Ch. 6 Finance Test 2
12) A record collector has agreed to sell her entire collection to a historical museum in three years at a price of $100,000. The current risk-free rate is 7 percent. At what price should she value her collection today?
$100,000(1.07)-3 = $81,630
42) Tangshan Coal Inc. just issued a 10 percent, 25-year bond with a $1,000 par value that pays interest semiannually. (a) How much can the investor expect in annual interest (in dollars)? (b) How much can the investor expect in interest every six months (in dollars)? (c) How much can the investor expect in par value at the end of the 25th year?
(a) $100 (b) $50 (c) $1,000
L-1000-9-5-6 M-100-10-8-10 N-500-18-17-15 34) (a)Calculate the current value of Bond L. (b)What will happen to the value/price as the bond approaches maturity? 35) Calculate the current value of Bond M 36) Calculate the current value of Bond M if the time of maturity is six years. 37) (a)Calculate the current value of Bond N. (b) What will happen to value/price as the bond approaches maturity?
34)(a)Using Financial calculator:CPT PV = $1,126.08 (b)The bond price will decrease and come closer to par. 35) $100. 36)The bond is at par, or $100, because the annual coupon interest rate is equal to the required rate of return. 37)CPT PV = $590.71 (b)The bond price will decrease and come closer to par.
13) A type of long-term financing used by both corporations and government entities is ________. A) common stocks B) bonds C) preferred stocks D) retained earnings
B
Ford-11-july31/14-65.50-?-104-10-5100 64) Based on the table 6.1, on this trading day, the number of Ford bonds which changed hands was ___ 65) Based on the Table 6.1, assume this bond's face value is $1,000. What is the bond's current market price? 66) Based on the Table 6.1, what is the last yield for this bond?
64)5,100,000 65)655 66)16.8%
13) A corporate financial analyst must calculate the value of an asset which produces year-end annual cash flows of $0 the first year, $2,000 the second year, $3,000 the third year, and $2,500 the fourth year. Assuming a discount rate of 15 percent, what is the value of this asset?
= $0/(1.15)1 + $2,000/(1.15)2 + $3,000/(1.15)3 + $2,500/(1.15)4 = $4,914
10) Tangshan Industries has issued a bond which has a $1,000 par value and a 15 percent annual coupon interest rate. The bond will mature in ten years and currently sells for $1,250. Using this information, the yield to maturity on the Tangshan Industries bond is ________. A) 10.79 percent B) 11.39 percent C) 12.19 percent D) 13.29 percent
A
16) The legal contract setting forth the terms and provisions of a corporate bond is a(n) ________. A) indenture B) debenture C) loan document D) promissory note
A
17) Danno is trying to decide which of two bonds to buy. Bond H is a 10 percent coupon, 10-year maturity, $1,000 par, January 1, 2000 issue paying annual interest. Bond F is a 10 percent coupon, 10-year maturity, $1,000 par, January 1, 2000 issue paying semiannual interest. The market required return for each bond is 10 percent. When using present value to determine the prices of the bonds, Danno will find that ________. A) there is no difference in price B) the price of F is greater than H C) the price of H is greater than F D) he needs more information before determining the prices
A
18) A(n) ________ is a paid individual, corporation, or a commercial bank trust department that acts as a third party to a bond indenture. A) trustee B) investment banker C) bond issuer D) bond rating agency
A
19) Calculate the value of a $1,000 bond which has 10 years until maturity and pays quarterly interest at an annual coupon rate of 12 percent. The required return on similar-risk bonds is 20 percent. A) $656.82 B) $835.45 C) $845.66 D) $2,201.08
A
25) When the required return is constant and equal to the coupon rate, the price of a bond as it approaches its maturity date will ________. A) remain at par B) increase C) decrease D) change depending on whether it is a discount or premium bond
A
31) The ________ feature permits the issuer to repurchase bonds at a stated price prior to maturity. A) call B) conversion C) put D) swap
A
31) Which of the following affects the cost of a bond? A) maturity of a bond B) dividend policy C) fixed assets purchased from the proceeds of bond issue D) money market regulations
