Deakin University
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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 find my contact details below. The study materials for
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 annual nominal yield to maturity on the bond?
a.
8%
b.
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
an
iron-clad
provision
never borrow any more money.
in
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, with quarterly compounding, how much should you be wi
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
par
value
of
$1,000.
bankruptcy.
The
postponement
of
int
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 bond issue outstanding with 15 years to maturity and 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 outstanding bond issue to be put into effect.
The
issue has 10
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 yield to maturity of 9.7072 percent remains constant,
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 price of the bond?
$ 634.86
$1,064.18
$1,065.04
$1,078.23
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 companies and thus has no advantages for issuers.
a. True
b.
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
price of a 10-year noncallable bond of equal risk which p
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 the bond's
nominal yield to call?
a. 4.50%
b. 8.25%
c. 8.
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 have
a 10 percent coupon rate and pay interest on a semian
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
Diff: E
Statements a, b, c, and d are all correct.
27.
Th
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 pay a $60 coupon every six months).
currently have a yi
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
has an 8 percent coupon with quarterly payments (i.e.,
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 percent with quarterly compounding, how much should you be wi
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 than it will on the prices
of short-term bonds.
b. All els
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, including stocks,
bonds, or art work, may be found by deter
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. True
b. False
Debt coupon rate
7
.
Answer: a
Diff: E
Othe
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 financial strength.
a. True
b. False
Bond ratings and re
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 below 9 percent and would sell for a discount if interest r
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-year bond with an 8 percent coupon.
1-year zero-coupon bo
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 companies and thus has no advantages for issuers.
a. True
b.
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 correct?
a.
The bonds yield to maturity is 9 percent.
b.
The
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
the YTM with it.
a. higher than
b. lower than
c. the sa
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 which is based on market
prices.
b. The yield to maturi
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. If a coupon bond is selling at par, its current yield
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 expected
longer,
life
than
an
that
callable after 5 years wil
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. A 20-year bond with semiannual interest payments has hi