Deck 6: Bonds and Bond Valuation

Question 1

Blackburn Inc. has issued 30-year $1,000 face value, 10% annual coupon bonds, with a yield to maturity of 9.0%. The annual interest payment for the bond is ________.

A) $100
B) $90
C) $50
D) $45

Answer 1

A

Question 2

A bond may be issued by ________.

A) companies
B) state governments
C) the federal government
D) All of the above

Answer 2

D

Question 3

The four steps to determining the price of a bond are:

A) determine the amount and timing of the present cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and add the PVs of the principal and coupons.
B) determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the future value of the lump-sum principal and the annuity stream of coupons, and add the FVs of the principal and coupons.
C) determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and multiply the PVs of the principal and coupons.
D) determine the amount and timing of the future cash flows, determine the appropriate discount rate, find the present value of the lump-sum principal and the annuity stream of coupons, and add the PVs of the principal and coupons.

Answer 3

D

Question 4

A bond is a ________ instrument by which a borrower of funds agrees to pay back the funds with interest on specific dates in the future.

A) long-term equity
B) long-term debt
C) short-term debt
D) short-term equity

Question 5

The ________ is the expiration date of the bond.

A) future value
B) yield to maturity
C) maturity date
D) coupon

Question 6

The ________ is the yield an individual would receive if the individual purchased the bond today and held the bond to the end of its life.

A) current yield
B) yield to maturity
C) prime rate
D) coupon rate

Question 7

Bonds are sometimes called ________ securities because they pay set amounts on specific future dates.

A) variable-income
B) fixed-income
C) bully
D) real

Question 8

Johnson Construction Inc. has issued 20-year $1,000 face value, 8% annual coupon bonds, with a yield to maturity of 10%. The current price of the bond is ________.

A) $1,000.00
B) $1,196.36
C) $829.73
D) There is not enough information to answer this question.

Question 9

Petty Productions Inc. recently issued 30-year $1,000 face value, 12% annual coupon bonds. The market discount rate for this bond is only 7%. What is the current price of this bond?

A) $387.59
B) $597.24
C) $1,000.00
D) $1,620.45

Question 10

Ten years ago Bacon Signs Inc. issued twenty-five-year 8% annual coupon bonds with a $1,000 face value each. Since then, interest rates in general have risen and the yield to maturity on the Bacon bonds is now 9%. Given this information, what is the price today for a Bacon Signs bond?

A) $1,000
B) $919.39
C) $901.77
D) $1.085.59

Question 11

The ________ is the return the bondholder receives on the bond if held to maturity.

A) coupon
B) coupon rate
C) yield to maturity
D) par rate

Question 12

The ________ is the regular interest payment of the bond.

A) dividend
B) par
C) coupon rate
D) coupon

Question 13

The ________ is the annual coupon payment divided by the current price of the bond, and is not always an accurate indicator.

A) current yield
B) yield to maturity
C) bond discount rate
D) coupon rate

Question 14

Johnson Products issued $1,000 face value 20-year bonds five years ago. These bonds are currently selling for $1,218.47. From this information we can conclude that the Johnson Products bonds have a yield-to-maturity greater than the coupon rate on these bonds.

Question 15

The ________ is the face value of the bond.

A) coupon rate
B) maturity date
C) par value
D) coupon rate

Question 16

Ten years ago Bacon Signs Inc. issued twenty-five-year 8% annual coupon bonds with a $1,000 face value each. Since then, interest rates in general have fallen and the yield to maturity on the Bacon bonds is now 7%. Given this information, what is the price today for a Bacon Signs bond?

A) $1,000
B) $1,116.54
C) $1,091.08
D) $914.41

Question 17

The coupon payment for an annual-coupon corporate bond is equal to the yield to maturity multiplied by the par value of the bond.

Question 18

Zero-coupon bonds are more difficult and time-consuming to price because of the extensive revision of the basic bond pricing formula.

Question 19

Five years ago, Thompson Tarps Inc. issued twenty-five-year 10% annual coupon bonds with a $1,000 face value each. Since then, interest rates in general have risen and the yield to maturity on the Thompson bonds is now 12%. Given this information, what is the price today for a Thompson Tarps bond?

