Question 1

Sometimes it is not clear if a particular security is debt or equity. Explain the basic difference between debt and equity.

Accepted Answer

This can boil down to a legal and semantic issue with hybrid securities,but at this stage,it is expected the student recognizes that equity represents an ownership interest and it is a residual claim in the firm. This means that equity holders are paid after debt holders which increases the risk of equity ownership over debt ownership. We will soon see this increased risk is rewarded by a higher required rate of return. Debt holders,on the other hand,have an upper limit on their wealth; that being the payment of periodic interest and the repayment of principal.

Question 2

The newly issued bonds of the Cain Corp. offer a 6% coupon with semiannual interest payments. The bonds are currently priced at par value. The effective annual rate provided by these bonds must be:

Accepted Answer

A)  equal to 3%. 
B)  greater than 3% but less than 4%. 
C)  equal to 6%. 
D)  greater than 6% but less than 7%. 
E)  equal to 12%. 
A)  equal to 3%. 
B)  greater than 3% but less than 4%. 
C)  equal to 6%. 
D)  greater than 6% but less than 7%. 
E)  equal to 12%. D

Question 3

The relationship between nominal interest rates on default-free,pure discount securities and the time to maturity is called the:

Accepted Answer

A)  liquidity effect. 
B)  Fisher effect. 
C)  term structure of interest rates. 
D)  inflation premium. 
E)  interest rate risk premium. 
A)  liquidity effect. 
B)  Fisher effect. 
C)  term structure of interest rates. 
D)  inflation premium. 
E)  interest rate risk premium. C

Question 4

The Lo Sun Corporation offers a 6% bond with a current market price of $875.05. The yield to maturity is 7.34%. The face value is $1,000. Interest is paid semiannually. How many years is it until this bond matures?

Accepted Answer

A)  16 years 
B)  18 years 
C)  24 years 
D)  30 years 
E)  32 years 
A)  16 years 
B)  18 years 
C)  24 years 
D)  30 years 
E)  32 years

Question 5

One basis point is equal to:

Accepted Answer

A)  .01%. 
B)  .10%. 
C)  1.0%. 
D)  10%. 
E)  100%. 
A)  .01%. 
B)  .10%. 
C)  1.0%. 
D)  10%. 
E)  100%.

Question 6

The stated interest payment,in dollars,made on a bond each period is called the bond's:

Accepted Answer

A)  coupon. 
B)  face value. 
C)  maturity. 
D)  yield to maturity. 
E)  coupon ratE. 
A)  coupon. 
B)  face value. 
C)  maturity. 
D)  yield to maturity. 
E)  coupon ratE.

Question 7

A bond with a face value of $1,000 that sells for $1,000 in the market is called a _____ bond.

Accepted Answer

A)  par value 
B)  discount 
C)  premium 
D)  zero coupon 
E)  floating rate 
A)  par value 
B)  discount 
C)  premium 
D)  zero coupon 
E)  floating rate

Question 8

The outstanding bonds of Boutelle,Inc. provide a real rate of return of 3.6%. The current rate of inflation is 2.5%. What is the nominal rate of return on these bonds?

Accepted Answer

A)  6.10% 
B)  6.13% 
C)  6.16% 
D)  6.19% 
E)  6.22% 
A)  6.10% 
B)  6.13% 
C)  6.16% 
D)  6.19% 
E)  6.22%

Question 9

The bonds issued by Manson & Son bear a 6% coupon,payable semiannually. The bond matures in 8 years and has a $1,000 face value. Currently,the bond sells at par. What is the yield to maturity?

Accepted Answer

A)  5.87% 
B)  5.97% 
C)  6.00% 
D)  6.09% 
E)  6.17% 
A)  5.87% 
B)  5.97% 
C)  6.00% 
D)  6.09% 
E)  6.17%

Question 10

The market price of a bond is equal to the present value of the:

Accepted Answer

A)  face value minus the present value of the annuity payments. 
B)  annuity payments plus the future value of the face amount. 
C)  face value plus the present value of the annuity payments. 
D)  face value plus the future value of the annuity payments. 
E)  annuity payments minus the face value of the bond. 
A)  face value minus the present value of the annuity payments. 
B)  annuity payments plus the future value of the face amount. 
C)  face value plus the present value of the annuity payments. 
D)  face value plus the future value of the annuity payments. 
E)  annuity payments minus the face value of the bond.

Question 11

A bond with a face value of $1,000 that sells for less than $1,000 in the market is called a _____ bond.

Accepted Answer

A)  par 
B)  discount 
C)  premium 
D)  zero coupon 
E)  floating rate 
A)  par 
B)  discount 
C)  premium 
D)  zero coupon 
E)  floating rate

Question 12

Interest rate risk is often explained by using the concept of a teeter-totter. Explain interest rate risk and how it is related to the movements of a teeter-totter.

Accepted Answer

Interest rates sit on one end of the tee

Question 13

Given the opportunity to invest in one of the three bonds listed below,which would you purchase?
 Assume an interest rate of 7%.

Accepted Answer

PV of Bond A = $971.96 < Price Do not bu

Question 14

The MerryWeather Firm wants to raise $10 million to expand its business. To accomplish this,it plans to sell 30-year,$1,000 face value zero-coupon bonds. The bonds will be priced to yield 6%. What is the minimum number of bonds it must sell to raise the $10 million it needs?

