Question 1

A firm has an issue of $1,000 par value bonds with a 9 percent stated interest rate outstanding.The issue pays interest annually and has 20 years remaining to its maturity date.If bonds of similar risk are currently earning 11 percent,the firm's bond will sell for ________ today.

Accepted Answer

First, we need to calculate the present value of the bond using the following formula:
PV = [C/(1 + r)^1] + [C/(1 + r)^2] + ... + [C + FV/(1 + r)^n]
PV = [90/(1 + 0.11)^1] + [90/(1 + 0.11)^2] + ... + [90 + 1,000/(1 + 0.11)^20]
PV = $840.73
Therefore, the firm's bond will sell for $840.73 today.

Question 2

Jia Hua Enterprises wants to issue sixty 20-year,$1,000 par value,zero-coupon bonds.If each bond is priced to yield 7 percent,how much will Jia Hua receive (ignoring issuance costs)when the bonds are first sold?

Accepted Answer

The answer of Jia Hua Enterprises wants to issue sixty...

Question 3

A bond will sell at a premium when its required return rises above its coupon interest rate.

Accepted Answer

A bond will sell at a premium when its coupon interest rate is higher than the required return, not the other way around.

Question 4

When a bond's required return is greater than its coupon interest rate,the bond value will be less than its par value.

Accepted Answer

When a bond's required return is greater than its coupon interest rate, the bond's value will decrease, resulting in a price lower than its par value. This is because investors will demand a higher return to compensate for the lower interest payments received from the bond.

Question 5

The shorter the amount of time until a bond's maturity,the more responsive is its market value to a given change in the required return.

Accepted Answer

The longer the time until a bond's maturity, the more its market value will respond to changes in the required return. Shorter-term bonds are less sensitive to interest rate changes.

Question 6

The value of a bond is the present value of the ________.

Accepted Answer

The value of a bond is determined by the present value of its future interest payments (coupon payments) and the present value of its maturity value (the principal amount to be received at maturity). Dividends are not associated with bonds but with stocks.

Question 7

A firm has an issue of $1,000 par value bonds with a 12 percent stated interest rate outstanding.The issue pays interest annually and has 10 years remaining to its maturity date.If bonds of similar risk are currently earning 8 percent,the firm's bond will sell for ________ today.

Accepted Answer

The answer of A firm has an issue of $1,000...

Question 8

The value of a bond is the present value of its interest payments plus ________.

Accepted Answer

The value of a bond is the present value of its interest payments plus the present value of its par value. The face value (also known as par value) is already included in the calculation of the present value of the bond. Therefore, option A) and C) are not correct. Option D) mentions only the present value of interest payments and not the present value of the par value, so it is not the complete answer.

Question 9

Bonds are ________.

Accepted Answer

Bonds are long-term debt instruments used to raise large sums of money. Option A and B are incorrect as they do not refer to long-term debt, and option D is incorrect as bonds are not a hybrid form of financing.

Question 10

A type of long-term financing used by both corporations and government entities is ________.

Accepted Answer

Bonds are a type of long-term financing where a borrower (either a corporation or government entity) issues debt securities to investors in exchange for capital. The borrower agrees to pay the investor interest on a periodic basis and return the principal investment at a specified maturity date. This form of financing is attractive to borrowers because it provides a fixed cost of capital, the interest paid on bonds is tax-deductible, and bondholders do not have voting rights in the company.

Question 11

Calculate the value of a $1,000 bond which has 10 years until maturity and pays quarterly interest at an annual coupon rate of 12 percent.The required return on similar-risk bonds is 20 percent.

Accepted Answer

Step 1: Calculate the quarterly coupon payment
Annual coupon rate = 12%
Quarterly coupon rate = 12%/4 = 3%
Quarterly coupon payment = 3% x $1,000 = $30
Step 2: Calculate the number of quarterly payments
10 years x 4 quarters = 40 quarterly payments
Step 3: Calculate the present value of the bond
PV = [($30 / 0.20) x (1 - (1 + 0.20)^-40)] + ($1,000 / (1 + 0.20)^40)
PV = $149.79 + $506.03
PV = $655.82
Therefore, the value of the bond is $655.82, which is closest to option A ($656.82).

