Deck 9: Debt Valuation and Interest Rates

Question 1

All of the following affect the value of a bond EXCEPT:

A)investors' required rate of return.
B)the recorded value of the firm's assets.
C)the coupon rate of interest.
D)the maturity date of the bond.

Answer 1

B

Question 2

Bondholders have a priority claim on assets ahead of:

A)common stockholders.
B)preferred stockholders.
C)both A and B.
D)none of the above.

Answer 2

C

Question 3

Common indenture provisions include:

A)restrictions on the issuance of common stock dividends.
B)restrictions on the sale or purchase of fixed assets.
C)constraints on additional borrowing.
D)all of the above.

Answer 3

D

Question 4

The par value of a bond:

A)never equals its market value.
B)is determined by the investor.
C)generally is $1,000.
D)is never returned to the bondholder.

Question 5

Any unsecured long-term debt instrument is a debenture.

Question 6

The interest on corporate bonds is typically paid:

A)semiannually.
B)annually.
C)quarterly.
D)monthly.

Question 7

A mortgage bond is always secured by a lien on real property.

Question 8

A(n)________ is used to outline the issuing company's contractual obligations to bondholders.

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

Question 9

The yield to maturity on a bond:

A)is fixed in the indenture.
B)is lower for higher-risk bonds.
C)is the required return on the bond.
D)is generally equal to the coupon interest rate.

Question 10

The par value of a corporate bond indicates the level of interest payments that will be paid to investors.

Question 11

Which of the following is generally NOT a characteristic of a bond?

A)Voting rights
B)Par value
C)Claims on assets and income
D)Indenture

Question 12

Mortgage bonds:

A)are a type of debenture.
B)are secured by a lien on real property.
C)usually pay little or no interest.
D)can only be issued by financial institutions.

Question 13

A $1,000 par value 10-year bond with a 10% coupon rate recently sold for $900.The yield to maturity:

A)is 10%.
B)is greater than 10%.
C)is less than 10%.
D)cannot be determined.

Question 14

Which type of value is shown on the firm's balance sheet?

A)Book value
B)Liquidation value
C)Market value
D)Intrinsic value

Question 15

Sterling Corp.bonds pay 10% annual interest and are selling at 97.The market rate of interest:

A)is less than 10%.
B)is greater than 10%.
C)equals 10%.
D)cannot be determined.

Question 16

Junk bonds:

A)are high yield bonds.
B)have higher default risk.
C)were used to finance "fallen angels."
D)all of the above.

Question 17

On any given day,a bond can be issued at:

A)a discount.
B)a premium.
C)par.
D)all of the above.

Question 18

The debenture is the legal agreement between the firm issuing a bond and the bond trustee who represents the bondholders.

Question 19

The issuance of bonds to raise capital for a corporation:

A)magnifies the returns to the stockholders.
B)increases risk to the stockholders.
C)is a cheaper form of capital than the issuance of common stock.
D)all of the above.
E)none of the above.

Question 20

Which of the following investors incurs the least risk?

A)Bondholders
B)Preferred stockholders
C)Common stockholders
D)All of the above bear equal risk

Question 21

Zoro Sword Company bonds pay an annual coupon rate of 9 1/2%.They have eight years to maturity and face value,or par,of $1,000.Compute the value of Zoro bonds if investors' required rate of return is 10%.

A)$1,516.18
B)$973.33
C)$1,027.17
D)$950.00

Question 22

Bond ratings are usually not affected by:

A)the company's fiscal year end.
B)profitable operations.
C)variability in earnings.
D)firm size.

Question 23

The discount rate used to value a bond is:

A)the coupon interest rate.
B)determined by the issuing company.
C)fixed for the life of the bond.
D)the market rate of interest.

Question 24

Six years ago,Colt,Inc.sold an issue of 30-year,$1,000 par value bonds.The coupon rate of 5.25% is payable annually.Investors presently require a rate of return of 8.375%.What is the current market price (intrinsic value)of the bonds? Round off to the nearest $1.

A)$1,050
B)$932
C)$681
D)$1,111

Question 25

Colby & Company bonds pay semiannual interest of $50.They mature in 15 years and have a par value of $1,000.The market rate of interest is 8%.The market value of Colby bonds is (round to the nearest dollar):

A)$1,173.
B)$743.
C)$1,000.
D)$827.