A) $843.14
B) $850.61
C) $1,181.54
D) $1,170.27

Question 20

The appropriate rate to use to discount the cash flows of a bond in order to determine the current price is the ________.

A) yield to maturity
B) coupon rate
C) par rate
D) current yield

Question 21

The ________ is the interest rate printed on the bond.

A) coupon rate
B) semi-annual coupon rate
C) yield to maturity
D) compound rate

Question 22

Which of the following types of bonds, as characterized by a feature, by definition has two coupon payments per year?

A) Consol
B) Semiannual
C) Zero-coupon
D) Putable

Question 23

When pricing a zero-coupon bond, the convention is to use the semiannual pricing formula rather than the annual pricing formula.

Question 24

Most U.S. corporate and government bonds choose to make ________ coupon payments.

A) annual
B) semiannual
C) quarterly
D) monthly

Question 25

Progressive Plastics Inc. issued 30-year 7% annual coupon bonds five years ago. Currently, the yield to maturity is 9.65% on these $1,000 par value bonds. What is the current price per bond?

Question 26

The coupon rate for a bond is the interest rate for the coupons, stated in annual terms, and printed on the bond. It normally remains the same throughout the life of the bond.

Question 27

Zero-coupon U.S. Government bonds are known as ________.

A) STRIPS
B) muni-bonds
C) Uncle Sam's Empty Pockets
D) BLANKS

Question 28

RC Inc. just issued zero-coupon bonds with a par value of $1,000. If the bond has a maturity of 15 years and a yield to maturity of 10%, what is the current price of the bond if it is priced in the conventional manner?

A) $1,000
B) $239.39
C) $231.38
D) This question cannot be answered because the coupon payment information is missing.

Question 29

The difference between the price and the par value of a zero-coupon bond represents ________.

A) taxes payable by the bond buyer
B) the accumulated principal over the life of the bond
C) the bond premium
D) the accumulated interest over the life of the bond

Question 30

Endicott Enterprises Inc. has issued 30-year semiannual coupon bonds with a face value of $1,000. If the annual coupon rate is 14% and the current yield to maturity is 8%, what is the firm's current price per bond?

A) $578.82
B) $579.84
C) $1,675.47
D) $1,678.70

Question 31

Almost all corporate and government bonds pay coupons on an annual basis.

Question 32

Endicott Enterprises Inc. has issued 30-year semiannual coupon bonds with a face value of $1,000. If the annual coupon rate is 14% and the current yield to maturity is 15%, what is the firm's current price per bond?

A) $934.20
B) $1,000.00
C) $934.34
D) $466.79

Question 33

Zero-coupon bonds are priced at deep discounts.

Question 34

Endicott Enterprises Inc. has twenty years remaining on $1,000 par value semiannual coupon bonds paying an annual coupon of $80. If the yield to maturity on these bonds is 6% per year, what is the current price?

Question 35

Delagold Corporation is issuing a zero-coupon bond that will have a maturity of fifty years. The bond's par value is $1,000, and the current yield on similar bonds is 7.5%. What is the expected price of this bond, using the semiannual convention?

A) $25.19
B) $250.19
C) $750.00
D) $1,000.00

Question 36

The coupon payment for an annual-coupon corporate bond is equal to the coupon rate multiplied by the current price of the bond.

Question 37

The Cougar Corporation has issued 20-year semi-annual coupon bonds with a face value of $1,000. If the annual coupon rate is 10% and the current yield to maturity is 12%, what is the firm's current price per bond?

A) $850.61
B) $849.54
C) $1,170.27
D) $1,171.59

Question 38

The ________ is a market derived interest rate used to discount the future cash flows of the bond.

A) coupon rate
B) semi-annual coupon rate
C) yield to maturity
D) compound rate

Question 39

Assume that today's date is August 15, 2010 and that the Rite Aid Bond is an annual-coupon bond. Describe what each of the following terms mean and how each value was determined if appropriate.

Question 40

Zero-coupon bonds are priced at steep premiums.

Question 41

"Junk" bonds are a street name for ________ grade bonds.

A) investment
B) speculative
C) extremely speculative
D) speculative and investment

Question 42

When the ________ is less than the yield to maturity, the bond sells at a/the ________ the par value.

