond selling for today? (Round to the nearest whole dollar.)

1. $1,196
2. $1,042

c. $1,000

d. $946

Difficulty: Moderate

Keywords: bond value

91. Lambda Co. has bonds outstanding that mature in 10 years. The bonds have $1,000 par value, pay interest annually at a rate of 9%, and have a current selling price of $1,125. The yield to maturity on the bonds is:

a. 7.20%.

b. 9%.

c. 10.12%.

d. 14.40%.

Difficulty: Moderate

Keywords: yield to maturity

92. Generic, Inc. has bonds outstanding that mature in 20 years. The bonds have $1,000 par value, pay interest annually at a rate of 10%, and have a current selling price of $875.25. The yield to maturity on the bonds is:

a. 10%.

b. 8.75%.

c. 11.63%.

d. 7.24%.

Difficulty: Moderate

Keywords: yield to maturity

93. Quirk Drugs sold an issue of 30-year, $1,000 par value bonds to the public that carry a 10.85% coupon rate, payable semiannually. It is now 10 years later, and the current market rate of interest is 9.00%. If interest rates remain at 9.00% until Quirk’s bonds mature, what will happen to the value of the bonds over time?

a. The bonds will sell at a premium and decline in value until maturity.

b. The bonds will sell at a discount and rise in value until maturity.

c. The bonds will sell at a premium and rise in value until maturity.

d. The bonds will sell at a discount and fall in value until maturity.

Difficulty: Moderate

Keywords: bond prices and interest rates

94. Which of the following statements is true?

a. When investors’ required rate of return equals the bond’s coupon rate, then the market value of the bond may be selling at par value.

b. When investors’ required rate of return exceeds the bond’s coupon rate, then the market value of the bond will be greater than par value.

c. When investors’ required rate of return is less than the bond’s coupon rate, then market value of the bond will be greater than par value.

d. When investors’ required rate of return is less than the bond’s coupon rate, then the market value of the bond will be less than par value.

Difficulty: Moderate

Keywords: bond value and interest rates

95. A bond with a face value of $1,000 has annual coupon payments of $100 and was issued seven years ago. The bond currently sells for a premium and has eight years left to maturity. This bond’s ______ must be less than 10%.

a. yield to maturity

b. current yield

c. coupon rate

d. current yield and coupon rate

e. yield to maturity and current yield

Difficulty: Hard

Keywords: bond yields

96. A bond has a coupon rate of 10% and yield to maturity of 12%. Which of the following must be true?

a. The bond is selling at a discount.

b. The bond is selling at a premium.

c. The bond’s current yield is less than the coupon rate.

d. Both a and c.

e. Both b and c.

Difficulty: Hard

Keywords: bond value and interest rates

97. Beta, Inc. has bonds outstanding that mature in 10 years. The bonds have $1,000 par value and pay interest annually at a rate of 10%, which is also the current required rate of return on the bonds. The bonds’ duration is:

a. 10.00.

b. 6.76.

c. 5.

d. unable to be determined based on the information given.

Difficulty: Moderate

Keywords: bond duration

98. The issuance of bonds to raise capital for a corporation:

a. magnifies the returns to the stockholders.

b. increases risk to the stockholders.

c. is a cheaper form of capital than the issuance of common stock.

d. all of the above.

e. none of the above.

Difficulty: Moderate

Keywords: bonds versus stocks

99. Which of the following bonds is sold by a corporation at a discount and pays no interest?

a. An indenture bond

b. A zero coupon bond

c. A junk bond

d. A eurobond

Difficulty: Easy

Keywords: zero coupon bond

100. Which of the following is an advantage of zero coupon bonds?

1. Small cash outflow at maturity
2. Lower yield due to low demand
3. Ability to deduct annual amortization of discount
4. Both a and c
5. All of the above

Difficulty: Moderate

Keywords: zero coupon bonds

101. A(n)_____________ is used to outline the issuing company’s contractual obligations to bondholders.

a. mortgage

b. debenture

c. bond rating

d. indenture

Difficulty: Easy

Keywords: indenture

102. Junk bonds:

1. are high yield bonds.
2. have higher default risk.
3. were used to finance “fallen angels.”
4. all of the above.