A
32) A bond will sell ________ when the stated rate of interest exceeds the required rate of return, ________ when the stated rate of interest is less than the required return, and ________ when the stated rate of interest is equal to the required return. A) at a premium: at a discount: equal to the par value B) at a premium: equal to the par value: at a discount C) at a discount: at a premium: equal to the par value D) equal to the par value: at a premium: at a discount
A
32) To compensate for the uncertainty of future interest rates and the fact that the longer the term of a loan the higher the probability that the borrower will default, the lender typically ________. A) charges a higher interest rate on long-term loans B) reserves the right to change the terms of the loan at any time C) includes excessively restrictive debt provisions D) reserves the right to demand immediate payment at any time
A
33) If a corporate bond is issued with a coupon rate that varies directly with the required return, the price of the bond will ________. A) equal the face value B) be less than the face value C) be greater than the face value D) be greater than or less than the face value depending on how interest rates vary
A
34) The ________ in the capital market is the basis for determining a bond's coupon interest rate. A) cost of money B) weighted average cost of capital C) bond's face value D) average coupon interest rate
A
37) The current yield on a bond is measured by ________. A) the annual interest payment divided by the current price B) the annual interest payment divided by the par value C) the annual interest payment divided by the maturity value D) the annual interest payment divided by the yield to maturity
A
47) On ________, the stated interest rate is adjusted periodically within stated limits in response to changes in specified money or capital market rates. A) a floating rate bond B) a zero coupon bond C) a mortgage bond D) an equipment trust certificate
A
51) Convertible bonds are normally ________. A) debentures B) income bonds C) zero coupon bonds D) mortgage bonds
A
63) A foreign bond is issued by a(n) ________. A) foreign corporation or government and is denominated in the investor's home currency and sold in the investor's home market B) corporation or government and is denominated in the investor's foreign currency and sold in the foreign market C) international borrower and sold to investors in countries with currencies other than the local currency D) international borrower and sold to investors in countries with currencies in which the bond is denominated
A
10) The value of any asset is the ________. A) sum of all future cash flows it is expected to provide over the relevant time period B) sum of the present values of all future cash flows it is expected to provide over the relevant time period C) present value of the sum of all future cash flows it is expected to provide over the relevant time period D) sum of all compounded future cash flows it is expected to provide over the relevant time period
B
11) Corporate bonds have a ________. A) face value of $5,000 B) market price of $1,000 C) specified coupon rate paid annually D) par value of $1,000
B
16) The value of a bond is the present value of its interest payments plus ________. A) future value of its par value B) present value of its par value C) its face value D) present value of interest payment
B
17) A debt instrument indicating that a corporation has borrowed a certain amount of money and promises to repay it in the future under clearly defined terms is called a(n) ________. A) common stock B) corporate bond C) indenture D) preferred stock
B
19) A ________ is a restrictive provision in a bond indenture, providing for the systematic retirement of the bonds prior to their maturity. A) redemption clause B) sinking-fund requirement C) conversion feature D) subordination clause
B
20) Bond indentures include restrictive covenants.These provisions protect the bondholders against ________. A) increase in inflation rate B) increase in borrower's risk C) decrease in liquidity risk D) maturity risk
B
