Question 1

Master Craft Control Inc.has bonds that mature in 6 1/2 years with a par value of $1,000.They pay a coupon rate of 9% with semiannual payments.If the required rate of return on these bonds is 11% what is the bond's value?

Accepted Answer

The bond's value can be calculated using the present value of its future cash flows, which include the semiannual interest payments and the principal amount at maturity. The formula for the present value of an annuity (the interest payments) and the present value of a lump sum (the principal repayment) can be used here. Given a 9% annual coupon rate with semiannual payments, the semiannual interest payment is $45 ($1,000 * 9% / 2). There are 13 periods (6.5 years * 2) and a semiannual discount rate of 5.5% (11% / 2). The bond's value is calculated as follows:$$ \text{Present Value of Interest Payments} = \frac{\$45 \times [1 - (1 + 0.055)^{-13}]}{0.055} $$$$ \text{Present Value of Principal} = \frac{\$1,000}{(1 + 0.055)^{13}} $$Adding these two components gives the bond's value, which is approximately $908.83. This calculation involves the present value of an annuity formula for the coupon payments and the present value of a lump sum for the bond's par value at maturity.

Question 2

Alice Kitchen's,Inc.bonds have a 10% coupon rate with semiannual coupon payments.They have 12 and 1/2 years to maturity and a par value of $1,000.Compute the value of Alice's bonds if investors' required rate of return is 8%.

Accepted Answer

The bond's value is calculated using the present value of its future cash flows, which include semiannual coupon payments and the par value at maturity. With a coupon rate of 10% and a required return of 8%, the bond's value is higher than its par value, and $1,156.22 is the correct calculation.

Question 3

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?

Accepted Answer

The correct answer is D because investors' required returns may differ based on their level of risk aversion, and therefore they may assign differing values to the bond. The coupon rate and face value are the same for all investors, but the required return may differ based on each individual's investment objectives and level of perceived risk. Therefore, Fred and Ethel do not necessarily have to assign the same value to the bond, and the efficient market hypothesis does not necessarily imply that Ethel will make the same decision as Fred.

Question 4

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

Accepted Answer

Risk is typically incorporated into the present value bond valuation model through discounting future cash flows at a higher discount rate or required return to compensate for the increased risk associated with those cash flows.

Question 5

Suppose interest rates have been at historically low levels the past two years.A reasonable strategy for bond investors during this time period would be to

Accepted Answer

Investing in short-term bonds would help reduce interest rate risk during a period of historically low interest rates, as they will allow for the reinvestment of funds at higher rates in the future. Long-term bonds would be riskier in this scenario, as they would be locked in at low rates for an extended period of time. Investing in junk bonds may provide higher interest rates, but also comes with higher default risk. Finally, there is no guarantee that interest rates will increase in the future, so attempting to lock in a position with long-term bonds could result in missing out on higher rates if they do not increase.

Question 6

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?

Accepted Answer

The zero coupon bond would have to sell at a discount to provide the same yield to maturity as the bond with an 8% coupon rate. This is because the zero coupon bond does not pay any interest payments until maturity, whereas the bond with an 8% coupon rate pays interest payments annually. Therefore, investors in the zero coupon bond would only receive capital gains at maturity, which is lower than receiving interest payments annually plus capital gains. As such, the zero coupon bond must sell for a lower price than the bond with an 8% coupon rate.

Question 7

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%?

Accepted Answer

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

Question 8

Assume that Bunch Inc.has an issue of 18-year $1,000 par value bonds that pay 7% interest,annually.Further assume that today's required rate of return on these bonds is 5%.How much would these bonds sell for today? Round off to the nearest $1.

Accepted Answer

The present value of a bond can be calculated using the formula: 
PV = C x [(1 - (1 / (1 + r)^n)) / r] + F / (1 + r)^n 
Where:
PV = Present Value 
C = Annual interest payment 
r = Required rate of return 
n = number of years to maturity 
F = Par Value

Plugging in the values, we get: 
PV = $70 x [(1 - (1 / (1 + 0.05)^18)) / 0.05] + $1,000 / (1 + 0.05)^18 
PV = $70 x 12.078 + $1,000 / 4.074 
PV = $845.46 + $245.33 
PV = $1,090.79

Rounding off to the nearest $1, the bonds would sell for $1,233.79. Therefore, the best choice is A.

Question 9

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

Accepted Answer

When interest rates decrease, the value of existing bonds increases. This is because the interest rate that the bond pays becomes relatively more attractive compared to newly issued bonds with lower interest rates. This causes demand for the existing bond to increase, which drives up its price.

Question 10

If markets were entirely efficient (perfect),which of the following would we conclude?

Accepted Answer

If markets were entirely efficient, market value and intrinsic value (the true value of a company based on its future earnings potential) would be the same. This is because in an efficient market, all available information is already reflected in the stock price, resulting in a fair price that accurately reflects the true value of the company. In such a market, there would be no anomalies like undervalued or overvalued stocks, and book value (the accounting value of a company's assets minus its liabilities) would not necessarily be the same as market value. However, perfect market efficiency does not guarantee that there would be no inflation or that no firms would default on their bonds as these factors are influenced by macroeconomic and microeconomic factors beyond the scope of market efficiency.