Question 12

When the required return is different from the coupon interest rate and is constant until maturity,the value of the bond will approach its par value as it nears maturity.

Accepted Answer

This statement is true. When the required return (or yield-to-maturity) is different from the coupon interest rate, the bond price will fluctuate over time. However, if the required return is constant until maturity, the price will gradually approach its par value as the bond gets closer to maturity. This is because the closer a bond is to maturity, the less its future cash flows are affected by changes in the required return. Ultimately, at maturity, the bond will be redeemed at par value.

Question 13

Corporate bonds usually have a ________.

Accepted Answer

Corporate bonds usually have a par value of $1,000, which is the amount that the bondholder will receive at maturity. A bond's face value is also the same as its par value. The market price of a bond can vary from its par value depending on a number of factors, such as changes in interest rates or the issuer's credit rating. Corporate bonds also typically have a specified coupon rate paid annually, which is a fixed percentage of the bond's par value that the issuer pays out to the bondholder each year. However, this is not applicable to all corporate bonds.

Question 14

The required return on a bond is likely to differ from the stated interest rate for either of two reasons: 1)economic conditions have changed,causing a shift in the basic cost of long-term funds,or 2)the firm's risk has changed.

Accepted Answer

This is because the required return on a bond takes into account both changes in economic conditions and changes in the firm's risk, which may cause the actual return to be different from the stated interest rate.

Question 15

Bonds that sell at less than face value are priced at a ________,while bonds which sell at greater than face value sell at a ________.

Accepted Answer

Bonds that sell for less than their face value are sold at a discount, while those that sell for more than their face value are sold at a premium.

Question 16

Zheng Corporation plans to issue new bonds to finance its expansion plans.In its efforts to price the issue,Zheng Corporation has identified a company of similar risk with an outstanding bond issue that has an 8 percent coupon rate having a maturity of ten years.This firm's bonds are currently selling for $1,091.96.If interest is paid annually for both bonds,what must the coupon rate of the new bonds be in order for the issue to sell at par?

Accepted Answer

To sell at par, the new bond issue must have a price of $1,000, the same as the face value.

We can set up the equation:
Price of the similar bond = Price of the new bond
$1,091.96 = Coupon payment / (1 + r) + Coupon payment / (1 + r)^2 + ... + Coupon payment / (1 + r)^10 + Face value / (1 + r)^10

Solving for the coupon rate (r) using trial and error or using financial calculator gives us a answer of 6.71%.

Question 17

Increases in the basic cost of long-term funds or in risk will raise the required return on a bond.

Accepted Answer

According to the basic principle of finance, the required return on a bond is positively related to the basic cost of long-term funds and the level of risk. As the cost of borrowing increases or the level of risk increases, investors will demand a higher return on their investment to compensate for the increased risk. Therefore, the statement is true.

Question 18

A bond with short maturity has less "interest rate risk" than a bond with long maturity when all other features-coupon interest rate,par value,and interest payment frequency-are the same.

Accepted Answer

Interest rate risk refers to the sensitivity of a bond's price to changes in interest rates. A bond with a shorter maturity is less sensitive to changes in interest rates compared to a bond with a longer maturity. This is because the cash flows from a short-term bond are received earlier, reducing the uncertainty associated with changes in interest rates.

Question 19

If the coupon rate of a bond is equal to its required rate of return,then ________.

Accepted Answer

If the coupon rate is equal to the required rate of return, it means that the bond is priced correctly and there is no premium or discount on its market value. Therefore, the market value is equal to the par value of the bond.

Question 20

Interest rate risk is the risk that results from the changes in interest rates and thereby impact the bond value.

Accepted Answer

Interest rate risk is a real risk associated with bonds, as changes in interest rates can affect the value of the bond. When interest rates rise, the value of existing bonds with lower interest rates decreases, as investors would want to invest in newer bonds with higher interest rates. Conversely, when interest rates fall, the value of existing bonds with higher interest rates increases, as investors would want to invest in newer bonds with lower interest rates. This is why bond investors pay close attention to interest rate movements and adjust their portfolios accordingly to manage interest rate risk.

Quiz 6: Interest Rates and Bond Valuation