Fin 3302 review exam 2 (ch7 &8)
16) The Johnson Corporation issues a bond which has a coupon rate of 10.20%, a yield to maturity of 10.55%, a face value of $1,000, and a market price of $850. Therefore, the annual interest payment is A) $101.75. B) $102. C) $105.50. D) $120.0. Answer: B
1000*10.20%=102 B) $102
23) Alice Kitchen's, Inc. bonds have a 10% coupon rate with semiannual coupon payments. They have years to maturity and a par value of $1,000. Compute the value of Alice's bonds if investors' required rate of return is 8%. A) $1,156.22 B) $1,239.33 C) $1,137.10 D) $1,084.44
A) $1,156.22
19) Assume that Bunch Inc. has an issue of 18-year $1,000 par value bonds that pay 7% interest, annually. Further assume that today's required rate of return on these bonds is 5%. How much would these bonds sell for today? Round off to the nearest $1. A) $1,233.79 B) $1,201.32 C) $1,134.88 D) $1,032.56
A) $1,233.79
17) LRQ Inc. issued bonds on July 1, 2006. The bonds had a coupon rate of 5.5%, with interest paid semiannually. The face value of the bonds is $1,000 and the bonds mature on July 1, 2021. What is the intrinsic value of an LRQ Corporation bond on July 1, 2012 to an investor with a required return of 7%? A) $901.08 B) $902.27 C) $1,000.00 D) $1,104.28
A) $901.08
14) Valley Manufacturing Inc. just issued $1,000 par 20-year bonds. The bonds sold for $758.18 and pay interest semiannually. Investors require a rate of 9% on the bonds. What is the bonds' coupon rate? A) 6% B) 7% C) 8% D) 9%
A) 6%
8) Both Investor A and Investor B are considering the purchase of Corporation FJR bonds. The bonds are selling at a price of $1,100 each. Investor A decides to buy the bonds and Investor B does not buy the bonds. A) Investor A must have a required return lower than the required return for Investor B. B) The yield to maturity for Investor A must be higher than the yield to maturity for Investor B. C) The yield to maturity for Investor A must be less than the yield to maturity for Investor B. D) The yield to maturity for this bond must be higher than the coupon rate.
A) Investor A must have a required return lower than the required return for Investor B.
19) Which of the following bond provisions will make a bond more desirable to investors, other things being equal? A) The bond is convertible. B) The bond is callable. C) The coupon rate is lower. D) The bond is subordinated.
A) The bond is convertible.
15) Which of the following is true of a zero coupon bond? A) The bond makes no coupon payments. B) The bond sells at a premium prior to maturity. C) The bond has a zero par value. D) The bond has no value until the year it matures because there are no positive cash flows until then.
A) The bond makes no coupon payments.
Harold considers investing in an LM Corp. bond and decides not to purchase the bond. Which of the following statements is MOST correct? A) The intrinsic value of the bond for the investor is less than the market value of the bond. B) The liquidation value of the bond is greater than the market value of the bond. C) The intrinsic value of the bond for the investor is less than the par value of the bond. D) The intrinsic value of the bond for the investor is greater than the book value of the bond.
A) The intrinsic value of the bond for the investor is less than the market value of the bond.
13) Which type of value is shown on the firm's balance sheet? A) book value B) liquidation value C) market value D) intrinsic value
A) book value
16) If a firm were to experience financial insolvency, the legal system provides an order of hierarchy for the payment of claims. Assume that a firm has the following outstanding securities: mortgage bonds, common stock, debentures, and preferred stock. Rank the order in which investors that own mortgage bonds would have their claim paid? A) first B) second C) third D) fourth
A) first
11) The interest on corporate bonds is typically paid A) semiannually. B) annually. C) quarterly. D) monthly.
A) semiannually.
11) 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. C) liquidation value must be higher than book value. D) Market value and intrinsic value are always the same; therefore, this could not happen.
A) the asset is undervalued to the investor.