A) coupon rate, premium over
B) coupon rate, discount to
C) time to maturity, discount to
D) time to maturity, same price as

Question 43

As the rating of a bond increases (for example, from A, to AA, to AAA), it generally means that

A) the credit rating increases, the default risk increases, and the required rate of return decreases.
B) the credit rating increases, the default risk decreases, and the required rate of return increases.
C) the credit rating increases, the default risk decreases, and the required rate of return decreases.
D) the credit rating decreases, the default risk decreases, and the required rate of return decreases.

Question 44

Which of the following is NOT a category for rating classifications of bonds?

A) Investment grade bonds
B) American grade bonds
C) Extremely speculative grade bonds
D) Speculative grade bonds

Question 45

Phillips Fine Fixtures Inc. wishes to issue new bonds but is uncertain how the market would set the yield to maturity. The bonds would be 20-year, 7% annual coupon bonds with a $1,000 par value. Fisher has determined that these bonds would sell for $1,050 each. What is the yield to maturity for these bonds?

A) 7.00%
B) 6.55%
C) 7.35%
D) 6.54%

Question 46

Snake River Power Inc. has $1,000 par value, twenty-year, 6% annual coupon bonds, outstanding currently selling for $696.25. What is the yield to maturity on these bonds? Use a calculator for your answer.

Question 47

MacroMedia Inc. $1,000 par value bonds are selling for $1,265. Which of the following statements is TRUE?

A) The bond market currently requires a rate (yield) less than the coupon rate.
B) The bonds are selling at a premium to the par value.
C) The coupon rate is greater than the yield to maturity.
D) All of the above are true.

Question 48

Describe the relationship between the yield to maturity and the coupon rate of a bond.

Question 49

When the coupon rate is less than the yield to maturity, the bond sells for a premium over the par value.

Question 50

Which of the following statements about the relationship between yield to maturity and bond prices is FALSE?

A) When the yield to maturity and coupon rate are the same, the bond is called a par value bond.
B) A bond selling at a premium means that the coupon rate is greater than the yield to maturity.
C) When interest rates go up, bond prices go up.
D) A bond selling at a discount means that the coupon rate is less than the yield to maturity.

Question 51

Curtis Equipment Inc., $1,000 par value, 15% annual coupon bonds, have 6 years remaining to maturity and are currently selling for $938.45. What is the firm's yield to maturity for these bonds?

A) 15.00%
B) 16.70%
C) 16.66%
D) 15.47%

Question 52

Rogue Racing Inc. has $1,000 par value bonds with a coupon rate of 8% per year making semiannual coupon payments. If there are twelve years remaining prior to maturity and these bonds are selling for $876.40, what is the yield to maturity for these bonds?

A) 9.80%
B) 8.00%
C) 9.77%
D) 8.33%

Question 53

From 1980 to 2006, the default risk premium differential between Aaa-rated bonds and Baa-rated bonds has averaged between ________.

A) 5 to 10 basis points
B) 11 to 23 basis points
C) 24 to 35 basis points
D) 36 to 50 basis points

Question 54

Benson Biometrics Inc., has outstanding $1,000 face value 8% coupon bonds that make semiannual payments, and have 14 years remaining to maturity. If the current price for these bonds is $1,118.74, what is the annualized yield to maturity?

A) 6.68%
B) 6.67%
C) 6.12%
D) 6.00%

Question 55

If the par value of a bond is equal to the bond price, then we know the yield to maturity is equal to the coupon rate.

Question 56

Benson Biometrics Inc., has outstanding $1,000 face value 8% coupon bonds that make semiannual payments, and have 14 years remaining to maturity. If the current price for these bonds is $987.24, what is the annualized yield to maturity?

A) 8.00%
B) 8.38%
C) 8.15%
D) 8.64%

Question 57

MicroMedia Inc. $1,000 par value bonds are selling for $832. Which of the following statements is TRUE?

A) The bonds must have more than six years to maturity.
B) The bonds are selling at a premium to the par value.
C) The coupon rate is greater than the yield to maturity.
D) None of the above are true.

Question 58

If a bond is selling at a premium above the par value, that means that the yield to maturity is greater than the coupon rate.

