Question 1

If a firm raises capital by selling new bonds, the buyer is called the "issuing firm," and the coupon rate is generally set equal to the required rate.

Accepted Answer

A) True 
 B)False

Question 2

Marie Snell recently inherited some bonds (face value $100,000) from her father, and soon thereafter she became engaged to Sam Spade, a University of Florida marketing graduate. Sam wants Marie to cash in the bonds so the two of them can use the money to "live like royalty" for two years in Monte Carlo. The 2 percent annual coupon bonds mature in exactly twenty years. Interest on these bonds is paid annually on December 31 of each year, and new annual coupon bonds with similar risk and maturity are currently yielding 12 percent. If Marie sells her bonds now and puts the proceeds into an account which pays 10 percent compounded annually, what would be the largest equal annual amounts she could withdraw for two years, beginning today (i.e., two payments, the first payment today and the second payment one year from today)?

Accepted Answer

A)  $13,255 
B)  $29,708 
C)  $12,654 
D)  $25,305 
E)  $14,580 
A)  $13,255 
B)  $29,708 
C)  $12,654 
D)  $25,305 
E)  $14,580

Question 3

Which of the following statements is most correct?

Accepted Answer

A)  If a bond's yield to maturity exceeds its coupon rate, the bond's current yield must also exceed its coupon rate. 
B)  If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value. 
C)  If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price regardless of the bond's coupon rate. 
D)  Answers b and c are correct. 
E)  None of the answers above is correct. 
A)  If a bond's yield to maturity exceeds its coupon rate, the bond's current yield must also exceed its coupon rate. 
B)  If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value. 
C)  If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price regardless of the bond's coupon rate. 
D)  Answers b and c are correct. 
E)  None of the answers above is correct.

Question 4

A 15-year bond with a 10 percent semiannual coupon has a par value of $1,000. The bond may be called after 10 years at a call price of $1,050. The bond has a nominal yield to call of 6.5 percent. What is the bond's yield to maturity, stated on a nominal, or annual basis?

Accepted Answer

A)  5.97% 
B)  6.30% 
C)  6.75% 
D)  6.95% 
E)  7.10% 
A)  5.97% 
B)  6.30% 
C)  6.75% 
D)  6.95% 
E)  7.10%

Question 5

A company is planning to raise $1,000,000 to finance a new plant. Which of the following statements is most correct?

Accepted Answer

A)  If debt is used to raise the million dollars, the cost of the debt would be lower if the debt is in the form of a fixed rate bond rather than a floating rate bond. 
B)  If debt is used to raise the million dollars, the cost of the debt would be lower if the debt is in the form of a bond rather than a term loan. 
C)  If debt is used to raise the million dollars, but $500,000 is raised as a first mortgage bond on the new plant and $500,000 as debentures, the interest rate on the first mortgage bond would be lower than it would be if the entire $1 million were raised by selling first mortgage bonds. 
D)  The company would be especially anxious to have a call provision included in the indenture if its management thinks that interest rates are almost certain to rise in the foreseeable future. 
E)  All of the statements above are false. 
A)  If debt is used to raise the million dollars, the cost of the debt would be lower if the debt is in the form of a fixed rate bond rather than a floating rate bond. 
B)  If debt is used to raise the million dollars, the cost of the debt would be lower if the debt is in the form of a bond rather than a term loan. 
C)  If debt is used to raise the million dollars, but $500,000 is raised as a first mortgage bond on the new plant and $500,000 as debentures, the interest rate on the first mortgage bond would be lower than it would be if the entire $1 million were raised by selling first mortgage bonds. 
D)  The company would be especially anxious to have a call provision included in the indenture if its management thinks that interest rates are almost certain to rise in the foreseeable future. 
E)  All of the statements above are false.

Question 6

An 8 percent annual coupon, noncallable bond has ten years until it matures and a yield to maturity of 9.1 percent. What should be the price of a 10-year noncallable bond of equal risk which pays an 8 percent semiannual coupon? Assume both bonds have a par value of $1,000.

Accepted Answer

A)  $ 898.64 
B)  $ 736.86 
C)  $ 854.27 
D)  $ 941.09 
E)  $ 964.23 
A)  $ 898.64 
B)  $ 736.86 
C)  $ 854.27 
D)  $ 941.09 
E)  $ 964.23

Question 7

If the yield to maturity decreased 1 percentage point, which of the following bonds would have the largest percentage increase in value?

Accepted Answer

A)  A 1-year bond with an 8 percent coupon. 
B)  A 1-year zero-coupon bond. 
C)  A 10-year zero-coupon bond. 
D)  A 10-year bond with an 8 percent coupon. 
E)  A 10-year bond with a 12 percent coupon. 
A)  A 1-year bond with an 8 percent coupon. 
B)  A 1-year zero-coupon bond. 
C)  A 10-year zero-coupon bond. 
D)  A 10-year bond with an 8 percent coupon. 
E)  A 10-year bond with a 12 percent coupon.