11) Progressive Corporation issued callable bonds. The bonds are most likely to be called if A) interest rates decrease. B) interest rates increase. C) Progressive Corporation needs additional financing. D) Progressive Corporation's stock price increases dramatically.
A. interest rates decrease
30) FYI bonds have a par value of $1,000. The bonds pay $40 in interest every six months and will mature in 10 years. a. Calculate the price if the yield to maturity on the bonds is 7, 8, and 9 percent, respectively. b. Explain the impact on price if the required rate of return decreases. c. Compute the coupon rate on the bonds. How does the relationship between the coupon rate and the yield to maturity determine how a bond's price will compare to it par value?
Answer: a. 7% YTM price = $1,071.06 8% YTM price = $1,000.00 9% YTM price = $934.96 b. The price of the bond will increase. c. Coupon rate = ($40 × 2)/$1,000 = 8%
27) A bond with a $1,000 face value and a 10 percent annual coupon rate matures in 15 years. a. Determine the value of the bond to a friend of yours with a required rate of return of 13%. b. A zero coupon bond with similar risk is selling for $180. The bond has a face value of $1,000 and matures in 15 years. Your friend asks you which bond she should invest in, the zero coupon bond or the bond in part (a). Which bond do you recommend, and why? Assume the market price of the bond in part (a) is $820.
Answer: a. Value of Bond = $100 (PVIFA13%,15) + $1,000 (PVIF13%,15) = $806.13; Alternatively, using Excel, PV(Rate = .13, Nper = 15, Pmt = 100, Fv = 1000) = 806.13 b. Recommend the zero coupon bond. The yield to maturity on the zero coupon bond is 13.48%, which is higher than your friend's required return. The yield to maturity on the bond in part (a) must be less than 13% since the market price of the bond is more than $806.13.
29) Calculate the value of a bond that is expected to mature in 18 years with a $1,000 face value. The coupon rate is 4%, and the required rate of return is 8%. Interest is paid annually. Answer: $625.12
Answer: $625.12
28) GAT, Inc. has issued a $1,000 par 4% annual coupon bond that is to mature in 18 years. If your required rate of return is 6.5%, what price would you be willing to pay for the bond?
Answer: $739.19 from Excel PV function with Rate = .065, Nper = 18, Pmt = 40, Fv = 1000, and Type = 0
26) Due to a number of lawsuits related to toxic wastes, a major chemical company has recently experienced a market revaluation. The firm has bonds outstanding that were issued 8 years ago at their par value of $1,000. These bonds have 12 years to maturity and a coupon rate of 6 percent, with interest paid semiannually. The required return on these bonds has increased to 14 percent. What is the current value of one of these bonds?
Answer: Value of Bond = 30 (PVIFA7%,24) + 1000 (PVIF7%,24) = $541.23
17) Put the following in order of their claim on assets of a firm, starting with the LAST to have a claim: A. Subordinated debentures B. Debentures (unsubordinated) C. Common Stock D. Preferred stock A) C, B, A, D B) C, D, A, B C) B, A, C, D D) D, C, B, A E) D, C, A, B
B) C, D, A, B
12) Which of the following statements concerning junk bonds is MOST correct? A) A rational investor will always prefer a AAA-rated bond to a junk bond. B) Junk bonds have higher interest rates than AAA-rated bonds because of the higher risk. C) Junk bonds may also be called low-yielding securities. D) Junk bonds are priced higher than AAA-rated bonds because junk bonds are more risky.
B) Junk bonds have higher interest rates than AAA-rated bonds because of the higher risk.
18) Other things being equal, investors will value which of the following bonds the highest? A) callable bonds B) convertible bonds C) bonds that are both callable and convertible D) unsecured, callable bonds
B) convertible bonds
) 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
B) market value = intrinsic value
20) If a corporation were to choose between issuing a debenture, a mortgage bond, or a subordinated debenture, everything else equal (such as coupon rate, maturity, etc.) which would sell for the greatest price? A) the debenture B) the mortgage bond C) the subordinated debenture D) All of the above types of bonds would sell for the same price.