Question 59

From 1980 to 2006, the default risk premium differential between Aaa-rated bonds and Aa-rated bonds has averaged between ________.

A) 50 to 150 basis points
B) 90 to 190 basis points
C) 120 to 220 basis points
D) 250 to 350 basis points

Question 60

Your firm has issued ten-year zero-coupon bonds with a $1,000 face value. If the bonds are currently selling for $514.87. What is the yield to maturity?

A) 6.75%
B) 6.86%
C) 10.45%
D) This question cannot be answered because there is no coupon payment provided.

Question 61

Which of the choices below is FALSE?

A) When issuing a putable bond, the firm anticipates that interest rates will rise over the life of the bond.
B) When issuing a callable bond, the firm anticipates that interest rates will fall over the life of the bond.
C) When issuing a callable bond, the firm anticipates that interest rates will rise over the life of the bond.
D) A putable bond is essentially the reverse of a callable bond.

Question 62

________ are always unsecured bonds.

A) Mortgage bonds
B) Debentures
C) Callable bonds
D) Junior debt bonds

Question 63

The ________ is the written contract between the bond issuer and the bondholder.

A) debenture
B) sinking fund
C) indenture
D) corpus

Question 64

A sinking fund may be used for each of the following EXCEPT ________.

A) to be held on to and used to pay off the principal at maturity
B) to call in bonds early
C) to buy back some of the bonds over time
D) to be used to pay off other outstanding debt issues

Question 65

According to bond rating agencies, a bond rated "AAA" has a higher probability of default than a bond with a "BBB" rating.

Question 66

Which of he following types of bonds may the buyer sell back before maturity?

A) Callable bond
B) Putable bond
C) Convertible bond
D) Zero-coupon bond

Question 67

With a bearer bond, whoever held it was entitled to the ________ and the ________.

A) interest payments, principal.
B) dividend payments. principal.
C) interest payments, dividend payments.
D) interest payments, voting rights.

Question 68

A higher bond rating usually means a lower yield.

Question 69

Bonds that pay interest tied to the earnings of the company are known as ________ bonds.

A) income
B) exotic
C) floating rate
D) variable earnings

Question 70

Which of the following types of bonds may the issuer buy back before maturity?

A) Callable bond
B) Putable bond
C) Convertible bond
D) Zero-coupon bond

Question 71

What type of risk is being rated when bond agencies assign ratings to outstanding debt? What are the two main reasons for having bond agencies rate bonds?

Question 72

The interest rate banks charge to their best customers is the ________ rate.

A) variable
B) prime
C) discount
D) federal funds

Question 73

Moody's has developed a corporate bond default-risk rating system using capital and lower case letters and numbers. Below are several examples of Moody's ratings. Which answer choice lists a collection of ratings for "high credit investment grade" bonds?

A) Baa1, A1, A3
B) Ba1, Baa2, Baa3
C) Aa2, Aa3, A1
D) Caa, Ca, C

Question 74

A ________ is an unsecured bond, and most of the bonds sold today in the United States are of this type

A) mortgage bond
B) debenture
C) senior bond
D) bond indenture

Question 75

Espresso Petroleum Inc. has a contractual option to buy back, prior to maturity, bonds the firm issued five years ago. This is an example of what type of bond?

A) Putable bond
B) Callable bond
C) Convertible bond
D) Junior bond

Question 76

A basis point is ________.

A) one-thousandth of a percentage point
B) one percentage point
C) one-tenth of a percentage point
D) one-hundredth of a percentage point

Question 77

When a company is in financial difficulty and cannot fully pay all of its creditors, the first lenders to be paid are the ________.

A) stockholders
B) sinking fund holders
C) junior debtholders
D) senior debtholders

Question 78

When a bond is callable, the ability to call the bond is an option for ________.

A) the bond issuer
B) the bond purchaser
C) a mutual decision between the issuer and the purchaser of the bond
D) the trustee holding the bond

Question 79

When real property is used as collateral for a bond, it is termed a/an ________.

A) debenture
B) mortgaged security
C) indenture
D) senior bond

Question 80

Which of the following is NOT an example of a bond that contains an option feature?

A) Callable bond
B) Putable bond
C) Convertible bond
D) These are all examples of bonds with option features.