22) If the coupon rate of a bond is equal to its required rate of return, then ________. A) the current value is not equal to par value B) the current value is equal to par value C) the maturity value is equal to par value D) the current value is equal to maturity value
B
23) The purpose of the debt covenant that prohibits borrowers from entering into certain types of leases is to ________. A) protect the lender by controlling the risk and marketability of the borrower's security investments alternatives B) limit the amount of fixed-payment obligations C) ensure a cash shortage does not cause an inability to meet current obligations D) limit the annual cash dividends paid by the firm
B
27) ________ means that subsequent creditors agree to wait until all claims of the are senior debt satisfied before having their claims satisfied. A) Security interest B) Subordination C) Sinking fund requirement D) Bond indenture
B
29) An example of a standard debt provision is to ________. A) limit the corporation's annual cash dividend payments B) pay taxes and other liabilities when due C) restrict the corporation from disposing of fixed assets D) maintain a minimum level of liquidity
B
29) If the required return is greater than the coupon rate, a bond will sell at ________. A) par B) a discount C) a premium D) book value
B
30) ABC company has two bonds outstanding that are the same except for the maturity date. Bond D matures in 4 years, while Bond E matures in 7 years. If the required return changes by 5 percent, then ________. A) bond D will have a greater change in price B) bond E will have a greater change in price C) the price of the bonds will be constant D) the percentage price change for the bonds will be equal
B
32) The ________ feature allows bondholders to change each bond into stated number of shares of stock. A) call B) conversion C) put D) swap
B
33) The size of a loan and its issuance costs (as a percentage of the amount borrowed) are ________. A) not related B) inversely related C) independent D) perfectly positively correlated
B
33) ________ allow bondholders to purchase a certain number of shares of the firm's common stock at a specified price over a certain period of time. A) Call options B) Stock purchase warrants C) Debentures D) Put options
B
35) Stock purchase warrants are instruments that give their holders ________. A) the obligation to purchase a certain number of shares of the issuer's common stock at a specified price over a certain period of time B) the right to purchase a certain number of shares of the issuer's common stock at a specified price over a certain period of time C) the obligation to sell a certain number of shares of the issuer's preferred stock at a specified price over a certain period of time D) the right to sell a certain number of shares of the issuer's preferred stock at a specified price over a certain period of time
B
38) A bond rated Aaa according to Moody's, is considered ________. A) a high grade bond B) a prime quality bond C) an upper medium grade bond D) a medium grade bond
B
41) ________ is used to finance "rolling stock"-airplanes,trucks,boats,railroad cars. A) Income bonds B) Equipment trust certificates C) Collateral trust bonds D) Subordinated debentures
B
43) Stated interest rate under ________ is adjusted periodically within stated limits in response to changes in specified money market or capital market rates. A) junk bonds B) floating rate bonds C) extendible notes D) putable bonds
B
44) ________ are popular vehicle used to finance mergers and takeovers. A) Income bonds B) Junk bonds C) Floating rate bonds D) Convertible debentures
B
46) A(n) ________ is issued with no or very low coupon and sells significantly below its par value. A) income bond B) zero or low coupon bond C) mortgage bond D) subordinated debenture
B
48) ________ are commonly issued in the reorganization of a failed or failing firm. A) Floating rate bonds B) Income bonds C) Mortgage bonds D) Equipment trust certificates
B
49) ________ bonds are characterized by interest payments that are required only when earnings are available. A) Floating rate B) Income C) Mortgage D) Junk
B
54) ________ have a short maturities, typically one to five years, and which can be renewed for a similar period at the option of their holders. A) Floating rate bonds B) Extendible notes C) Putable bonds D) Junk bonds
B