Accepted Answer

A)  47,411 
B)  52,667 
C)  57,435 
D)  60,000 
E)  117,435 
A)  47,411 
B)  52,667 
C)  57,435 
D)  60,000 
E)  117,435

Question 15

A corporate bond with a face value of $1,000 matures in 4 years and has an 8% coupon paid at the end of each year. The current price of the bond is $932. What is the yield to maturity for this bond?

Accepted Answer

A)  5.05% 
B)  6.48% 
C)  8.58% 
D)  10.15% 
E)  11.92% 
A)  5.05% 
B)  6.48% 
C)  8.58% 
D)  10.15% 
E)  11.92%

Question 16

A bond with semi-annual interest payments,all else equal,would be priced _________ than one with annual interest payments.

Accepted Answer

A)  higher 
B)  lower 
C)  the same 
D)  it is impossible to tell 
E)  either higher or the same 
A)  higher 
B)  lower 
C)  the same 
D)  it is impossible to tell 
E)  either higher or the same

Question 17

A zero coupon bond with a face value of $1,000 is issued with an initial price of $463.34. The bond matures in 25 years. What is the implicit interest,in dollars,for the first year of the bond's life?

Accepted Answer

A)  $9.08 
B)  $12.56 
C)  $14.48 
D)  $21.47 
E)  $31.25 
A)  $9.08 
B)  $12.56 
C)  $14.48 
D)  $21.47 
E)  $31.25

Question 18

Ted's Co. offers a zero coupon bond with an 11.3% yield to maturity. The bond matures in 16 years. What is the current price of a $1,000 face value bond?

Accepted Answer

A)  $178.78 
B)  $180.33 
C)  $188.36 
D)  $190.09 
E)  $192.18 
A)  $178.78 
B)  $180.33 
C)  $188.36 
D)  $190.09 
E)  $192.18

Question 19

Your firm offers a 10-year,zero coupon bond. The yield to maturity is 8.2%. What is the current market price of a $1,000 face value bond?

Accepted Answer

A)  $454.70 
B)  $485.62 
C)  $856.18 
D)  $931.27 
E)  $2199.24 
A)  $454.70 
B)  $485.62 
C)  $856.18 
D)  $931.27 
E)  $2199.24

Question 20

The Fisher Effect primarily emphasizes the effects of _____ risk on an investor's rate of return.

Accepted Answer

A)  default 
B)  market 
C)  interest rate 
D)  inflation 
E)  maturity 
A)  default 
B)  market 
C)  interest rate 
D)  inflation 
E)  maturity

Exam 8: Interest Rates and Bond Valuation

Sometimes it is not clear if a particular security is debt or equity. Explain the basic difference between debt and equity.

The newly issued bonds of the Cain Corp. offer a 6% coupon with semiannual interest payments. The bonds are currently priced at par value. The effective annual rate provided by these bonds must be:

The relationship between nominal interest rates on default-free,pure discount securities and the time to maturity is called the:

The Lo Sun Corporation offers a 6% bond with a current market price of $875.05. The yield to maturity is 7.34%. The face value is $1,000. Interest is paid semiannually. How many years is it until this bond matures?

One basis point is equal to:

The stated interest payment,in dollars,made on a bond each period is called the bond's:

A bond with a face value of $1,000 that sells for $1,000 in the market is called a _____ bond.

The outstanding bonds of Boutelle,Inc. provide a real rate of return of 3.6%. The current rate of inflation is 2.5%. What is the nominal rate of return on these bonds?

The bonds issued by Manson & Son bear a 6% coupon,payable semiannually. The bond matures in 8 years and has a $1,000 face value. Currently,the bond sells at par. What is the yield to maturity?

The market price of a bond is equal to the present value of the:

A bond with a face value of $1,000 that sells for less than $1,000 in the market is called a _____ bond.

Interest rate risk is often explained by using the concept of a teeter-totter. Explain interest rate risk and how it is related to the movements of a teeter-totter.

Given the opportunity to invest in one of the three bonds listed below,which would you purchase? Assume an interest rate of 7%.

The MerryWeather Firm wants to raise $10 million to expand its business. To accomplish this,it plans to sell 30-year,$1,000 face value zero-coupon bonds. The bonds will be priced to yield 6%. What is the minimum number of bonds it must sell to raise the $10 million it needs?

A corporate bond with a face value of $1,000 matures in 4 years and has an 8% coupon paid at the end of each year. The current price of the bond is $932. What is the yield to maturity for this bond?

A bond with semi-annual interest payments,all else equal,would be priced _________ than one with annual interest payments.

A zero coupon bond with a face value of $1,000 is issued with an initial price of $463.34. The bond matures in 25 years. What is the implicit interest,in dollars,for the first year of the bond's life?

Ted's Co. offers a zero coupon bond with an 11.3% yield to maturity. The bond matures in 16 years. What is the current price of a $1,000 face value bond?

Your firm offers a 10-year,zero coupon bond. The yield to maturity is 8.2%. What is the current market price of a $1,000 face value bond?

The Fisher Effect primarily emphasizes the effects of _____ risk on an investor's rate of return.

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Stock Valuation

Risk and Return: Lessons From Market History

Return and Risk: the Capital Asset Pricing Model Capm

An Alternative View of Risk and Return: The Arbitrage Pricing Theory

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Raising Capital

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers, Acquisitions, and Divestitures

Financial Distress

International Corporate Finance

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