Question 1

Bonds with ratings lower than Standard & Poor's BBB or Moody's Baa are classified as

Accepted Answer

A)  in default. 
B)  investment grade. 
C)  not investment grade. 
D)  medium quality.

Question 2

As bond approaches maturity, discounts and premiums become less and less significant.

Accepted Answer

A) True 
 B)False

Question 3

Advantages to borrowing in the private market include

Accepted Answer

A)  less restrictive covenants. 
B)  reduced initial costs. 
C)  lower interest costs. 
D)  avoiding future SEC registration.

Question 4

A basis point is equal to one hundredth of a percentage point.

Accepted Answer

A) True 
 B)False

Question 5

A bond's value equals the present value of interest and principal the owner will receive.

Accepted Answer

A) True 
 B)False

Question 6

Maturity risk and liquidity risk are equivalent terms.

Accepted Answer

A) True 
 B)False

Question 7

What is the expected rate of return on a bond that matures in seven years, has a par value of $1,000, a coupon rate of 14%, and is currently selling for $911? Assume annual coupon payments.

Accepted Answer

A)  7.81% 
B)  15.36% 
C)  15.61% 
D)  16.22%

Question 8

Miller Motorworks has a $1,000 par value, 8% annual coupon bond with interest payable semiannually with a remaining term of 15 years. The annual market yield on similar bonds is 6%. This bond will at a discount from par.

Accepted Answer

A) True 
 B)False

Question 9

The longer the time to maturity, the more sensitive a bond's price to changes in market interest rates.

Accepted Answer

A) True 
 B)False

Question 10

The yield to maturity on a bond

Accepted Answer

A)  is fixed in the indenture. 
B)  is lower for higher-risk bonds. 
C)  is the required return on the bond. 
D)  is generally equal to the coupon interest rate.

Question 11

The higher the bond rating, the more default risk associated with the bond.

Accepted Answer

A) True 
 B)False

Question 12

The discount rate used to value a bond is

Accepted Answer

A)  the coupon interest rate. 
B)  determined by the issuing company. 
C)  fixed for the life of the bond. 
D)  the market rate of interest.

Question 13

If provided the nominal rate of interest (r) of 14.2% and the anticipated rate of inflation (i) of 5.5%, what is the real rate of interest (R)?

Accepted Answer

The answer of If provided the nominal rate of interest...

Question 14

An ideal time to buy bonds with distant maturities is when the investor expects future yield curves to be

Accepted Answer

A)  upward sloping. 
B)  downward sloping. 
C)  flat. 
D)  unstable.

Question 15

Which of the following statements about bonds is true?

Accepted Answer

A)  The market value of a bond moves in the opposite direction of market interest rates. 
B)  As the maturity date of a bond approaches, the market value of a bond will become more volatile. 
C)  Long-term bonds are less risky than short-term bonds. 
D)  If market interest rates are higher than a bond's coupon interest rate, then the bond will sell above its par value. 
E)  None of the above.

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

Lambda Co. has bonds outstanding that mature in 10 years. The bonds have $1,000 par value, pay interest annually at a rate of 9%, and have a current selling price of $1,125. The yield to maturity on the bonds is less than 9%.

Accepted Answer

A) True 
 B)False

Question 18

Long-term government bonds are not without maturity risk.

Accepted Answer

A) True 
 B)False

Question 19

What elements determine what the yield to maturity will be for a bond?

Accepted Answer

The answer of What elements determine what the yield to...

Question 20

Given the following information, determine the market value of EAO Company bonds.
Par 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...

Exam 9: Debt Valuation and Interest Rates

Bonds with ratings lower than Standard & Poor's BBB or Moody's Baa are classified as

As bond approaches maturity, discounts and premiums become less and less significant.

Advantages to borrowing in the private market include

A basis point is equal to one hundredth of a percentage point.

A bond's value equals the present value of interest and principal the owner will receive.

Maturity risk and liquidity risk are equivalent terms.

What is the expected rate of return on a bond that matures in seven years, has a par value of $1,000, a coupon rate of 14%, and is currently selling for $911? Assume annual coupon payments.

Miller Motorworks has a $1,000 par value, 8% annual coupon bond with interest payable semiannually with a remaining term of 15 years. The annual market yield on similar bonds is 6%. This bond will at a discount from par.

The longer the time to maturity, the more sensitive a bond's price to changes in market interest rates.

The yield to maturity on a bond

The higher the bond rating, the more default risk associated with the bond.

The discount rate used to value a bond is

If provided the nominal rate of interest (r) of 14.2% and the anticipated rate of inflation (i) of 5.5%, what is the real rate of interest (R)?

An ideal time to buy bonds with distant maturities is when the investor expects future yield curves to be

Which of the following statements about bonds is true?

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

Lambda Co. has bonds outstanding that mature in 10 years. The bonds have $1,000 par value, pay interest annually at a rate of 9%, and have a current selling price of $1,125. The yield to maturity on the bonds is less than 9%.

Long-term government bonds are not without maturity risk.

What elements determine what the yield to maturity will be for a bond?

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