55) Payment of interest required only when earnings are made available from which to make a payment is characteristic of a(n) ________. A) floating rate bond B) income bond C) mortgage bond D) equipment trust certificate
B
58) When issuing a(n) ________ the issuer can annually deduct the current year's interest accrual without having to actually pay the interest until the bond matures. A) junk bond B) zero coupon bond C) floating rate bond D) extendible note
B
6) The process that links risk and return in order to determine the worth of an asset is termed ________. A) securitization B) valuation C) discounting D) compounding
B
60) ________ are claims that are not satisfied until those of the creditors holding certain (senior) debts have been fully satisfied. A) Convertible debentures B) Subordinated debentures C) Mortgage bonds D) Collateral trust bonds
B
7) The return expected from an asset is fully defined by its ________. A) risk and cash flow B) cash flow and timing C) discount rate D) beta
B
8) The key inputs to the valuation process include ________. A) returns and risk B) cash flow, cash flow timing, and risk C) cash flows and discount rate D) returns, discount rate, and risk
B
9) What is the approximate yield to maturity for a $1,000 par value bond selling for $1,120 that matures in 6 years and pays 12 percent interest annually? A) 8.5 percent B) 9.3 percent C) 12.0 percent D) 13.2 percent
B
11) In the basic valuation model, risk is generally incorporated into the ________. A) cash flows B) timing C) discount rate D) total value
C
11) What is the yield to maturity, to the nearest percent, for the following bond: current price is $908, coupon rate is 11 percent, $1,000 par value, interest paid annually, eight years to maturity? A) 11 percent B) 12 percent C) 13 percent D) 14 percent
C
12) Bonds are ________. A) a series of perpetual short-term debt instruments B) a form of equity financing that pays interest C) long-term debt instruments used to raise large sums of money D) a hybrid form of financing used to raise large sums of money from a diverse group of lenders
C
12) What is the current price of a $1,000 par value bond maturing in 12 years with a coupon rate of 14 percent, paid semiannually, that has a YTM of 13 percent? A) $604 B) $1,090 C) $1,060 D) $1,073
C
13) Nico Corp issued bonds bearing a coupon rate of 12 percent, pay coupons semiannually, have 3 years remaining to maturity, and are currently priced at $940 per bond. What is the yield to maturity? A) 12.00% B) 13.99% C) 14.54% D) 15.25%
C
18) A firm has an issue of $1,000 par value bonds with a 9 percent stated interest rate outstanding. The issue pays interest annually and has 20 years remaining to its maturity date. If bonds of similar risk are currently earning 11 percent, the firm's bond will sell for ________ today. A) $1,000 B) $716.67 C) $840.73 D) $1,123.33
C
20) Jia Hua Enterprises wants to issue sixty 20-year, $1,000 par value, zero-coupon bonds. If each bond is priced to yield 7 percent, how much will Jia Hua receive (ignoring issuance costs) when the bonds are first sold? A) $11,212 B) $12,393 C) $15,505 D) $18,880
C
22) The purpose of the debt covenant that requires maintaining a minimum level of net working capital is to ________. A) protect the lender by controlling the risk and marketability of the borrower's security investment alternatives B) limit the amount of fixed-payment obligations C) ensure a cash shortage does not cause an inability to meet current obligations D) limit the annual cash dividends paid by the firm
C
23) Bonds which sell at less than face value are priced at a ________, while bonds which sell at greater than face value sell at a ________. A) par: premium B) discount: par C) discount: premium D) coupon: premium
C
25) The purpose of the restrictive debt covenant that prohibits the sale of accounts receivable is to ________. A) assure the lender that additional borrowing is constrained B) limit the amount of fixed-payment obligations C) limit the realization of current assets to cash D) limit the payment of annual cash dividends
C
26) Interest rate risk and the time to maturity have a relationship that is best characterized as ________. A) constant B) varying C) direct D) inverse
C
