Medium:
Bond value - annual payment
76
.
Answer: d
You are the owner of 100 bonds issued by Euler, Ltd.
Diff: M
These bonds have
8 years remaining to maturity, an annual coupon payment of $80, and a
p
Deakin University
Staff profile
Welcome to MMM365 Strategic Management. My name is Pauline Hagel, and I am the unit chair of MMM365. I will also be your offcampus coordinator for this unit. You will
CHAPTER 6
BONDS AND THEIR VALUATION
(Difficulty: E = Easy, M = Medium, and T =
Tough)
True-False
Easy:
Discounted cash flows
1
.
Answer: b
Diff: E
The market value of any real or financial asset, incl
Yield to maturity
69
.
Answer: b
Diff: E
A bond has an annual 8 percent coupon rate, a maturity of 10 years, a
face value of $1,000, and makes semiannual payments.
If the price is
$934.96, what is the
Weighted average cost of debt
67
.
Answer: e
Diff: T
Suppose a new company decides to raise its initial $200 million of
capital as $100 million of common equity and $100 million of long-term
debt.
By
Bond value - quarterly payment
81
.
Answer: b
Diff: M
Assume that a 15-year, $1,000 face value bond pays interest of $37.50
every 3 months.
If you require a nominal annual rate of return of 12
percent
Bond value - semiannual payment
78
.
Answer: d
Diff: M
Due to a number of lawsuits related to toxic wastes, a major chemical
manufacturer has recently experienced a market reevaluation.
The firm
has a
Tough:
Bond value
87
.
Answer: d
Recently, Ohio Hospitals Inc. filed for bankruptcy.
Diff: T
The firm was
reorganized as American Hospitals Inc., and the court permitted a new
indenture on an outstand
Future value of bond
84
.
Answer: c
Diff: M
You just purchased a 15-year bond with an 11 percent annual coupon.
The bond has a face value of $1,000 and a current yield of 10 percent.
Assuming that the
Financial Calculator Section
Multiple Choice: Problems
Easy:
Bond value - semiannual payment
89
.
A corporate bond
months.
The bond will mature in ten years, and has a nominal yield to
What is the pri
Floating rate debt
23
.
Answer: b
Diff: M
Floating rate debt is advantageous to investors because the interest
rate moves up if market rates rise.
Floating rate debt shifts interest
rate risk to compa
Medium:
Bond value - semiannual payment
97
.
Answer: d
Diff: M
An 8 percent annual coupon, noncallable bond has ten years until it
matures and a yield to maturity of 9.1 percent.
What should be the
pr
100
.
A 12-year bond with a 10 percent semiannual coupon and a $1,000 par
value has a nominal yield to maturity of 9 percent.
called in five years at a call price of $1,050.
The bond can be
What is th
Current yield and capital gains yield
108
.
Answer: c
Diff: M
Meade Corporation bonds mature in 6 years and have a yield to maturity
of 8.5 percent.
The par value of the bonds is $1,000.
The bonds hav
22.
Sinking fund
Answer: b
Diff: M
23.
Floating rate debt
Answer: b
Diff: M
24.
Bond ratings
Answer: a
Diff: M
25.
Interest rates
Answer: e
Diff: E
26.
Interest rate and reinvestment risk
Answer: e
Di
Yield to call
104
.
Answer: b
Diff: M
McGriff Motors has bonds outstanding which will mature in 12 years.
The bonds pay a 12 percent semiannual coupon and have a face value of
$1,000 (i.e., the bonds
Bond value and effective annual rate
111
.
Answer: b
Diff: T
You are considering investing in a security that matures in 10 years
with a par value of $1,000.
During the first five years, the security
Bond value - quarterly payment
73
.
Answer: c
Diff: E
A $1,000 par value bond pays interest of $35 each quarter and will
mature in 10 years.
If your nominal annual required rate of return is
12 percen
Bond concepts
64
.
Answer: e
Diff: T
Which of the following statements is most correct?
a. All else equal, an increase in interest rates will have a greater
effect on the prices of long-term bonds tha
Mortgage bond
6
.
Answer: a
Diff: E
Typically, debentures have higher interest rates than mortgage bonds
primarily
because
the
mortgage
bonds
are
backed
by
assets
while
debentures are unsecured.
a. Tr
Junk bond
12
.
Answer: a
Diff: E
A junk bond is a high risk, high yield debt instrument typically used
to finance a leveraged buyout or a merger, or to provide financing to a
company of questionable f
Bond premiums and discounts
17
.
Answer: a
Diff: M
A bond with a $100 annual interest payment with five years to maturity
(not expected to default) would sell for a premium if interest rates
were belo
Price risk
40
.
Answer: c
Diff: M
If the yield to maturity decreased 1 percentage point, which of the
following bonds would have the largest percentage increase in value?
a.
b.
c.
d.
e.
A
A
A
A
A
1-ye
Floating rate debt
23
.
Answer: b
Diff: M
Floating rate debt is advantageous to investors because the interest
rate moves up if market rates rise.
Floating rate debt shifts interest
rate risk to compa
Bond concepts
32
.
Answer: e
Diff: E
A 10-year corporate bond has an annual coupon payment of 9 percent.
The bond is currently selling at par ($1,000).
Which of the following
statements is most correc
Call provision
28
.
Other
things
Answer: b
held
constant,
if
a
bond
indenture
contains
Diff: E
a
call
provision, the yield to maturity that would exist without such a call
provision will generally be
Medium:
Bond yield
36
.
Answer: b
Diff: M
Which of the following statements is most correct?
a. Rising
inflation
makes
the
actual
yield
to
maturity
on
a
bond
greater than the quoted yield to maturity
Bond concepts
44
.
Answer: b
Diff: M
Which of the following statements is most correct?
a. If a bond is selling for a premium, this implies that the bonds
yield to maturity exceeds its coupon rate.
b.
Callable bond
48
.
Answer: d
Diff: M
Which of the following statements is most correct?
a. Distant cash flows are generally riskier than near-term cash flows.
Further, a 20-year bond that is
an expect
Miscellaneous concepts
53
.
Answer: e
Diff: M
Which of the following statements is most correct?
a. All else equal, a 1-year bond will have a higher (i.e., better) bond
rating than a 20-year bond.
b.