Difficulty: Easy

Keywords: junk bonds

103. Assume that you wish to purchase a 20-year bond that has a maturity value of $1,000 and a coupon interest rate of 8%, paid semiannually. If you require a 10% rate of return on this investment, what is the maximum price that you would be willing to pay for this bond?

a. $619

b. $674

c. $761

d. $828

e. $902

Difficulty: Moderate

Keywords: bond value

104. Assume that you wish to purchase a 30-year bond that has a maturity value of $1,000 and a coupon interest rate of 9.5%, paid semiannually. If you require a 6.75% rate of return on this investment, what is the maximum price that you should be willing to pay for this bond?

a. $1,111

b. $1,450

c. $1,352

d. $675

e. $1,000

Difficulty: Moderate

Keywords: bond value

105. Dry Seal plans to issue bonds to expand operations. The bonds will have a par value of $1,000, a 10-year maturity, and a coupon interest rate of 9%, paid semiannually. Current market conditions are such that the bonds will be sold to net $937.79. What is the yield-to-maturity of these bonds?

a. 11%

b. 10%

c. 9%

d. 8%

e. 7%

Difficulty: Moderate

Keywords: yield to maturity

106. Which of the following investors incurs the least risk?

a. Bondholders

b. Preferred stockholders

c. Common stockholders

d. All of the above bear equal risk

Difficulty: Easy

Keywords: bondholders and risk

107. You purchased Photon, Inc. bonds exactly one year ago today for $875. During the latest year, you received $65 in interest on the bonds. What is your current yield on these bonds?

a. 11.3%

b. 7.4%

c. 6.5%

d. 10.5%

e. 9.1%

Difficulty: Moderate

Keywords: current yield

108. You purchased Gibraltar Corp. bonds exactly one year ago today for $1,075. During the latest year, you received $85 in interest on the bonds. What is your current yield on these bonds?

a. 11.3%

b. 8.5%

c. 6.5%

d. 7.9%

e. 9.1%

Difficulty: Moderate

Keywords: current yield

109. Which of the following statements about bonds is true?

a. Bond prices move in the same direction as market interest rates.

b. If market interest rates change, long-term bonds will fluctuate more in value than short-term bonds.

c. Long-term bonds are less risky than short-term bonds.

d. If market interest rates are higher than a bond’s coupon interest rate, then the bond will sell above its par value.

e. None of the above.

Difficulty: Moderate

Keywords: bond relationships

110. Which of the following statements about bonds is true?

a. As the maturity date of a bond approaches, the market value of a bond will become more volatile.

b. Long-term bonds have less interest rate risk than do short-term bonds.

c. Bond prices move in the same direction as market interest rates.

d. If market interest rates are above a bond’s coupon interest rate, then the bond will sell below its par value.

e. None of the above.

Difficulty: Moderate

Keywords: bond relationships

111. Which of the following statements about bonds is true?

a. The market value of a bond moves in the opposite direction of market interest rates.

b. As the maturity date of a bond approaches, the market value of a bond will become more volatile.

c. Long-term bonds are less risky than short-term bonds.

d. If market interest rates are higher than a bond’s coupon interest rate, then the bond will sell above its par value.

e. None of the above.

Difficulty: Moderate

Keywords: bond relationships

112. Which of the following statements is false?

a. A debenture would usually be more risky than a mortgage bond that is issued by the same firm.

b. A bond will sell at a discount if the prevailing required rate of return is more than the bond’s coupon rate.

c. A short-term bond will fluctuate less in value than a long-term bond if interest rates fluctuate.

d. Interest rates and bond prices usually move in the same direction.