27) If the required return is less than the coupon rate, a bond will sell at ________. A) par B) a discount C) a premium D) book value
C
30) The cost of a long-term debt generally ________ that of a short-term debt. A) is less than B) is equal to C) is greater than D) is less than or equal to
C
36) A $1,000, 8% bond sells for 980. $1,000 is called the ________. A) current value B) market value C) par value D) auction value
C
39) The riskiness of publicly traded bond issues is rated by independent agencies. According to Moody's rating system, an Aaa bond and a Caa bond are ________ and ________ respectively. A) speculative: investment grade B) prime quality: medium grade C) prime quality: speculative D) medium grade: lowest grade
C
40) A(n) ________ gives purchasers inflation protection. A) zero-coupon bond B) junk bond C) floating rate bond D) income bond
C
42) Deeply discounted bond that pays no coupon interest is a ________. A) junk bond B) floating rate bond C) zero coupon bond D) subordinated debenture
C
45) A(n) ________ is secured by real estate. A) income bond B) debenture C) mortgage bond D) subordinated debenture
C
50) ________ are debt rated Ba or lower by Moody's or BB or lower by Standard & Poor's and are commonly used by rapidly growing firms to obtain growth capital, most often to finance mergers and takeovers. A) Subordinated debentures B) Mortgage bonds C) Junk bonds D) Equipment trust certificates
C
53) ________ are secured by stock and/or bonds that are owned by the issuer. A) Mortgage bonds B) Equipment trust certificates C) Collateral trust bonds D) Subordinated debentures
C
57) A significant portion of the return on a zero coupon bond is in the form of ________. A) interest and gain in value B) interest C) gain in value D) tax reduction
C
6) For an investor who plans to purchase a bond maturing in one year, the primary consideration should be ________. A) retained earnings B) face value C) yield to maturity D) net income
C
62) The decision to refund a callable bond ________. A) should be made only if interest rates have increased B) is a net working capital decision C) is a capital budgeting decision D) is an investing decision
C
7) Yield to maturity on a bond with price equal to its par value will ________. A) be less than the coupon rate B) be more than the coupon rate C) always be equal to the coupon rate D) be less than or equal to the coupon rate depending on the required return
C
8) What is the current price of a $1,000 par value bond maturing in 9 years with a coupon rate of 8 percent, paid annually, that has a YTM of 9 percent? A) $700 B) $945 C) $940 D) $1,062
C
9) Less certain a cash flow, the ________ the risk, and ________ the present value of the cash flow. A) lower: higher B) lower: lower C) higher: lower D) higher: higher
C
40) To finance a new line of product, the Tangshan Toys has issued a bond with a par value of $1,000, coupon rate of 8 percent, and maturity of 30 years. Compute the price of the bond if the opportunity cost is 11 percent.
Coupon payment = 1,000 × 0.08 = $80 Using financial calculator: PMT= 80, I=11, N=30, FV=1000, CPT PV= $739.19
43) Yantai Food, Inc. has issued a bond with par value of $1,000, a coupon rate of 9 percent that is paid semi-annually, and that matures in 10 years. What is the value of the bond if the required rate of return is 12 percent?
Coupon payment = 1,000 × 0.09 = $90 Semi-annual coupon payment = 90/2 =$45 Using financial calculator: PMT= 45, I=6, N=20, FV=1000, CPT PV = $827.95
39) To expand its business, the Kingston Outlet factory would like to issue a bond with par value of $1,000, coupon rate of 10 percent, and maturity of 10 years from now. What is the value of the bond if the required rate of return is 1) 8 percent, 2) 10 percent, and 3) 12 percent?
Coupon payment = 1,000 × 0.10 = $100 1) Using Financial calculator: PMT=100, N=10, I=8, FV=1000, CPT PV = $1,134.20 2) $1,000 since coupon rate and required rate of return are equal. 3) Using Financial calculator: PMT=100, N=10, I=12, FV=1000, CPT PV = $887
41) Zhen Yi Computers has an outstanding issue of bond with a par value of $1,000, paying 12 percent coupon rate semi-annually. The bond was issued 25 years ago and has 5 years to maturity. What is the value of the bond assuming 14 percent rate of interest?