Question 11

Which of the following affect an asset's value to an investor? 
I.Amount of an asset's expected cash flow 
II.The riskiness of the cash flows 
III.Timing of an asset's cash flows
IV.Investor's required rate of return

Accepted Answer

All four factors listed affect an asset's value to an investor. Expected cash flows, their riskiness, the timing of these cash flows, and the investor's required rate of return all play crucial roles in determining how much an asset is worth to an investor.

Question 12

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.

Accepted Answer

Since Investor A bought the bonds while Investor B did not, it can be assumed that Investor A has a lower required return for the bonds compared to Investor B. This is because Investor A is willing to pay the market price of $1,100 for the bonds, while Investor B is not. This means that Investor A is satisfied with the bond's yield, which is below Investor B's required return.

Question 13

Bart's Moving Company bonds have a 11% coupon rate.Interest is paid semiannually.The bonds have a par value of $1,000 and will mature 8 years from now.Compute the value of Bart's Moving Company bonds if investors' required rate of return is 9.5%.

Accepted Answer

The answer of Bart's Moving Company bonds have a 11%...

Question 14

In an efficient market,two investors may agree on the amount and timing of a bond's expected cash flows and also on the bond's risk level,as measured by its debt rating,and still determine two different values for the bond.

Accepted Answer

This is because investors may have different required rates of return or discount rates, which will affect the present value of the bond's future cash flows and its overall value. Additionally, investors may have different market views or beliefs about the economy, interest rates, or other factors that can impact the bond's value. As a result, even with the same information and inputs, investors may arrive at different values for a bond in an efficient market.

Question 15

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

Accepted Answer

The price of outstanding bonds will change as interest rates change. When interest rates rise, the price of existing bonds falls because they are less attractive to investors compared to newly issued bonds with higher interest rates. Likewise, when interest rates fall, the price of existing bonds rises because they offer higher coupon payments than newly issued bonds. This inverse relationship between interest rates and bond prices is known as interest rate risk.

Question 16

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

Accepted Answer

The balance sheet shows the book value of a firm, which is the accounting value of the firm's assets minus its liabilities. It is not the market value or intrinsic value of the firm. The liquidation value is the value of the firm's assets if they were sold off in a fire sale, and is not typically shown on the balance sheet.

Question 17

What is the value of a bond that matures in 5 years,has an annual coupon payment of $110,and a par value of $2,000? Assume a required rate of return of 8.69%.

Accepted Answer

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

Question 18

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

Accepted Answer

Finance theory suggests that the current market value of a bond is based upon the sum of the present value of the bond's interest payments and the present value of the principal. This is because bond investors are primarily concerned with the future cash flows they will receive from the bond, and the present value of those future cash flows determines the bond's market value. The future value of interest paid on a bond (A) and the sum total of principal and interest paid on a bond (B) are not used to determine the current market value of a bond. Option D is not a valid formula.

Question 19

What is the value of a bond that matures in 17 years,makes an annual coupon payment of $50,and has a par value of $1,000? Assume a required rate of return of 5.90%.

Accepted Answer

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

Question 20

What is the value of a bond that has a par value of $1,000,a coupon of $120 (annually),and matures in 10 years? Assume a required rate of return of 7.02%.

Accepted Answer

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

Quiz 7: The Valuation and Characteristics of Bonds

Master Craft Control Inc.has bonds that mature in 6 1/2 years with a par value of $1,000.They pay a coupon rate of 9% with semiannual payments.If the required rate of return on these bonds is 11% what is the bond's value?

Alice Kitchen's,Inc.bonds have a 10% coupon rate with semiannual coupon payments.They have 12 and 1/2 years to maturity and a par value of $1,000.Compute the value of Alice's bonds if investors' required rate of return is 8%.

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?

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

Suppose interest rates have been at historically low levels the past two years.A reasonable strategy for bond investors during this time period would be to

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 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%?

Assume that Bunch Inc.has an issue of 18-year $1,000 par value bonds that pay 7% interest,annually.Further assume that today's required rate of return on these bonds is 5%.How much would these bonds sell for today? Round off to the nearest $1.

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

If markets were entirely efficient (perfect) ,which of the following would we conclude?

Which of the following affect an asset's value to an investor? I.Amount of an asset's expected cash flow II.The riskiness of the cash flows III.Timing of an asset's cash flows IV.Investor's required rate of return

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.

Bart's Moving Company bonds have a 11% coupon rate.Interest is paid semiannually.The bonds have a par value of $1,000 and will mature 8 years from now.Compute the value of Bart's Moving Company bonds if investors' required rate of return is 9.5%.

In an efficient market,two investors may agree on the amount and timing of a bond's expected cash flows and also on the bond's risk level,as measured by its debt rating,and still determine two different values for the bond.

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

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

What is the value of a bond that matures in 5 years,has an annual coupon payment of $110,and a par value of $2,000? Assume a required rate of return of 8.69%.

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

What is the value of a bond that matures in 17 years,makes an annual coupon payment of $50,and has a par value of $1,000? Assume a required rate of return of 5.90%.

What is the value of a bond that has a par value of $1,000,a coupon of $120 (annually) ,and matures in 10 years? Assume a required rate of return of 7.02%.