Question 8

Kennedy Gas Works has bonds which mature in 10 years, and have a face value of $1,000. The bonds have a 10 percent quarterly coupon (i.e., the nominal coupon rate is 10 percent). The bonds may be called in five years. The bonds have a nominal yield to maturity of 8 percent and a yield to call of 7.5 percent. What is the call price on the bonds?

Accepted Answer

A)  $ 379.27 
B)  $1,025.00 
C)  $1,048.34 
D)  $1,036.77 
E)  $1,136.78 
A)  $ 379.27 
B)  $1,025.00 
C)  $1,048.34 
D)  $1,036.77 
E)  $1,136.78

Question 9

A corporate bond has a face value of $1,000, and pays a $50 coupon every six months (i.e., the bond has a 10 percent semiannual coupon). The bond matures in 12 years and sells at a price of $1,080. What is the bond's nominal yield to maturity?

Accepted Answer

A)  8.28% 
B)  8.65% 
C)  8.90% 
D)  9.31% 
E)  10.78% 
A)  8.28% 
B)  8.65% 
C)  8.90% 
D)  9.31% 
E)  10.78%

Question 10

Assume that you wish to purchase a bond with a 30-year maturity, an annual coupon rate of 10 percent, a face value of $1,000, and semiannual interest payments. If you require a 9 percent nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

Accepted Answer

A)  $905.35 
B)  $1,102.74 
C)  $1,103.19 
D)  $1,106.76 
E)  $1,149.63 
A)  $905.35 
B)  $1,102.74 
C)  $1,103.19 
D)  $1,106.76 
E)  $1,149.63

Question 11

A company is issuing $1,000 bonds at par value. The coupon rate (and yield to maturity) on the bonds is 8 percent (with annual payments) and the bonds will mature in 10 years. The bonds can be called at a call premium of 5 percent above face value after 3 years. What is the after-tax yield to call for an investor with a 31 percent tax rate?

Accepted Answer

A)  5.52% 
B)  5.90% 
C)  6.60% 
D)  7.07% 
E)  9.52% 
A)  5.52% 
B)  5.90% 
C)  6.60% 
D)  7.07% 
E)  9.52%

Question 12

Which of the following statements is most correct?

Accepted Answer

A)  The current yield on Bond A exceeds the current yield on Bond B; therefore, Bond A must have a higher yield to maturity than Bond B. 
B)  If a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity. 
C)  If a coupon bond is selling at par, its current yield equals its yield to maturity. 
D)  Both a and b are correct. 
E)  Both b and c are correct. 
A)  The current yield on Bond A exceeds the current yield on Bond B; therefore, Bond A must have a higher yield to maturity than Bond B. 
B)  If a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity. 
C)  If a coupon bond is selling at par, its current yield equals its yield to maturity. 
D)  Both a and b are correct. 
E)  Both b and c are correct.

Question 13

The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds, other things equal and held constant.

Accepted Answer

A) True 
 B)False

Question 14

Consider a $1,000 par value bond with a 7 percent annual coupon. The bond pays interest annually. There are 9 years remaining until maturity. What is the current yield on the bond assuming that the required return on the bond is 10 percent?

Accepted Answer

A)  10.00% 
B)  8.46% 
C)  7.00% 
D)  8.52% 
E)  8.37% 
A)  10.00% 
B)  8.46% 
C)  7.00% 
D)  8.52% 
E)  8.37%

Question 15

Which of the following statements is most correct?

Accepted Answer

A)  Rising inflation makes the actual yield to maturity on a bond greater than the quoted yield to maturity which is based on market prices. 
B)  The yield to maturity for a coupon bond that sells at its par value consists entirely of an interest yield; it has a zero expected capital gains yield. 
C)  On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss. 
D)  The market value of a bond will always approach its par value as its maturity date approaches. This holds true even if the firm enters bankruptcy. 
E)  All of the statements above are false. 
A)  Rising inflation makes the actual yield to maturity on a bond greater than the quoted yield to maturity which is based on market prices. 
B)  The yield to maturity for a coupon bond that sells at its par value consists entirely of an interest yield; it has a zero expected capital gains yield. 
C)  On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss. 
D)  The market value of a bond will always approach its par value as its maturity date approaches. This holds true even if the firm enters bankruptcy. 
E)  All of the statements above are false.

Question 16

A corporate bond with a $1,000 face value pays a $50 coupon every six months. The bond will mature in ten years, and has a nominal yield to maturity of 9 percent. What is the price of the bond?

Accepted Answer

A)  $ 634.86 
B)  $1,064.18 
C)  $1,065.04 
D)  $1,078.23 
E)  $1,094.56 
A)  $ 634.86 
B)  $1,064.18 
C)  $1,065.04 
D)  $1,078.23 
E)  $1,094.56

Question 17

Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, be subject to much more interest rate risk if you purchased a 30-day bond than if you bought a 30-year bond.

