Question 1

Fred and Ethel are both considering buying a corporate bond with a coupon rate of 8%,a face value of $1,000,and a maturity date of January 1,2025.Which of the following statements is MOST correct?
A) Because both Fred and Ethel will receive the same cash flows if they each buy a bond, they both must assign the same value to the bond.
B) If Fred decides to buy the bond, then Ethel will also decide to buy the bond, if markets are efficient.
C) Fred and Ethel will only buy the bonds if the bonds are rated BBB or above.
D) Fred may determine a different value for a bond than Ethel because each investor may have a different level of risk aversion, and hence a different required return.

Accepted Answer

Investors may have different levels of risk aversion, which can lead to different required returns. Therefore, Fred and Ethel may each determine a different value for the bond based on their individual risk preferences. Choices A, B, and C are not necessarily true and cannot be concluded based on the information provided.

Question 2

When using the pv (present value)function in Excel to calculate bond values,the bond's coupon rate is entered as the Rate variable.

Accepted Answer

The Rate variable in the PV function represents the discount rate or yield, not the bond's coupon rate.

Question 3

Finance theory suggests that the current market value of a bond is based upon which of the following?
A) the future value of interest paid on a bond
B) the sum total of principal and interest paid on a bond
C) the sum of the present value of the bond's interest payments and the present value of the principal
D) the present value of a bond's par value plus the future value of the bond's present value

Accepted Answer

Finance theory suggests that the current market value of a bond is based on the present value of the bond's interest payments and the present value of the principal. This means that the market value of the bond takes into account the time value of money and discounts the future cash flows to their present value. Option A and B do not consider the present value of the bond's cash flows, and Option D does not make logical sense as it includes both the present and future value.

Question 4

The Wall Street Journal bond quotes indicate that the net close for a bond with a $1,000 par value is  .The closing price for that bond was $100.75.

Accepted Answer

The answer of The Wall Street Journal bond quotes indicate...

Question 5

Valley Manufacturing Inc.just issued $1,000 par 20-year bonds.The bonds sold for $758.18 and pay interest semiannually.Investors require a rate of 9% on the bonds.What is the bonds' coupon rate?
A) 6%
B) 7%
C) 8%
D) 9%

Accepted Answer

The correct answer is A because the coupon rate is the annual interest payment divided by the face value of the bond. In this case, the annual interest payment is $1,000 * 9% / 2 = $45, and the face value of the bond is $1,000, so the coupon rate is $45 / $1,000 = 6%.

Question 6

In Excel,the variable pv stands for a bond's par value.

Accepted Answer

In Excel, the variable pv stands for present value, which represents the current value of a bond's future cash flows.

Question 7

Which of the following will cause the value of a bond to increase,other things held the same?
A) Investors' required rate of return increases.
B) The company's debt rating drops from AAA to BBB.
C) Interest rates decrease.
D) The bond is callable.

Accepted Answer

When interest rates decrease, the value of existing bonds increases. This is because the bond's fixed interest payments become more attractive to investors in comparison to new bonds with lower interest rates. The opposite is also true - when interest rates increase, the value of existing bonds decreases. Therefore, option C is the correct answer.

Question 8

A bond issued by Liberty,Inc.10 years ago has a coupon rate of 8% and a face value of $1,000.The bond will mature in 15 years.What is the value to an investor with a required return of 12.5%?
A) $800
B) $750.86
C) $658.94
D) $701.52

Accepted Answer

The answer of A bond issued by Liberty,Inc.10 years ago...

Question 9

The value of a bond is inversely related to changes in the investor's present required rate of return.

Accepted Answer

When an investor's required rate of return increases, the value of a bond decreases. This inverse relationship between bond value and required rate of return is due to the fact that changes in interest rates have a significant impact on bond prices. When interest rates rise, newly issued bonds offer higher interest payments to investors, making existing bonds with lower interest payments less attractive, which lowers their market value.

