Question 1

Which of the following statements concerning bonds and risk is true?

Accepted Answer

A)  Because the interest payments and maturing value are known, the only risk associated with investing in bonds is default risk. 
B)  Zero coupon bonds are always more risky than bonds with high coupon rates because of the time value of money. 
C)  Bonds are generally less risky than common stock because of the preference for debt over equity in the event of bankruptcy and liquidation. 
D)  B-rated bonds are above average for risk, i.e., less risky than the average bond. 
A)  Because the interest payments and maturing value are known, the only risk associated with investing in bonds is default risk. 
B)  Zero coupon bonds are always more risky than bonds with high coupon rates because of the time value of money. 
C)  Bonds are generally less risky than common stock because of the preference for debt over equity in the event of bankruptcy and liquidation. 
D)  B-rated bonds are above average for risk, i.e., less risky than the average bond.

Question 2

Two bonds are identical except for their maturity.The bonds have a coupon rate that is greater than their yield to maturity.Which of the following is true when comparing the two bonds?

Accepted Answer

A)  The longer maturity bond has a greater premium (is priced farther above par). 
B)  The longer maturity bond has a smaller premium (is priced above par but closer to par). 
C)  The longer maturity bond has a greater discount (is priced farther below par). 
D)  The longer maturity bond has a smaller discount (is priced below par but closer to par). 
A)  The longer maturity bond has a greater premium (is priced farther above par). 
B)  The longer maturity bond has a smaller premium (is priced above par but closer to par). 
C)  The longer maturity bond has a greater discount (is priced farther below par). 
D)  The longer maturity bond has a smaller discount (is priced below par but closer to par).

Question 3

LRQ Inc.issued bonds on July 1,2006.The bonds had a coupon rate of 5.5%,with interest paid semiannually.The face value of the bonds is $1,000 and the bonds mature on July 1,2021.What is the intrinsic value of an LRQ Corporation bond on July 1,2012 to an investor with a required return of 7%?

Accepted Answer

A)  $901.08 
B)  $902.27 
C)  $1,000.00 
D)  $1,104.28 
A)  $901.08 
B)  $902.27 
C)  $1,000.00 
D)  $1,104.28

Question 4

Long-term bonds have greater interest rate risk than shorter-term bonds.

Accepted Answer

A) True 
 B)False

Question 5

A corporate bond has a coupon rate of 9%,a face value of $1,000,and matures in 15 years.Which of the following statements is MOST correct?

Accepted Answer

A)  An investor with a required return of 10% will value the bond at more than $1,000. 
B)  An investor who buys the bond for $900 and holds the bond until maturity will have a capital loss. 
C)  An investor who buys the bond for $900 will have a yield to maturity on the bond greater than 9%. 
D)  If the bond's market price is $900, then the annual interest payments on the bond will be $81. 
A)  An investor with a required return of 10% will value the bond at more than $1,000. 
B)  An investor who buys the bond for $900 and holds the bond until maturity will have a capital loss. 
C)  An investor who buys the bond for $900 will have a yield to maturity on the bond greater than 9%. 
D)  If the bond's market price is $900, then the annual interest payments on the bond will be $81.

Question 6

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

A) True 
 B)False

Question 7

The yield to maturity on long-term bonds

Accepted Answer

A)  is equal to the current yield if the bond is selling for face value. 
B)  is equal to the coupon rate on the bond. 
C)  is equal to the net present value of the bond's future cash flows. 
D)  is set by the indenture agreement and will not change over the life of the bond. 
A)  is equal to the current yield if the bond is selling for face value. 
B)  is equal to the coupon rate on the bond. 
C)  is equal to the net present value of the bond's future cash flows. 
D)  is set by the indenture agreement and will not change over the life of the bond.

Question 8

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?

Accepted Answer

A)  9.333% 
B)  7.750% 
C)  4.125% 
D)  8.675% 
A)  9.333% 
B)  7.750% 
C)  4.125% 
D)  8.675%

Question 9

A common protective provision in a bond indenture is the limitation of dividends on the issuing firm's common stock.