Coupon payment = 1,000 × 0.12 = $120 Semi-annual coupon payment = 120/2 = $60 Using financial calculator: PMT= 60, I=7, N=10, FV=1000, CPT PV = $929.76
14) The value of a bond is the present value of the ________. A) dividends and maturity value B) interest and dividend payments C) maturity value D) interest payments and maturity value
D
15) A firm has an issue of $1,000 par value bonds with a 12 percent stated interest rate outstanding. The issue pays interest annually and has 10 years remaining to its maturity date. If bonds of similar risk are currently earning 8 percent, the firm's bond will sell for ________ today. A) $1,000 B) $805.20 C) $1,115.50 D) $1,268.40
D
21) Which of the following is a restrictive covenant? A) to maintain satisfactory accounting records B) to pay the taxes due C) to supply audited financial statements D) to impose fixed asset restrictions
D
21) Zheng Corporation plans to issue new bonds to finance its expansion plans. In its efforts to price the issue, Zheng Corporation has identified a company of similar risk with an outstanding bond issue that has an 8 percent coupon rate having a maturity of ten years. This firm's bonds are currently selling for $1,091.96. If interest is paid annually for both bonds, what must the coupon rate of the new bonds be in order for the issue to sell at par? A) 5.78% B) 6.88% C) 6.50% D) 6.71%
D
24) The price of a bond with a fixed coupon rate and the required return have a relationship that is best described as ________. A) perfect positive correlation B) constant C) direct D) inverse
D
24) The purpose of the restrictive debt covenant that imposes fixed assets restrictions is to ________. A) protect the lender by controlling the risk and marketability of the borrower's security investment alternatives B) limit the amount of fixed-payment obligations C) ensure a cash shortage does not cause an inability to meet current obligations D) prevent the firm from liquidation and ensure its ability to repay the debt
D
26) The purpose of the restrictive debt covenant that requires that subsequent borrowing be subordinated to the original loan is to ________. A) maintain a minimum level of liquidity B) limit the amount of fixed-payment obligations C) ensure a long-run cash shortage does not cause an inability to meet current obligations D) protect the original lender in the priority of claims during liquidation
D
28) The purpose of the restrictive debt covenant that limits the distribution of profits to shareholders is to ________. A) assure the lender that additional borrowing is constrained or may be subordinated to the original loan B) limit the amount of fixed-payment obligations C) ensure a cash shortage does not cause an inability to meet current obligations D) avoid default of payments to bondholders
D
28) When the required return is constant but different from the coupon rate, the price of a bond as it approaches its maturity date will ________. A) remain constant B) increase C) decrease D) approach par
D
31) Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent annual coupon interest rate. The issue has ten years remaining to the maturity date. Bonds of similar risk are currently selling to yield a 12 percent rate of return. The current value of each Hewitt bond is ________. A) $791.00 B) $1,000 C) $1,052.24 D) $1,113.00
D
52) A debenture is ________. A) a bond secured by specific assets that any firm can issue B) a secured bond that is secured by unspecified assets C) a secured bond issued by startup firms D) an unsecured bond that only creditworthy firms can issue
D
56) A putable bond gives the bondholder ________. A) the right to sell the bond back to the corporation at a discount B) the right to sell the bond back to the corporation at a stated premium C) the right to redeem the bond back to the corporation at the current market value D) the right to redeem the bond back to the corporation at par
D
59) High-risk, high-yield junk bonds have declined in popularity over time due to ________. A) the decline in mergers and takeovers, which these bonds were used to finance B) the declining need of growth capital C) the stabilizing of interest rates D) a number of major defaults on these bonds
D
61) Bonds that can be redeemed at par at the option of their holders either at specific date after the date of issue and every 1 to 5 years thereafter or when and if the firm takes specified actions such as being acquired, acquiring another company, or issuing a large amount of additional debt are called ________. A) zero coupon bonds B) junk bonds C) floating-rate bonds D) putable bonds
D
4) The level of risk associated with a given cash flow positively affects its value.
FALSE
1) A call premium is the amount by which the call price exceeds the market price of the bond.
FALSE
10) A call feature in a bond allows the issuer the opportunity to repurchase bonds at a stated price prior to maturity, and this option has a greater chance of being exercised (to the benefit of the bondholder) if market interest rates have fallen since the bond was issued.
FALSE
11) A conversion feature in a bond has a greater chance of being exercised (to the detriment of the bondholder) if market interest rates have risen since the bond was issued.
FALSE
12) In a bond indenture, the term "security interest" refers to the fact that most firms that issue bonds are required to establish sinking fund provisions to protect bondholders.
FALSE
15) The lower a bond's default risk, the higher is the interest rate.
FALSE
16) Any bond rated Aaa through Caa according to Moody's, would be considered investment grade debt.
FALSE
17) An A rated bond should provide investors with a higher yield than an otherwise identical B rated bond.
FALSE
2) Stock purchase warrants are instruments that give their holder the right to purchase a certain number of shares of the firm's common stock at the market price over a certain period of time.