B) the mortgage bond
18) Andre owns a corporate bond with a coupon rate of 8% that matures in 10 years. Ruth owns a corporate bond with a coupon rate of 12% that matures in 25 years. If interest rates go down, then A) the value of Andre's bond will decrease and the value of Ruth's bond will increase. B) the value of both bonds will increase. C) the value of Ruth's bond will decrease more than the value of Andre's bond due to the longer time to maturity. D) the value of both bonds will remain the same because they were both purchased in an earlier time period before the interest rate changed.
B) the value of both bonds will increase.
15) PR Corporation just issued $1,000 par 20-year bonds. The bonds sold for $936 and pay interest semiannually. Investors require a rate of 7.00% on the bonds. What is the amount of the semiannual interest payment on the bonds? A) $64.50 B) $55.00 C) $32.00 D) $21.75
C) $32.00
12) Nunavet Ocean Cruises sold an issue of 12-year $1,000 par bonds to build new ships. The bonds pay 4.85% interest, semiannually. Today's required rate of return is 9.7%. How much should these bonds sell for today? Round off to the nearest $1. A) $771.86 B) $732.93 C) $660.45 D) $598.33
C) $660.45
16) A Johnson corporation bond is currently selling for $850. The bond matures in 20 years, has a face value of $1,000, and a yield to maturity of 14.30%. The bond's coupon rate is A) 10%. B) 11%. C) 12%. D) 13%.
C) 12%.
Speculative, or non-investment-grade, bonds have an S&P bond rating of A) C or less. B) CCC or less. C) BB or less. D) BBB or less.
C) BB or less.
Which of the following statements concerning bonds and risk is true? A) Because the interest payments and maturing value are known, the only risk associated with investing in bonds is default risk. B) Zero coupon bonds are always more risky than bonds with high coupon rates because of the time value of money. C) Bonds are generally less risky than common stock because of the preference for debt over equity in the event of bankruptcy and liquidation. D) B-rated bonds are above average for risk, i.e., less risky than the average bond.
C) Bonds are generally less risky than common stock because of the preference for debt over equity in the event of bankruptcy and liquidation.
18) Which of the following is FALSE concerning bonds? A) The indenture spells out the obligations of the bond issuer. B) Mortgage bonds are secured by assets such as real estate. C) Debentures are secured by assets other than real estate. D) Subordinated debentures are riskier than unsubordinated debentures.
C) Debentures are secured by assets other than real estate.
10) Which of the following will cause the value of a bond to increase, other things held the same? A) Investors' required rate of return increases. B) The company's debt rating drops from AAA to BBB. C) Interest rates decrease. D) The bond is callable.
C) Interest rates decrease.
7) Charlie Corporation has two bonds outstanding. Both bonds mature in 10 years, have a face value of $1,000, and have a yield to maturity of 8%. One bond is a zero coupon bond and the other bond has a coupon rate of 8%. Which of the following statements is true? A) Both bonds must sell for the same price if markets are in equilibrium. B) The zero coupon bond must have a higher price because of its greater capital gain potential. C) The zero coupon bond must sell for a lower price than the bond with an 8% coupon rate. D) All rational investors will prefer the 8% bond because it pays more interest
C) The zero coupon bond must sell for a lower price than the bond with an 8% coupon rate.
2) In the present value bond valuation model, risk is generally incorporated into the A) maturity amount. B) timing of cash flows (assuming more risky cash flows are received early). C) discount rate or required return. D) cash flows (making some smaller if they are more risky).
C) discount rate or required return.
12) 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.
C) intrinsic value.
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) par value.
C) its intrinsic value.