Question 10

Nunavet Ocean Cruises sold an issue of 12-year $1,000 par bonds to build new ships.The bonds pay 4.85% interest,semiannually.Today's required rate of return is 9.7%.How much should these bonds sell for today? Round off to the nearest $1.
A) $771.86
B) $732.93
C) $660.45
D) $598.33

Accepted Answer

To calculate the price of the bond, we need to use the following formula:

P = (C / r) x [1 - 1 / (1 + r)n] + FV / (1 + r)n

Where:
P = price of the bond
C = semiannual coupon payment
r = required rate of return (annual)
n = number of semiannual periods (years x 2)
FV = face value

Plugging in the values, we get:

P = (2.425 / 0.097) x [1 - 1 / (1 + 0.097)^24] + 1000 / (1 + 0.097)^24
P = 25.00 x 12.954 + 260.53
P = 660.45

Therefore, the answer is C.

Question 11

In the present value bond valuation model,risk is generally incorporated into the
A) maturity amount.
B) timing of cash flows (assuming more risky cash flows are received early).
C) discount rate or required return.
D) cash flows (making some smaller if they are more risky).

Accepted Answer

Risk is accounted for in the present value bond valuation model by adjusting the discount rate or required return. Investors demand a higher return for bearing more risk, which is reflected in the discount rate used to calculate the present value of future cash flows. Therefore, the higher the risk, the higher the discount rate, and the lower the present value of the bond's cash flows. Maturity amount, timing of cash flows, and adjusting individual cash flows do not directly account for risk in the present value bond valuation model.

Question 12

A bond with a par value of $1,000 is listed in the Wall Street Journal at a price of 100.50.This bond is selling for $1,005.

Accepted Answer

The price listed in the Wall Street Journal of 100.50 means the bond is being sold at 100.50% of its par value, which is 100.50% * $1,000 = $1,005. Therefore, the statement is true.

Question 13

As interest rates,and consequently investors' required rates of return,change over time the ________ of outstanding bonds will change as a result.
A) maturity date
B) coupon interest payment
C) par value
D) price

Accepted Answer

The price of outstanding bonds will change as a result of changes in interest rates and investors' required rates of return. When interest rates increase, the existing bonds with lower coupon rates become less valuable compared to newly issued bonds with higher coupon rates, causing the price of outstanding bonds to decrease. Conversely, when interest rates decrease, the existing bonds with higher coupon rates become more valuable compared to newly issued bonds with lower coupon rates, causing the price of outstanding bonds to increase. Therefore, the price of bonds is directly influenced by changes in interest rates reflecting the investors' required rates of return.

Question 14

PR Corporation just issued $1,000 par 20-year bonds.The bonds sold for $936 and pay interest semiannually.Investors require a rate of 7.00% on the bonds.What is the amount of the semiannual interest payment on the bonds?
A) $64.50
B) $55.00
C) $32.00
D) $21.75

Accepted Answer

The answer of PR Corporation just issued $1,000 par 20-year...

Question 15

The interest on corporate bonds is typically paid
A) semiannually.
B) annually.
C) quarterly.
D) monthly.

Accepted Answer

The interest on corporate bonds is typically paid semiannually, meaning every six months.

Question 16

The value of a bond is the present value of both the future interest to be received and the price of the bond.

Accepted Answer

The answer of The value of a bond is the...

Question 17

Charlie Corporation has two bonds outstanding.Both bonds mature in 10 years,have a face value of $1,000,and have a yield to maturity of 8%.One bond is a zero coupon bond and the other bond has a coupon rate of 8%.Which of the following statements is true?
A) Both bonds must sell for the same price if markets are in equilibrium.
B) The zero coupon bond must have a higher price because of its greater capital gain potential.
C) The zero coupon bond must sell for a lower price than the bond with an 8% coupon rate.
D) All rational investors will prefer the 8% bond because it pays more interest.

Accepted Answer

The zero coupon bond must sell for a lower price than the bond with an 8% coupon rate because it has no coupon payments to offset the lower price. While the zero coupon bond may have greater capital gain potential, this does not necessarily make it more valuable in the present. Rational investors may prefer either bond depending on their investment goals and risk preferences.