Accepted Answer

A) True 
 B)False

Question 18

Assume that you wish to purchase a 20-year bond that has a maturity value of $1,000 and makes semiannual interest payments of $40. If you require a 10 percent nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

Accepted Answer

A)  $619 
B)  $674 
C)  $761 
D)  $828 
E)  $902 
A)  $619 
B)  $674 
C)  $761 
D)  $828 
E)  $902

Question 19

If interest rates fall from 8 percent to 7 percent, which of the following bonds will have the largest percentage increase in its value?

Accepted Answer

A)  A 10-year zero coupon bond. 
B)  A 10-year bond with a 10 percent semiannual coupon. 
C)  A 10-year bond with a 10 percent annual coupon. 
D)  A 5-year zero coupon bond. 
E)  A 5-year bond with a 12 percent annual coupon. 
A)  A 10-year zero coupon bond. 
B)  A 10-year bond with a 10 percent semiannual coupon. 
C)  A 10-year bond with a 10 percent annual coupon. 
D)  A 5-year zero coupon bond. 
E)  A 5-year bond with a 12 percent annual coupon.

Question 20

Recently, Ohio Hospitals Inc. filed for bankruptcy. The firm was reorganized as American Hospitals Inc., and the court permitted a new indenture on an outstanding bond issue to be put into effect. The issue has 10 years to maturity and a coupon rate of 10 percent, paid annually. The new agreement allows the firm to pay no interest for 5 years. Then, interest payments will be resumed for the next 5 years. Finally, at maturity (Year 10), the principal plus the interest that was not paid during the first 5 years will be paid. However, no interest will be paid on the deferred interest. If the required annual return is 20 percent, what should the bonds sell for in the market today?

Accepted Answer

A)  $242.26 
B)  $281.69 
C)  $578.31 
D)  $362.44 
E)  $813.69 
A)  $242.26 
B)  $281.69 
C)  $578.31 
D)  $362.44 
E)  $813.69

Exam 4: Bond Valuation

If a firm raises capital by selling new bonds, the buyer is called the "issuing firm," and the coupon rate is generally set equal to the required rate.

Which of the following statements is most correct?

A 15-year bond with a 10 percent semiannual coupon has a par value of $1,000. The bond may be called after 10 years at a call price of $1,050. The bond has a nominal yield to call of 6.5 percent. What is the bond's yield to maturity, stated on a nominal, or annual basis?

A company is planning to raise $1,000,000 to finance a new plant. Which of the following statements is most correct?

An 8 percent annual coupon, noncallable bond has ten years until it matures and a yield to maturity of 9.1 percent. What should be the price of a 10-year noncallable bond of equal risk which pays an 8 percent semiannual coupon? Assume both bonds have a par value of $1,000.

If the yield to maturity decreased 1 percentage point, which of the following bonds would have the largest percentage increase in value?

A corporate bond has a face value of $1,000, and pays a $50 coupon every six months (i.e., the bond has a 10 percent semiannual coupon). The bond matures in 12 years and sells at a price of $1,080. What is the bond's nominal yield to maturity?

Which of the following statements is most correct?

The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds, other things equal and held constant.

Consider a $1,000 par value bond with a 7 percent annual coupon. The bond pays interest annually. There are 9 years remaining until maturity. What is the current yield on the bond assuming that the required return on the bond is 10 percent?

Which of the following statements is most correct?

A corporate bond with a $1,000 face value pays a $50 coupon every six months. The bond will mature in ten years, and has a nominal yield to maturity of 9 percent. What is the price of the bond?

Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, be subject to much more interest rate risk if you purchased a 30-day bond than if you bought a 30-year bond.

Assume that you wish to purchase a 20-year bond that has a maturity value of $1,000 and makes semiannual interest payments of $40. If you require a 10 percent nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

If interest rates fall from 8 percent to 7 percent, which of the following bonds will have the largest percentage increase in its value?

An Overview of Financial Management

Risk and Return: Part I

Risk and Return: Part II

Basic Stock Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Financial Planning and Forecasting Financial Statements

Determining the Cost of Capital

Corporate Valuation and Value-Based Management

Capital Budgeting: Decision Criteria

Capital Budgeting: Cash Flows and Risk

Real Options

Capital Structure Decisions: Part I

Capital Structure Decisions: Part II

Distributions to Shareholders

Ipos, Investment Banking, and Financial Restructuring

Lease Financing

Hybrid Financing

Working Capital Management

Providing and Obtaining Credit

Other Topics in Working Capital Management

Derivatives and Risk Management

Bankruptcy, Reorganization, and Liquidation

Mergers, Lbos, Divestitures, and Holding Companies

Multinational Financial Management

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