A company with a bond rating of BBB is more likely to have which of the following qualities compared to a company with a bond rating of B? A) greater reliance on equity financing B) high variability in past earnings C) little use of subordinated debt D) small firm size
C) little use of subordinated debt
14) If a corporation were to choose between issuing a debenture, a mortgage bond, or a subordinated debenture, which would have the highest yield to maturity, everything else equal? A) the debenture B) the mortgage bond C) the subordinated debenture D) all of the above
C) the subordinated debenture
3) Finance theory suggests that the current market value of a bond is based upon which of the following? A) the future value of interest paid on a bond B) the sum total of principal and interest paid on a bond C) the sum of the present value of the bond's interest payments and the present value of the principal D) the present value of a bond's par value plus the future value of the bond's present value
C) the sum of the present value of the bond's interest
13) Which of the following statements is true regarding convertible bonds? A) The holder has the right to sell these bonds back to the issuer if the bonds don't perform well. B) The holder can convert these bonds into an equal number of new bonds if they choose to do so. C) These bonds are convertible into common stock of the issuing firm at a prespecified price. D) These bonds have a variable interest rate.
C. These bonds are convertible into common stock of the issuing firm at a prespecified price.
24) Bart's Moving Company bonds have a 11% coupon rate. Interest is paid semiannually. The bonds have a par value of $1,000 and will mature 8 years from now. Compute the value of Bart's Moving Company bonds if investors' required rate of return is 9.5%. A) $1,197.27 B) $1,133.05 C) $1,098.99 D) $1,082.75
D) $1,082.75
20) What is the value of a bond that has a par value of $1,000, a coupon of $120 (annually), and matures in 10 years? Assume a required rate of return of 7.02%. A) $1,198.45 B) $1,200.78 C) $1,284.38 D) $1,349.45
D) $1,349.45
22) What is the value of a bond that matures in 5 years, has an annual coupon payment of $110, and a par value of $2,000? Assume a required rate of return of 8.69%. A) $938.50 B) $1,876.99 C) $1,891.36 D) $1,749.83
D) $1,749.83
9) A bond issued by Liberty, Inc. 10 years ago has a coupon rate of 8% and a face value of $1,000. The bond will mature in 15 years. What is the value to an investor with a required return of 12.5%? A) $800 B) $750.86 C) $658.94 D) $701.52
D) $701.52
21) What is the value of a bond that matures in 17 years, makes an annual coupon payment of $50, and has a par value of $1,000? Assume a required rate of return of 5.90%. A) $823.48 B) $856.98 C) $895.23 D) $905.02
D) $905.02
25) Master Craft Control Inc. has bonds that mature in 6 1/2 years with a par value of $1,000. They pay a coupon rate of 9% with semiannual payments. If the required rate of return on these bonds is 11% what is the bond's value? A) $1,026.73 B) $973.76 C) $1,022.74 D) $908.83
D) $908.83
13) Bryant Inc. just issued $1,000 par 30-year bonds. The bonds sold for $1,107.20 and pay interest semiannually. Investors require a rate of 7.75% on the bonds. What is the bonds' coupon rate? A) 9.333% B) 7.750% C) 4.125% D) 8.675%
D) 8.675%
3) Fred and Ethel are both considering buying a corporate bond with a coupon rate of 8%, a face value of $1,000, and a maturity date of January 1, 2025. Which of the following statements is MOST correct? A) Because both Fred and Ethel will receive the same cash flows if they each buy a bond, they both must assign the same value to the bond. B) If Fred decides to buy the bond, then Ethel will also decide to buy the bond, if markets are efficient. C) Fred and Ethel will only buy the bonds if the bonds are rated BBB or above. D) Fred may determine a different value for a bond than Ethel because each investor may have a different level of risk aversion, and hence a different required return.
D) Fred may determine a different value for a bond than Ethel because each investor may have a different level of risk aversion, and hence a different required return.
2) Which of the following affect an asset's value to an investor? I. Amount of an asset's expected cash flow II. The riskiness of the cash flows III. Timing of an asset's cash flows IV. Investor's required rate of return A) I, II, III B) I, III, IV C) I, II, IV D) I, II, III, IV
D) I, II, III, IV
) If markets were entirely efficient (perfect), which of the following would we conclude? A) There would be no inflation. B) Book value would be the same as market value. C) No firms would ever default on their bonds. D) Market value and intrinsic value would be the same.
D) Market value and intrinsic value would be the same.