Question 26

MI has a $1,000 par value,30-year bond outstanding that was issued 20 years ago at an annual coupon rate of 10%,paid semiannually.Market interest rates on similar bonds are 7%.Calculate the bond's price.

A)$956.42
B)$1,000.00
C)$1,168.31
D)$1,213.19

Question 27

The Blackburn Group has recently issued 20-year,unsecured bonds rated BB by Moody's.These bonds are:

A)low-risk bonds.
B)debentures.
C)premium bonds.
D)mortgage bonds.

Question 28

Applebee sold an issue of 30-year,$1,000 par value bonds to the public.The coupon rate of 8.75% is payable annually.It is now five years later,and the current market rate of interest is 7.25%.What is the current market price (intrinsic value)of the bonds? Round off to the nearest $1.

A)$715
B)$1,171
C)$1,225
D)$697

Question 29

What is the value of a bond that has a par value of $1,000,a coupon rate of $80 (annually),and matures in 11 years? Assume a required rate of return of 11%,and round your answer to the nearest $10.

A)$320
B)$500
C)$810
D)$790

Question 30

What is the value of a bond that matures in three years,has an annual coupon payment of $110,and a par value of $1,000? Assume a required rate of return of 11%,and round your answer to the nearest $10.

A)$970
B)$1,330
C)$330
D)$1,000

Question 31

Brookline,Inc.just sold an issue of 30-year bonds for $1,107.20.Investors require a rate of return on these bonds of 7.75%.The bonds pay interest semiannually.What is the coupon rate of the bonds?

A)7.750%
B)11.072%
C)9.375%
D)8.675%

Question 32

As interest rates,and consequently investors' required rates of return,change over time,the ________ of outstanding bonds will also change.

A)maturity date
B)coupon interest payment
C)par value
D)price

Question 33

What is the expected rate of return on a bond that pays a coupon rate of 9%,has a par value of $1,000,matures in five years,and is currently selling for $714? Round your answer to the nearest whole percent and assume annual coupon payments.

A)18%
B)13%
C)16%
D)17%

Question 34

You are considering the purchase of Hytec bonds that were issued 14 years ago.When the bonds were originally sold,they had a 30-year maturity and a 14.375% coupon interest rate that is payable semiannually.The bond is currently selling for $1,508.72.What is the yield to maturity on the bonds?

A)8.50%
B)14.38%
C)11.11%
D)7.67%

Question 35

Terminator Bug Company bonds have a 14% coupon rate.Interest is paid semiannually.The bonds have a par value of $1,000 and will mature 10 years from now.Compute the value of Terminator bonds if investors' required rate of return is 12%.

A)$1,114.70
B)$1,149.39
C)$894.06
D)$1,000.00

Question 36

Caldwell,Inc.sold an issue of 30-year,$1,000 par value bonds to the public.The bonds carry a 10.85% coupon rate and pay interest semiannually.It is now 12 years later.The current market rate of interest on the Caldwell bonds is 8.45%.What is the current market price (intrinsic value)of the bonds? Round off to the nearest $1.

A)$751
B)$1,177
C)$1,220
D)$976

Question 37

What is the expected rate of return on a bond that matures in seven years,has a par value of $1,000,a coupon rate of 14%,and is currently selling for $911? Round your answer to the nearest whole percent and assume annual coupon payments.

A)13%
B)14%
C)15%
D)16%

Question 38

What is the yield to maturity of a nine-year bond that pays a coupon rate of 20% per year,has a $1,000 par value,and is currently priced at $1,407? Round your answer to the nearest whole percent and assume annual coupon payments.

A)5%
B)14%
C)12%
D)11%

Question 39

Davis & Davis issued $1,000 par value bonds at 102.The bonds pay 12% interest annually and mature in 30 years.The market rate of interest is (round to the nearest hundredth of a percent):

A)12.00%.
B)11.76%.
C)10.12%.
D)11.29%.

Question 40

Frazier Fudge has a $1,000 par value bond that is currently selling for $1,300.It has an annual coupon rate of 7%,paid semiannually,and has nine years remaining until maturity.What is the annual yield to maturity on the bond? (Round to the nearest whole percentage. )

A)3%
B)5%
C)7%
D)9%

Question 41

You purchased Photon,Inc.bonds exactly one year ago today for $875.During the latest year,you received $65 in interest on the bonds.What is your current yield on these bonds?