Difficulty: Moderate

Keywords: bond relationships

113. Which of the following measures the responsiveness of a bond’s price to changing interest rates?

a. Beta

b. Duration

c. Holding period return

d. CAPM

Difficulty: Easy

Keywords: duration

114. Which of the following statements about bonds is true?

a. If market interest rates are below a bond’s coupon interest rate, then the bond will sell above its par value.

b. Long-term bonds have less interest rate risk than do short-term bonds.

c. Bond prices move in the same direction as market interest rates.

d. As the maturity date of a bond approaches, the market value of a bond will become more volatile.

e. None of the above.

Difficulty: Moderate

Keywords: bond relationships

115. Which of the following statements about bonds is true?

a. If market interest rates are below a bond’s coupon interest rate, then the bond will sell below its par value.

b. Long-term bonds have less interest rate risk than do short-term bonds.

c. Bond prices move in the same direction as market interest rates.

d. As the maturity of a bond approaches, its market value approaches its par value.

e. None of the above.

Difficulty: Moderate

Keywords: bond relationships

Short Answer

116. Compare and contrast current yield and yield to maturity.

Difficulty: Moderate

Keywords: current yield, yield to maturity

117. BCD's $1,000 par value bonds currently sell for $798.50. The coupon rate is 10%, paid semiannually. If the bonds have five years before maturity, what is the yield to maturity or expected rate of return?

$1,000(PVIF)

By trial and error try 8%.

$798.50 = $50 × 6.710 + $1,000 × .463

$798.50 = $798.50

Yield to maturity = (.08)(2) = .16

Difficulty: Moderate

Keywords: bond value

118. If you are willing to pay $1,392.05 for a 15-year, $1,000 par value bond that pays 10% interest semiannually, what is your expected rate of return?

Try 3%.

$1,392.05 = $50 × 19.601 + $1,000 × 0.412

Required rate of return = (.03)(2) = .06

Difficulty: Moderate

Keywords: expected rate of return, yield to maturity

119. Why are longer-term bonds more sensitive to changes in interest rates than shorter-term bonds?

Difficulty: Moderate

Keywords: interest rate risk, duration

120. DAH, Inc. has issued a 12% bond that is to mature in nine years. The bond had a $1,000 par value, and interest is due to be paid semiannually. If your required rate of return is 10%, what price would you be willing to pay for the bond?

V = 60(11.69) + 1000(.416)

V = 701.40 + 416.00

V = 1,117.40

Difficulty: Moderate

Keywords: bond value

121. Calculate the value of a bond that is expected to mature in 13 years with a $1,000 face value. The interest coupon rate is 8%, and the required rate of return is 10%. Interest is paid annually.

V = PV of interest payments as an annuity + PV of maturity value.

V = 568.27 + 289.66

V = $857.93

Difficulty: Moderate

Keywords: bond value

122. The market price of a 20-year, $1,000 bond that pays 9% interest semiannually is $774.31. What is the bond’s yield to maturity?

By trial and error, select 6% semi-annually (12% annually).

$774.31 = ($45 × 15.046) + ($1,000 × 0.097)

$774.31 = $774.07

Difficulty: Moderate

Keywords: bond value

123. Garvin, Inc.’s bonds have a par value of $1,000. The bonds pay semiannual interest of $40 and mature in five years.

a. How much would you pay for Garvin bonds if your required rate of

return is 10%?

b. How much would you pay if your required rate of return is 8%?

a. po = (40 × 7.722) + (1,000 × 0.614)

po = 922.88

b. po = (40 × 8.111) + (1,000 × 0.676)

po = 1,000

Difficulty: Moderate

Keywords: bond value

124. Given the following information, determine the market value of EAO Company bonds.

Par value $1,000

Coupon rate 10%

Years to maturity 6

Market rate 8%

Interest paid semiannually

po = (50 × 9.385) + (1,000 × 0.625)

po = 1,094.25

Difficulty: Moderate

Keywords: bond value