1) As interest rates, and consequently investors' required rates of return, change over time the ________ of outstanding bonds will change as a result. A) maturity date B) coupon interest payment C) par value D) price
D) price
1) In an efficient market, two investors may agree on the amount and timing of a bond's expected cash flows and also on the bond's risk level, as measured by its debt rating, and still determine two different values for the bond.
True
2) An example of a Eurobond is a bond issued in Asia by a U.S. Corporation with interest and principal payments made in U.S. dollars.
True
1) The value of a bond is the present value of both the future interest to be received and the price of the bond.
false
10) Debentures are expected to have a lower yield than secured bonds because the debentures are more risky and therefore less desirable.
false
3) Convertible bonds decrease in value whenever the price of the company's stock increases.
false
3) The Wall Street Journal bond quotes indicate that the net close for a bond with a $1,000 par value is . The closing price for that bond was $100.75
false
5) In Excel, the variable pv stands for a bond's par value.
false
6) When using the pv (present value) function in Excel to calculate bond values, the bond's coupon rate is entered as the Rate variable.
false
A bond rating of "BB" indicates that the company's financial position is above average and hence the default risk on the bonds is very low.
false
A company with a AAA bond rating will command a higher interest rate on its bonds than a company with a lesser BBB bond rating.
false
As market rates of interest rise, investors move their funds into bonds, thus increasing their price and lowering their yield.
false
Federal regulations make it impossible for rating agencies to drop a company's credit rating more than two notches at a time in order to prevent panic in bond markets.
false
If a bond's rating declines, the interest rate demanded by investors, called the required return, also decreases.
false
If the demand for a new bond issue increases, it is likely that the coupon rate will be adjusted upward by the issuing company.
false
In general, interest on bonds, like dividends on preferred stock, may be deferred until a later date at the discretion of management, making debt financing more appealing to corporate managers.
false
In the case of insolvency, the claims of debt are honored prior to those of common stock and after those of preferred stock.
false
Liquidation value is of primary importance to investors because it represents the true amount of cash that an investor is likely to receive.
false
Other things held equal, a bond with a call provision is worth more to investors than a bond without a call provision.
false
Unlike market value, the intrinsic value of an asset is estimated independently of risk
false
) If a bond has a market value that is higher than its par value, then the required return on the bond must be less than the bond's coupon rate.
true
) In an efficient market, the market value and intrinsic value of a security should be equal.
true
1) Subordinated debentures are more risky than unsubordinated debentures because the claims of subordinated debenture holders are less likely to be honored in the event of liquidation.
true
2) A bond with a par value of $1,000 is listed in the Wall Street Journal at a price of 100.50. This bond is selling for $1,005.
true
4) Junk bonds are also called high-yield bonds.
true
4) The value of a bond is inversely related to changes in the investor's present required rate of return.
true
5) The expected yield on junk bonds is higher than the yield on AAA-rated bonds because of the higher default risk associated with junk bonds.
true
6) Bonds issued in a country different from the one in which the currency of the bond is denominated are called Eurobonds.
true
7) Convertible bonds are debt securities that can be converted into a firm's stock at a prespecified price
true
8) A mortgage bond is secured by a lien on real property.
true
9) A bond is a long-term promissory note issued by the firm.
true
A common protective provision in a bond indenture is the limitation of dividends on the issuing firm's common stock.
true
A firm's bond rating would be favorably affected if they have a low use of financial leverage (debt).
true
Bonds generally have a maturity date while preferred stocks do not.
true
Junk bonds typically have an interest rate of between 3 and 5 percent more than AAA-rated long-term debt.
true
Restrictive provisions in bond indenture agreements are designed to protect bondholders and lessen the agency problems between bondholders and stockholders.
true
The par value of a corporate bond indicates the payment that the issuer promises to make to the bondholder at maturity.
true
The sum of the present values of an investment's expected future cash flows is known as the investment's intrinsic value.
true
To determine the periodic interest payments that a bond makes, multiply the bond's stated coupon rate by its par value and divide by the number of coupon payments per year
true