A)11.3%
B)7.4%
C)6.5%
D)10.5%
E)9.1%

Question 42

Marshall Manufacturing has a bond outstanding that was issued 20 years ago at a coupon rate of 9%.The $1,000 par value bond pays interest semiannually and was originally issued with a term of 30 years.If today's interest rate is 14%,what is the value of the bond today?

A)$654.98
B)$735.15
C)$814.42
D)$941.87

Question 43

Aurand,Inc.has outstanding bonds with an 8% annual coupon rate paid semiannually.The bonds have a par value of $1,000,a current price of $904,and will mature in 14 years.What is the annual yield to maturity on the bond?

A)15.80%
B)10.47%
C)9.24%
D)7.90%
E)4.62%

Question 44

When referring to bonds,expected rate of return and yield to maturity are often used interchangeably.

Question 45

Assume that you wish to purchase a 20-year bond that has a maturity value of $1,000 and a coupon interest rate of 8%,paid semiannually.If you require a 10% rate of return on this investment,what is the maximum price that you would be willing to pay for this bond?

A)$619
B)$674
C)$761
D)$828
E)$902

Question 46

A $1,000 par value bond with a 12% coupon rate currently selling for $825 has a current yield of:

A)14.55%.
B)12.44%.
C)7.27%.
D)5.61%.

Question 47

You purchased Gibraltar Corp.bonds exactly one year ago today for $1,075.During the latest year,you received $85 in interest on the bonds.What is your current yield on these bonds?

A)11.3%
B)8.5%
C)6.5%
D)7.9%
E)9.1%

Question 48

Dry Seal plans to issue bonds to expand operations.The bonds will have a par value of $1,000,a 10-year maturity,and a coupon interest rate of 9%,paid semiannually.Current market conditions are such that the bonds will be sold to net $937.79.What is the yield-to-maturity of these bonds?

A)11%
B)10%
C)9%
D)8%
E)7%

Question 49

A $1,000 par value bond is currently listed as selling at 92 1/8.This means:

A)that you can buy the bond for $92.125.
B)that you can buy the bond for $921.25.
C)that if you purchase the bond today,you will receive $921.25 when the bond matures.
D)none of the above.

Question 50

Lambda Co.has bonds outstanding that mature in 10 years.The bonds have $1,000 par value,pay interest annually at a rate of 9%,and have a current selling price of $1,125.The yield to maturity on the bonds is:

A)7.20%.
B)9%.
C)10.12%.
D)14.40%.

Question 51

Bond ratings measure the interest rate risk of a given bond issue.

Question 52

Miller Motorworks has a $1,000 par value,8% annual coupon bond with interest payable semiannually with a remaining term of 15 years.The annual market yield on similar bonds is 6%.What is the bond selling for today? (Round to the nearest whole dollar. )

A)$1,196
B)$1,042
C)$1,000
D)$946

Question 53

The higher the bond rating,the more default risk associated with the bond.

Question 54

A bond's value equals the present value of interest and principal the owner will receive.

Question 55

You paid $865.50 for a corporate bond that has a 6.75% coupon rate.What is the bond's current yield?

A)8.375%
B)7.800%
C)15.001%
D)6.667%

Question 56

The longer the time to maturity,the more sensitive a bond's price to changes in market interest rates.

Question 57

Bond ratings are favorably affected by:

A)a greater reliance on equity in financing the firm.
B)high variability in past earnings.
C)large firm size.
D)both A and C.

Question 58

Beta,Inc.has bonds outstanding that mature in 10 years.The bonds have $1,000 par value and pay interest annually at a rate of 10%,which is also the current required rate of return on the bonds.The bonds' duration is:

A)10.00.
B)6.76.
C)5.
D)unable to be determined based on the information given.

Question 59

Generic,Inc.has bonds outstanding that mature in 20 years.The bonds have $1,000 par value,pay interest annually at a rate of 10%,and have a current selling price of $875.25.The yield to maturity on the bonds is:

A)10%.
B)8.75%.
C)11.63%.
D)7.24%.

Question 60

Assume that you wish to purchase a 30-year bond that has a maturity value of $1,000 and a coupon interest rate of 9.5%,paid semiannually.If you require a 6.75% rate of return on this investment,what is the maximum price that you should be willing to pay for this bond?

