Homework 8

Anna's Dancewear, Inc. has an outstanding consul bond with a 5% coupon rate and a face value of $1000. If the bond is priced to provide an 8% required rate of return, the future value of the bond can be determined if we are provided with additional information.

False

The terms market value and terminal value have the same meaning in bond markets.

False

A sinking fund is a fund that is created to assist a failing business with the intent of preventing the firm's failure. Bonds purchased for a sinking fund are paid from future earnings of the firm once a set level of performance is attained.

False A sinking fund is a fund created for deposits by the issuer to ensure funds are available to repurchase the bonds at maturity.

Debentures are the contracts that accompany bonds and which will specify all the characteristics of the bonds.

False Debentures are uncollateralized bonds. The contract is an indenture.

An annual bond issued with a par value of $10,000 and a coupon rate of 12% will be priced above the $10,000 par value if it matures in 10 years and the required rate of return for the bond is 14%.

False It will be priced at $8,957 and will be priced below the par value because the required return is greater than the coupon rate.

Longer term to maturity bonds are less volatile or sensitive to interest rate changes than shorter term to maturity bonds.

False Longer term to maturity bonds are more volatile or sensitive to interest rate changes than shorter term to maturity bonds.

Low coupon bonds are less volatile or sensitive to interest rate changes than high coupon bonds.

False Low coupon bonds are more volatile or sensitive to interest rate changes than high coupon bonds.

Bond prices can be expected to fall if interest rates fall.

False Prices will fall if interest rates increase

Because of your interest in Humana, Inc. bonds, your broker informs you that the bonds are currently selling at a discount. This means the bonds are now a good investment.

False Selling at a discount simply means the bond's price is lower than its maturity value.

Because of your interest in Humana, Inc. bonds, your broker informs you that the bonds are currently selling at a premium. This means the bonds are now a good investment.

False Selling at a premium simply means the bond's price is higher than its maturity value.

Convertible bonds are bonds which may be converted into the stock of the issuer at the discretion of the issuer during a specified period of time.

False The bonds may be converted into the stock of the issuer at the discretion of the investor, not the issuer.

A bond's call provision provides a protection to investors because it allows the issuer to call back the bonds providing the investor with an early return of investment capital.

False The call provision is a benefit to the issuer as it allows the bond to be recalled at a time that is beneficial to the issuer not the investor.

a $1,000 semiannual bond with an 8% coupon provides payments of $80 to the owner of the bond every six months.

False The payments would be $80 per year (1000 x 0.08) paid in two semiannual installments of $40 each.

When a convertible bond is converted into the stock of the issuer, the bond is not retired but becomes available for issue once again in form of issue called a seasoned issue.

False When a bond is converted into stock, it is not made available for reissue.

A bond with BBB bond rating is considered as an investment grade bond.

True

A bond with a bond rating of B is less likely to default on payments than a bond rating of C.

True

A bond's yield to maturity may also be called its internal rate of return.

True

Bond prices can be expected to rise if interest rates fall.

True

Bonds are long-term liabilities of the issuer of the bonds.

True

Longer term to maturity bonds are more volatile or sensitive to interest rate changes than shorter term to maturity bonds.

True

Low coupon bonds are more volatile or sensitive to interest rate changes than high coupon bonds.

True

The terms face value, par value, maturity value, and terminal value all have the same meaning in the bond markets.

True

When a bond's yield to maturity is less than the bond's coupon rate, the bond: a. Had to be recently issued b. Is selling at a premium c. Has reached its maturity date d. Is priced at par e. Is selling at a discount

b. Is selling at a premium

Zero coupon or pure discount bonds a. Are perpetual with no stated maturity date b. Pay no interest c. Sell at a premium because of their pure discount status d. Must mature within a stated number of years e. None of the answers provided is correct

b. Pay no interest

Generally speaking, bonds issued in the US pay interest on a(n) ___ basis. a. Annual b. Semi-annual c. Quarterly d. Monthly e. Daily

b. Semi-annually

The annual interest divided by the face value of a bond is referred to as the: a. Market rate b. Call rate c. Coupon rate d. Current yield e. Yield-to-maturity

c. Coupon rate

The yield to maturity on a discount bond is: a. Equal to both the coupon rate and the current yield. b. Is equal to the current yield but greater than the coupon rate. c. Is greater than both the current yield and the coupon rate. d. Is less than the current yield but greater than the coupon rate. e. Is less than both the current yield and the coupon rate.

c. Is greater than both the current yield and the coupon rate

All of the following are features of bonds except: a. May be convertible into common stock b. May be callable by the issuer c. May be paid dividends on a semi-annual or annual basis d. May be collateralized by fixed assets e. None of the answers provided is correct

c. May be paid dividends on a semi-annual or annual basis

Which one of the following terms applies to a bond that initially sells at a deep discount and pays no interest payments? a. Callable b. Income c. Zero coupon d. Convertible e. Tax-free

c. Zero coupon

Which one of the following bonds is the least sensitive to changes in market interest rates? a. Zero-coupon, 10 year b. 6% annual coupon, 10 year c. Zero-coupon, 4 year d. 8% annual coupon, 4 year e. 6% annual coupon, 4 year

d. 8% annual coupon, 4 year

The current yield on a bond is equal to the annual interest divided by which one of the following? a. Issue price b. Maturity date c. Face amount d. Current market price e. Current par value

d. Current market price

One which one of the following dates is the principal amount of a bond repaid? a. Coupon date b. Issue date c. Discount date d. Maturity date e. Face date

d. Maturity date

What is the principal amount of a bond that is repaid at the end of the loan term called? a. Coupon b. Market price c. Accrued price d. Dirty price e. Face value

e. Face value