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

A)  book value 
B)  liquidation value 
C)  market value 
D)  intrinsic value 
A)  book value 
B)  liquidation value 
C)  market value 
D)  intrinsic value

Question 11

Which of the following is FALSE concerning bonds?

Accepted Answer

A)  The indenture spells out the obligations of the bond issuer. 
B)  Mortgage bonds are secured by assets such as real estate. 
C)  Debentures are secured by assets other than real estate. 
D)  Subordinated debentures are riskier than unsubordinated debentures. 
A)  The indenture spells out the obligations of the bond issuer. 
B)  Mortgage bonds are secured by assets such as real estate. 
C)  Debentures are secured by assets other than real estate. 
D)  Subordinated debentures are riskier than unsubordinated debentures.

Question 12

Andre owns a corporate bond with a coupon rate of 8% that matures in 10 years.Ruth owns a corporate bond with a coupon rate of 12% that matures in 25 years.If interest rates go down,then

Accepted Answer

A)  the value of Andre's bond will decrease and the value of Ruth's bond will increase. 
B)  the value of both bonds will increase. 
C)  the value of Ruth's bond will decrease more than the value of Andre's bond due to the longer time to maturity. 
D)  the value of both bonds will remain the same because they were both purchased in an earlier time period before the interest rate changed. 
A)  the value of Andre's bond will decrease and the value of Ruth's bond will increase. 
B)  the value of both bonds will increase. 
C)  the value of Ruth's bond will decrease more than the value of Andre's bond due to the longer time to maturity. 
D)  the value of both bonds will remain the same because they were both purchased in an earlier time period before the interest rate changed.

Question 13

If a corporation were to choose between issuing a debenture,a mortgage bond,or a subordinated debenture,which would have the highest yield to maturity,everything else equal?

Accepted Answer

A)  the debenture 
B)  the mortgage bond 
C)  the subordinated debenture 
D)  all of the above 
A)  the debenture 
B)  the mortgage bond 
C)  the subordinated debenture 
D)  all of the above

Question 14

Which of the following is NOT a definition of yield to maturity?

Accepted Answer

A)  discount rate that equates present value of future cash flows with a bond's price. 
B)  investors' required rate of return on a bond investment. 
C)  return that an investor will earn if they buy the bond for its market price and hold it until maturity. 
D)  discount rate that equates present value of future cash flows with a bond's face value. 
A)  discount rate that equates present value of future cash flows with a bond's price. 
B)  investors' required rate of return on a bond investment. 
C)  return that an investor will earn if they buy the bond for its market price and hold it until maturity. 
D)  discount rate that equates present value of future cash flows with a bond's face value.

Question 15

Convertible bonds decrease in value whenever the price of the company's stock increases.

Accepted Answer

A) True 
 B)False

Question 16

Bond A has a current yield of 6% and Bond B has a current yield of 8%.If the market price of both bonds is the same,then the yield to maturity on Bond B must be higher than the yield to maturity on Bond A.

Accepted Answer

A) True 
 B)False

Question 17

A bond with a coupon rate of 8% will also have a yield to maturity of 8%.

Accepted Answer

A) True 
 B)False

Question 18

PBJ Corporation issued bonds on January 1,2006.The bonds had a coupon rate of 5.5%,with interest paid semiannually.The face value of the bonds is $1,000 and the bonds mature on January 1,2021.What is the yield to maturity for a PBJ Corporation bond on January 1,2012 if the market price of the bond on that date is $950?

Accepted Answer

A)  5.50% 
B)  6.23% 
C)  8.43% 
D)  10.50% 
A)  5.50% 
B)  6.23% 
C)  8.43% 
D)  10.50%

Question 19

Define interest rate risk.How does a bond's level of interest rate risk depend on its maturity?