FALSE
2) The value of an asset depends on the historical cash flow(s) up to the present time.
FALSE
21) Putable bonds give the bondholders an option to sell the bond at a price higher than par value by the amount of one year interest payment when and if the firm takes specified actions such as being acquired, acquiring another company, or issuing a large amount of additional debt.
FALSE
23) With subordinated debentures, payment of interest by a firm is required only when earnings are available.
FALSE
26) Floating-rate bonds are bonds that can be redeemed at par at the option of their holder either at specific date after the date of issue and every 1 to 5 years thereafter or when and if the firm takes specified actions such as being acquired, acquiring another company, or issuing a large amount of additional debt.
FALSE
3) A call feature is a feature included in all corporate bonds and allows the issuer to repurchase bonds at the market price prior to maturity.
FALSE
3) A company's bonds will experience more trading activity (in terms of the number of bonds traded on a given day) compared to its stock.
FALSE
3) Standard debt provisions specify certain record keeping and general business practices that must be ensured by the bond issuer.
FALSE
30) A Eurobond bond is a bond denominated in Euros.
FALSE
4) A trustee is a paid party representing the bond issuer in the bond indenture.
FALSE
4) Bondholders will convert their convertible bonds into shares of stock only when the conversion price is greater than the market price of the stock.
FALSE
6) The conversion feature of a bond is a feature that is included in all corporate bond issues that gives the issuer the opportunity to repurchase bonds at a stated price prior to maturity.
FALSE
6) The restrictive debt covenant that imposes fixed assets is to guarantee fixed-payment obligations by maintaining a specified level of fixed assets.
FALSE
7) A call feature in a bond allows bondholders to change each bond into a stated number of shares of common stock.
FALSE
7) The shorter the amount of time until a bond's maturity, the more responsive is its market value to a given change in the required return.
FALSE
9) A bond will sell at a premium when its required return rises above its coupon interest rate.
FALSE
44) Gong Li has recently inherited $10,000 and is considering purchasing 10 bonds of the Lucky Corporation. The bond has a par value of $1,000 with 10 percent coupon rate and will mature in 10 years. Does Gong Li have enough money to buy 10 bonds if the required rate of return is 9 percent?
No. Since the required rate of return (9%) is less than the bond's coupon rate (10%), the bond's price is greater than its par value ($1,000). Thus, the total price of 10 bonds is greater than $10,000.
1) Coupon interest rate on a bond represents the percentage of the bond's par value that will be paid annually, typically in two equal semiannual payments, as interest.
TRUE
1) The value of a bond that pays semiannual interest is greater than that on an otherwise equivalent annual coupon interest paying bond.
TRUE
1) Valuation is the process that links risk and return to determine the worth of an asset.
TRUE
1) Yield to maturity (YTM) is the rate investors earn if they buy the bond at a specific price and hold it until maturity.
TRUE
10) Subordination means that subsequent creditors agree to wait until all claims of the senior debt are satisfied.
TRUE
10) The required return on a bond is likely to differ from the stated interest rate for either of two reasons: 1) economic conditions have changed, causing a shift in the basic cost of long-term funds, or 2) the firm's risk has changed.
TRUE
11) Restrictive covenants place operating and financial constraints on the borrower.
TRUE
13) In a bond indenture, the term "security interest" refers to collateral pledged against the bond.
TRUE
14) High-quality (high-rated) bonds provide lower returns than lower-quality (low-rated) bonds.
TRUE
14) Longer the maturity, higher is the cost of a bond.
TRUE
15) There is an inverse relationship between the quality or rating of a bond and the rate of return it must provide bondholders.
TRUE
18) Any Ba rated bond or lower would be considered speculative or "junk."
TRUE
19) As a bond approaches maturity, the price of the bond will approach its par value until, the bond is worth its face value at maturity.
TRUE
2) Interest rate risk is the risk that results from the changes in interest rates and thereby impact the bond value.
TRUE
2) Restrictive covenants are contractual clauses in long-term debt agreements that place certain operating and financial constraints on the borrower.
