Question 1

Which of the following statements is true?

Accepted Answer

A bond will sell at a premium if the prevailing required rate of return is less than the bond's coupon rate. This is because investors are willing to pay more than the face value of the bond in order to receive the higher coupon payments. A bond with a rating of AA is considered to be a relatively high-quality bond, not a junk bond. A zero coupon bond does not pay periodic interest payments and is typically sold at a discount, not secured by a lien on real property. A debenture agreement is a legal document that describes the terms and conditions of a corporate bond issue, but not all bonds are debentures.

Question 2

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

Accepted Answer

When current market interest rates rise, the value of outstanding bonds will fall. This is because investors will demand higher interest rates on new bonds being issued, which will make the older bonds with lower interest rates less valuable. As a result, the price of outstanding bonds will decrease in order to make up for the difference in interest rates.

Question 3

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

Accepted Answer

Since the required rate of return is less than the coupon rate, the bond will be priced at a premium to face value in order to bring the yield down to the required rate of return.

Question 4

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

Accepted Answer

The answer of When referring to bonds,expected rate of return...

Question 5

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?

Accepted Answer

The answer of The market price of a 20-year,$1,000 bond...

Question 6

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

Accepted Answer

This is true because higher bond ratings indicate a lower risk of default, making those bonds more attractive to investors. As a result, investors are willing to accept lower rates of return for safer investments. On the other hand, lower-rated bonds are riskier and require higher rates of return to compensate investors for the higher risk.

Question 7

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

Accepted Answer

The answer of Given the following information,determine the market value...

Question 8

Compare and contrast current yield and yield to maturity.

Accepted Answer

The answer of Compare and contrast current yield and yield...

Question 9

DAH,Inc.has issued a 12% bond that is to mature in nine years.The bond had a $1,000 face 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?

Accepted Answer

The answer of DAH,Inc.has issued a 12% bond that is...

Question 10

Garvin,Inc.'s bonds have a face 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%?

Accepted Answer

The answer of Garvin,Inc.'s bonds have a face value of...

Question 11

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.

Accepted Answer

This statement is true. The longer the time to maturity of a bond, the more sensitive its value will be to changes in interest rates. Additionally, the pattern of cash flows (e.g. whether the bond pays a fixed or variable interest rate) will also impact its sensitivity to interest rate changes.

Question 12

If the market price of a bond increases,then

Accepted Answer

Bond prices and yields are inversely related. When the market price of a bond increases, the yield to maturity decreases. This is because the investor is paying a higher price for the bond, so the annual interest payments (coupon rate) relative to the purchase price are lower, resulting in a lower yield to maturity.

Question 13

BCD's $1,000 face 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?

Accepted Answer

The answer of BCD's $1,000 face value bonds currently sell...

Question 14

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

Accepted Answer

Bond ratings measure the credit risk of a given bond issue, indicating the issuer's ability to make interest payments and repay the principal, not the interest rate risk.

Question 15

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

Accepted Answer

The answer of If you are willing to pay $1,392.05...

Question 16

Quirk Drugs sold an issue of 30-year,$1,000 face 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?

Accepted Answer

The bonds will sell at a premium because their coupon rate (10.85%) is higher than the current market rate (9.00%). As they approach maturity, their value will decline to the face value.

Question 17

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

Accepted Answer

When current market interest rates fall, the value of outstanding bonds will increase. This is because, with lower market interest rates, the interest rate offered by the bond becomes relatively higher, making it more attractive to potential buyers. As a result, the demand for the bond increases, driving up its market value.

Question 18

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

Accepted Answer

When a bond is selling at its face value, its current yield will be equal to its coupon rate as the yield is based on the coupon payment relative to the bond's current market price.

Question 19

Investment grade bonds are rated BB or lower.

Accepted Answer

Investment grade bonds are actually rated BBB- or higher by credit rating agencies. Bonds rated BB or lower are considered speculative or high yield, which means there is a higher risk of default.

Question 20

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.

Accepted Answer

The answer of Calculate the value of a bond that...

Quiz 9: Debt Valuation and Interest Rates