Accepted Answer

Interest rate risk is the risk of changi

Question 20

Junk bonds typically have an interest rate of between 3 and 5 percent more than AAA-rated long-term debt.

Accepted Answer

A) True 
 B)False

Which of the following statements concerning bonds and risk is true?

Two bonds are identical except for their maturity.The bonds have a coupon rate that is greater than their yield to maturity.Which of the following is true when comparing the two bonds?

LRQ Inc.issued bonds on July 1,2006.The bonds had a coupon rate of 5.5%,with interest paid semiannually.The face value of the bonds is $1,000 and the bonds mature on July 1,2021.What is the intrinsic value of an LRQ Corporation bond on July 1,2012 to an investor with a required return of 7%?

Long-term bonds have greater interest rate risk than shorter-term bonds.

A corporate bond has a coupon rate of 9%,a face value of $1,000,and matures in 15 years.Which of the following statements is MOST correct?

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.

The yield to maturity on long-term 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?

A common protective provision in a bond indenture is the limitation of dividends on the issuing firm's common stock.

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

Which of the following is FALSE concerning bonds?

Andre owns a corporate bond with a coupon rate of 8% that matures in 10 years.Ruth owns a corporate bond with a coupon rate of 12% that matures in 25 years.If interest rates go down,then

If a corporation were to choose between issuing a debenture,a mortgage bond,or a subordinated debenture,which would have the highest yield to maturity,everything else equal?

Which of the following is NOT a definition of yield to maturity?

Convertible bonds decrease in value whenever the price of the company's stock increases.

Bond A has a current yield of 6% and Bond B has a current yield of 8%.If the market price of both bonds is the same,then the yield to maturity on Bond B must be higher than the yield to maturity on Bond A.

A bond with a coupon rate of 8% will also have a yield to maturity of 8%.

Define interest rate risk.How does a bond's level of interest rate risk depend on its maturity?

Junk bonds typically have an interest rate of between 3 and 5 percent more than AAA-rated long-term debt.

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Stock

The Cost of Capital

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

International Business Finance

Cash,receivables,and Inventory Management

Filters

Exam 7: The Valuation and Characteristics of Bonds

Which of the following statements concerning bonds and risk is true?

Two bonds are identical except for their maturity.The bonds have a coupon rate that is greater than their yield to maturity.Which of the following is true when comparing the two bonds?

LRQ Inc.issued bonds on July 1,2006.The bonds had a coupon rate of 5.5%,with interest paid semiannually.The face value of the bonds is $1,000 and the bonds mature on July 1,2021.What is the intrinsic value of an LRQ Corporation bond on July 1,2012 to an investor with a required return of 7%?

Long-term bonds have greater interest rate risk than shorter-term bonds.

A corporate bond has a coupon rate of 9%,a face value of $1,000,and matures in 15 years.Which of the following statements is MOST correct?

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.

The yield to maturity on long-term 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?

A common protective provision in a bond indenture is the limitation of dividends on the issuing firm's common stock.

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

Which of the following is FALSE concerning bonds?

Andre owns a corporate bond with a coupon rate of 8% that matures in 10 years.Ruth owns a corporate bond with a coupon rate of 12% that matures in 25 years.If interest rates go down,then

If a corporation were to choose between issuing a debenture,a mortgage bond,or a subordinated debenture,which would have the highest yield to maturity,everything else equal?

Which of the following is NOT a definition of yield to maturity?

Convertible bonds decrease in value whenever the price of the company's stock increases.

Bond A has a current yield of 6% and Bond B has a current yield of 8%.If the market price of both bonds is the same,then the yield to maturity on Bond B must be higher than the yield to maturity on Bond A.

A bond with a coupon rate of 8% will also have a yield to maturity of 8%.

Define interest rate risk.How does a bond's level of interest rate risk depend on its maturity?

Junk bonds typically have an interest rate of between 3 and 5 percent more than AAA-rated long-term debt.

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Stock

The Cost of Capital

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

International Business Finance

Cash,receivables,and Inventory Management

Filters