TRUE
2) The yield to maturity on a bond with a current price equal to its par or face value, will always be equal to the coupon interest rate.
TRUE
20) Debentures such as convertible bonds are unsecured bonds that only the most creditworthy firms can issue.
TRUE
22) Since a putable bond gives its holder the right to "put the bond" at specified times or because of specified actions by the issuing firm, the bond's yield would be lower than that of an otherwise equivalent non-putable bond.
TRUE
24) Since the issuer of zero (or low) coupon bonds can annually deduct the current year's interest accrual without having to actually pay the interest until the bond matures (or is called), its cash flow each year is increased by the amount of the tax shield provided by the interest deduction.
TRUE
25) The market price of a callable bond will not generally exceed its call price, except in the case of a convertible bond.
TRUE
27) A bond issued by an American company that is denominated in Swiss Francs and sold in Switzerland would be an example of a foreign bond.
TRUE
28) A foreign bond is a bond issued by a foreign corporation or government and is denominated in the investor's home currency and sold in the investor's home market.
TRUE
29) A Eurobond is a bond issued by an international borrower and sold to investors in countries with currencies other than the country in which the bond is denominated.
TRUE
3) If a bond's required return always equals its coupon interest rate, the bond's value will remain at par until it matures.
TRUE
3) In the valuation process, the higher the risk, the greater is the required return.
TRUE
3) When the required return is different from the coupon interest rate and is constant until maturity, the value of the bond will approach its par value as it nears maturity.
TRUE
4) When a bond's required return is greater than its coupon interest rate, the bond value will be less than its par value.
TRUE
4) When a bond's value differs from par, its yield to maturity will differ from its coupon interest rate.
TRUE
5) A bond with short maturity has less "interest rate risk" than a bond with long maturity when all other features—coupon interest rate, par value, and interest payment frequency—are the same.
TRUE
5) Restrictive covenants, coupled with standard debt provisions, help the lender to monitor the borrower's activities to ensure efficient use of funds.
TRUE
5) The value of an asset is determined by discounting the expected cash flows back to its present value, using an appropriate discount rate.
TRUE
5) To sell a callable bond, the issuer must pay a higher interest rate than on an otherwise equivalent noncallable bond.
TRUE
5) Yield to call represents the rate of return that investors earn if they buy a callable bond at a specific price and hold it until it is called back and they receive the call price, which would be set above the bond's par value.
TRUE
6) Duration measures the sensitivity of a bond's prices to changing interest rates.
TRUE
7) In a bond indenture, subordination is the stipulation that subsequent creditors agree to wait until all claims of the senior debt are satisfied.
TRUE
8) A conversion feature in a bond allows bondholders to change each bond into a stated number of shares of common stock.
TRUE
8) Increases in the basic cost of long-term funds or in risk will raise the required return on a bond.
TRUE
8) The bond indenture identifies any collateral pledged against a bond and specifies how it is to be maintained.
TRUE
9) The call option in a bond has a greater chance of being exercised (to the detriment of the bondholder) if market interest rates have fallen since the bond was issued.
TRUE
9) To carry out systematic retirement of bonds, a corporation makes semiannual or annual payments that are used to retire bonds by purchasing them in the marketplace.
TRUE
12) IBM stock will experience greater trading activity (in terms of the number of shares traded on a given day) compared to IBM bonds.
TRUE 1
14) What is the value of an asset which pays $200 a year for the next 5 years and can be sold for $1,500 at the end of five years from now? Assume that the opportunity cost is 10 percent.
Using Financial calculator: FV=1500, PMT=200, N=5, I=10, CPT PV = -1689.54 The value of the asset = $1,689.54
38) Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent coupon interest rate outstanding. The issue pays interest semiannually and has 10 years remaining to its maturity date. Bonds of similar risk are currently selling to yield a 12 percent rate of return. What is the value of these Hewitt Packing Company bonds?
Using financial calculator: PMT=$70, N=20, FV=1000, I=6, CPT PV = $1,114.70
