Deck 9: Debt Valuation and Interest Rates

Question 1

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.

Answer 1

C

Question 2

Which of the following features allows a borrower to redeem or repurchase a bond issue before its maturity date?

A) the call provision
B) convertibility
C) floating rate
D) the priority of claims

Answer 2

A

Question 3

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.

Answer 3

D

Question 4

If the issuing company becomes insolvent, the claims of the bondholders are honored before those of preferred stockholders.

Question 5

Advantages of privately placing debt include all of the following except

A) speed.
B) reduced placement costs.
C) restrictive covenants.
D) flexibility.

Question 6

LIBOR last week was 1.88%, this week it is 1.91%. SC Corp. has borrowed $1,000,000 from North Pole Bank at a rate of one half a percentage point above LIBOR with cap of 2.5% and a floor of 2.0%. What interest was charged to SC last week?

A) 2.48%
B) 2.38%.
C) 2.0%
D) 2.5%

Question 7

Businesses that wish to issue public debt will usually seek help from

A) a state or union pension fund.
B) a large life insurance company.
C) the Federal Reserve bank.
D) an investment banking firm.

Question 8

Advantages to borrowing in the private market include

A) less restrictive covenants.
B) reduced initial costs.
C) lower interest costs.
D) avoiding future SEC registration.

Question 9

Banks often index interest rates on short-term operating loans to

A) LIBOR.
B) the S&P 500.
C) the inflation rate.
D) the 6 month Treasury Bill.

Question 10

The detailed legal agreement between a bond's issuer and and its trustees is known as the

A) collateral agreement.
B) call provision.
C) indenture.
D) covenant.

Question 11

The current yield is the average rate of interest a bond will from the time of purchase until it matures.

Question 12

Corporate debt can be privately placed with

A) union pension funds.
B) life insurance companies
C) state pension funds
D) all of the above

Question 13

Any unsecured long-term debt instrument is a debenture.

Question 14

The interest on corporate bonds is typically paid

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

Question 15

Bonds are rated by either Moody's or Standard & Poors or both.

Question 16

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

Question 17

The rate of return on a bond can be higher or lower than the coupon rate.

Question 18

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

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

Question 19

Bonds with ratings lower than Standard & Poor's BBB or Moody's Baa are classified as

A) in default.
B) investment grade.
C) not investment grade.
D) medium quality.

Question 20

On any given day, a bond can be issued at

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

Question 21

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.

Question 22

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 23

An ideal time to buy bonds with distant maturities is when the investor expects future yield curves to be

A) upward sloping.
B) downward sloping.
C) flat.
D) unstable.

Question 24

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 25

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? Assume annual coupon payments.

A) 7.81%
B) 15.36%
C) 15.61%
D) 16.22%

Question 26

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 27

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 .66
B) $1,011.00
C) $813.80
D) $790 ,79

Question 28

The Blackburn Group has recently issued 20-year, unsecured bonds rated BB by Moody's. These bonds yield 443 basis points above the U.S. Treasury yield of 2.76%. The yield to maturity on these bonds is

A) 4.43%.
B) 7.19%
C) 12.23%
D) mortgage bonds.

Question 29

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 30

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 31

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 32

What is the expected rate of return on a bond that pays a coupon rate of 9% paid semi-annually, has a par value of $1,000, matures in five years, and is currently selling for $1071?

A) 7.28%
B) 8.40%
C) 3.64%
D) 4.21%

Question 33

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 34

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) 11.71%.
C) 10.12%.
D) 11.29%.

Question 35

A bond that is held to maturity

A) will necessarily have a yield to maturity equal to the coupon rate.
B) will necessarily earn the yield to maturity at the time of purchase.
C) may earn more or less that its yield to maturity at the time of purchase because the rate at which coupons can be reinvested may change.
D) will earn the yield to maturity at the date of maturity.

Question 36

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 37

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 38

Bond ratings directly affect a bond's

A) spread over the Treasury yield.
B) coupon rate.
C) maturity date.
D) call provisions.

Question 39

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? Assume annual coupon payments.

A) 21.81%
B) 6.14%
C) 12.28%
D) 11.43%

Question 40

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 41

A bond is most likely to be called when the market rate is lower than the coupon rate.

Question 42

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 43

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%. This bond will at a discount from par.

Question 44

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

Question 45

A bond's "spread" refers to the difference between it's Moody's rating and its Standard & Poors rating.

Question 46

When a bond's coupon rate is lower than the required rate of return, the bond

A) will sell at a discount from par.
B) will sell at a premium over par
C) may sell at either a discount or a premium.
D) will sell at par value.

Question 47

Reindeer Corp. 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. The yield-to-maturity of these bonds is 10.65%.

Question 48

The expected yield of a bond will be less than its yield to maturity when

A) market interest rates are expected to rise.
B) market interest rates are expected to fall.
C) the expected yield of a bond cannot be lower than its yield to maturity.
D) when the bond is purchased at a discount.

Question 49

A AAA rated bond's yield to maturity will be very close to it's expected yield.

Question 50

Blue's Chips Inc. 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) 3.15%
B) 1.57%
C) 3.12%
D) 6.24%

Question 51

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 52

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

Question 53

You purchased Photon, Inc. bonds exactly one year ago today for $875. During the latest year, you received $65 in interest on the bonds. The current yield on these bonds is 6.5%.

Question 54

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 less than 9%.

Question 55

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 56

A basis point is equal to one hundredth of a percentage point.

Question 57

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 58

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 current yield on the bonds is 11.63%

Question 59

When a bond's coupon rate is higher than the required rate of return, the bond

A) will sell at a discount from par.
B) will sell at a premium over par
C) may sell at either a discount or a premium.
D) will sell at par value.

Question 60

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 61

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 62

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

Question 63

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 64

Given the following information, determine the market value of EAO Company bonds.
Par value $1,000
Coupon rate 10%
Years to maturity 6
Market rate 8%
Interest paid semiannually

Question 65

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 66

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

Question 67

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 68

When a bond's cash flows are discounted at the yield to maturity their present value will equal the purchase price.

Question 69

Compare and contrast current yield and yield to maturity.

Question 70

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 71

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 72

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 73

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 74

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 75

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

Question 76

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 77

Investment grade bonds are rated BB or lower.

Question 78

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 79

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

Question 80

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?