Question 18

What are the three important elements of asset valuation?

Accepted Answer

The answer of What are the three important elements of...

Question 19

Both Investor A and Investor B are considering the purchase of Corporation FJR bonds.The bonds are selling at a price of $1,100 each.Investor A decides to buy the bonds and Investor B does not buy the bonds.
A) Investor A must have a required return lower than the required return for Investor B.
B) The yield to maturity for Investor A must be higher than the yield to maturity for Investor B.
C) The yield to maturity for Investor A must be less than the yield to maturity for Investor B.
D) The yield to maturity for this bond must be higher than the coupon rate.

Accepted Answer

Investor A likely perceives the bond's yield to maturity as meeting or exceeding their required return, while Investor B does not, indicating Investor A's required return is lower.

Question 20

Bryant Inc.just issued $1,000 par 30-year bonds.The bonds sold for $1,107.20 and pay interest semiannually.Investors require a rate of 7.75% on the bonds.What is the bonds' coupon rate?
A) 9.333%
B) 7.750%
C) 4.125%
D) 8.675%

Accepted Answer

The bond's coupon rate can be calculated using the formula for the present value of a bond. Given that the bond sells for $1,107.20, has a par value of $1,000, a required rate of 7.75% (3.875% semiannually), and pays interest semiannually, the coupon rate is calculated to be approximately 8.675%.

Quiz 7: The Valuation and Characteristics of Bonds

Fred and Ethel are both considering buying a corporate bond with a coupon rate of 8%,a face value of $1,000,and a maturity date of January 1,2025.Which of the following statements is MOST correct?

When using the pv (present value)function in Excel to calculate bond values,the bond's coupon rate is entered as the Rate variable.

Finance theory suggests that the current market value of a bond is based upon which of the following?

The Wall Street Journal bond quotes indicate that the net close for a bond with a $1,000 par value is .The closing price for that bond was $100.75.

Valley Manufacturing Inc.just issued $1,000 par 20-year bonds.The bonds sold for $758.18 and pay interest semiannually.Investors require a rate of 9% on the bonds.What is the bonds' coupon rate?

In Excel,the variable pv stands for a bond's par value.

Which of the following will cause the value of a bond to increase,other things held the same?

A bond issued by Liberty,Inc.10 years ago has a coupon rate of 8% and a face value of $1,000.The bond will mature in 15 years.What is the value to an investor with a required return of 12.5%?

The value of a bond is inversely related to changes in the investor's present required rate of return.

Nunavet Ocean Cruises sold an issue of 12-year $1,000 par bonds to build new ships.The bonds pay 4.85% interest,semiannually.Today's required rate of return is 9.7%.How much should these bonds sell for today? Round off to the nearest $1.

In the present value bond valuation model,risk is generally incorporated into the

A bond with a par value of $1,000 is listed in the Wall Street Journal at a price of 100.50.This bond is selling for $1,005.

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

PR Corporation just issued $1,000 par 20-year bonds.The bonds sold for $936 and pay interest semiannually.Investors require a rate of 7.00% on the bonds.What is the amount of the semiannual interest payment on the bonds?

The interest on corporate bonds is typically paid

The value of a bond is the present value of both the future interest to be received and the price of the bond.

Charlie Corporation has two bonds outstanding.Both bonds mature in 10 years,have a face value of $1,000,and have a yield to maturity of 8%.One bond is a zero coupon bond and the other bond has a coupon rate of 8%.Which of the following statements is true?

What are the three important elements of asset valuation?

Both Investor A and Investor B are considering the purchase of Corporation FJR bonds.The bonds are selling at a price of $1,100 each.Investor A decides to buy the bonds and Investor B does not buy the bonds.

Bryant Inc.just issued $1,000 par 30-year bonds.The bonds sold for $1,107.20 and pay interest semiannually.Investors require a rate of 7.75% on the bonds.What is the bonds' coupon rate?