A)$1,111
B)$1,450
C)$1,352
D)$675
E)$1,000

Question 61

Compare and contrast current yield and yield to maturity.

Question 62

Given the following information,determine the market value of EAO Company bonds.

Question 63

If current market interest rates fall,what will happen to the value of outstanding bonds?

A)It will rise.
B)It will fall.
C)It will remain unchanged.
D)There is no connection between current market interest rates and the value of outstanding bonds.

Question 64

The current yield of a bond will equal its coupon rate when the bond is selling at par value.

Question 65

Which of the following statements is true?

A)A bond that has a rating of AA is considered to be a junk bond.
B)A bond will sell at a premium if the prevailing required rate of return is less than the bond's coupon rate.
C)A zero coupon is a bond that is secured by a lien on real property.
D)The legal document that describes all of the terms and conditions of a bond issue is called a debenture agreement.

Question 66

Junk bonds are rated BB or higher.

Question 67

If current market interest rates rise,what will happen to the value of outstanding bonds?

A)It will rise.
B)It will fall.
C)It will remain unchanged.
D)There is no connection between current market interest rates and the value of outstanding bonds.

Question 68

If you are willing to pay $1,392.05 for a 15-year,$1,000 par value bond that pays 10% interest semiannually,what is your expected rate of return?

Question 69

If the market price of a bond increases,then:

A)the yield to maturity decreases.
B)the coupon rate increases.
C)the yield to maturity increases.
D)none of the above.

Question 70

Calculate the value of a bond that is expected to mature in 13 years with a $1,000 face value.The interest coupon rate is 8%,and the required rate of return is 10%.Interest is paid annually.

Question 71

DAH,Inc.has issued a 12% bond that is to mature in nine years.The bond had a $1,000 par value,and interest is due to be paid semiannually.If your required rate of return is 10%,what price would you be willing to pay for the bond?

Question 72

A bond with a face value of $1,000 has annual coupon payments of $100 and was issued seven years ago.The bond currently sells for a premium and has eight years left to maturity.This bond's ________ must be less than 10%.

A)yield to maturity
B)current yield
C)coupon rate
D)current yield and coupon rate
E)yield to maturity and current yield

Question 73

The market price of a 20-year,$1,000 bond that pays 9% interest semiannually is $774.31.What is the bond's yield to maturity?

Question 74

Cassel Corp.bonds pay an annual coupon rate of 10%.If investors' required rate of return is now 8% on these bonds,they will be priced at:

A)par value.
B)a premium to par value.
C)a discount to par value.
D)cannot be determined from information given.

Question 75

The sensitivity of a bond's value to changing interest rates depends on both the bond's time to maturity and its pattern of cash flows.

Question 76

BCD's $1,000 par value bonds currently sell for $798.50.The coupon rate is 10%,paid semiannually.If the bonds have five years before maturity,what is the yield to maturity or expected rate of return?

Question 77

Quirk Drugs sold an issue of 30-year,$1,000 par value bonds to the public that carry a 10.85% coupon rate,payable semiannually.It is now 10 years later,and the current market rate of interest is 9.00%.If interest rates remain at 9.00% until Quirk's bonds mature,what will happen to the value of the bonds over time?

A)The bonds will sell at a premium and decline in value until maturity.
B)The bonds will sell at a discount and rise in value until maturity.
C)The bonds will sell at a premium and rise in value until maturity.
D)The bonds will sell at a discount and fall in value until maturity.

Question 78

Garvin,Inc.'s bonds have a par value of $1,000.The bonds pay semiannual interest of $40 and mature in five years.
a.How much would you pay for Garvin bonds if your required rate of return is 10%?
b.How much would you pay if your required rate of return is 8%?

Question 79

Which of the following statements is true?

A)When investors' required rate of return equals the bond's coupon rate,then the market value of the bond may be selling at par value.
B)When investors' required rate of return exceeds the bond's coupon rate,then the market value of the bond will be greater than par value.
C)When investors' required rate of return is less than the bond's coupon rate,then market value of the bond will be greater than par value.
D)When investors' required rate of return is less than the bond's coupon rate,then the market value of the bond will be less than par value.

Question 80

The better the bond rating,the lower the rate of return demanded in the capital markets.