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Financial Management: Principles and Applications, 11e (Titman)
Chapter 9 Debt Valuation and Interest Rates
1) The par value of a bond:
A) never equals its market value.
B) is determined by the investor.
C) generally is $1,000.
D) is never returned to the bondholder.
Topic: 9.1 Overview of Corporate Debt
Keywords: bonds
Principles: Principle 1: Money Has a Time Value
2) The interest on corporate bonds is typically paid:
A) semiannually.
B) annually.
C) quarterly.
D) monthly.
Topic: 9.1 Overview of Corporate Debt
Keywords: bonds
Principles: Principle 1: Money Has a Time Value
3) On any given day, a bond can be issued at:
A) a discount.
B) a premium.
C) par.
D) all of the above.
Topic: 9.1 Overview of Corporate Debt
Keywords: bonds
Principles: Principle 1: Money Has a Time Value
4) Mortgage bonds:
A) are a type of debenture.
B) are secured by a lien on real property.
C) usually pay little or no interest.
D) can only be issued by financial institutions.
Topic: 9.1 Overview of Corporate Debt
Keywords: bonds
1
Copyright © 2011 Pearson Education, Inc.
Principles: Principle 2: There Is a Risk-Return Tradeoff
5) Bondholders have a priority claim on assets ahead of:
A) common stockholders.
B) preferred stockholders.
C) both A and B.
D) none of the above.
Topic: 9.1 Overview of Corporate Debt
Keywords: bonds
Principles: Principle 2: There Is a Risk-Return Tradeoff
6) Which type of value is shown on the firm's balance sheet?
A) Book value
B) Liquidation value
C) Market value
D) Intrinsic value
Topic: 9.1 Overview of Corporate Debt
Keywords: balance sheet
Principles: Principle 3: Cash Flows Are the Source of Value
7) Which of the following is generally NOT a characteristic of a bond?
A) Voting rights
B) Par value
C) Claims on assets and income
D) Indenture
Topic: 9.1 Overview of Corporate Debt
Keywords: bonds
Principles: Principle 1: Money Has a Time Value
8) Common indenture provisions include:
A) restrictions on the issuance of common stock dividends.
B) restrictions on the sale or purchase of fixed assets.
C) constraints on additional borrowing.
D) all of the above.
Topic: 9.1 Overview of Corporate Debt
Keywords: bonds
Principles: Principle 2: There Is a Risk-Return Tradeoff
2
Copyright © 2011 Pearson Education, Inc.
9) The issuance of bonds to raise capital for a corporation:
A) magnifies the returns to the stockholders.
B) increases risk to the stockholders.
C) is a cheaper form of capital than the issuance of common stock.
D) all of the above.
E) none of the above.
Topic: 9.1 Overview of Corporate Debt
Keywords: bonds
Principles: Principle 2: There Is a Risk-Return Tradeoff
10) A(n)________ is used to outline the issuing company's contractual obligations to
bondholders.
A) mortgage
B) debenture
C) bond rating
D) indenture
Topic: 9.1 Overview of Corporate Debt
Keywords: bonds
Principles: Principle 2: There Is a Risk-Return Tradeoff
11) Junk bonds:
A) are high yield bonds.
B) have higher default risk.
C) were used to finance "fallen angels."
D) all of the above.
Topic: 9.1 Overview of Corporate Debt
Keywords: bonds
Principles: Principle 2: There Is a Risk-Return Tradeoff
12) Which of the following investors incurs the least risk?
A) Bondholders
B) Preferred stockholders
C) Common stockholders
D) All of the above bear equal risk
Topic: 9.1 Overview of Corporate Debt
Keywords: risk, return
Principles: Principle 2: There Is a Risk-Return Tradeoff
3
Copyright © 2011 Pearson Education, Inc.
13) The par value of a corporate bond indicates the level of interest payments that will be paid to
investors.
Topic: 9.1 Overview of Corporate Debt
Keywords: coupon rate
Principles: Principle 1: Money Has a Time Value
14) Any unsecured long-term debt instrument is a debenture.
Topic: 9.1 Overview of Corporate Debt
Keywords: bonds
Principles: Principle 2: There Is a Risk-Return Tradeoff
15) A mortgage bond is always secured by a lien on real property.
Topic: 9.1 Overview of Corporate Debt
Keywords: bonds
Principles: Principle 2: There Is a Risk-Return Tradeoff
16) The debenture is the legal agreement between the firm issuing a bond and the bond trustee
who represents the bondholders.
Topic: 9.1 Overview of Corporate Debt
Keywords: bonds
Principles: Principle 2: There Is a Risk-Return Tradeoff
1) The yield to maturity on a bond:
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.
Topic: 9.2 Valuing Corporate Debt
Keywords: yield to maturity
Principles: Principle 1: Money Has a Time Value
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Copyright © 2011 Pearson Education, Inc.
2) All of the following affect the value of a bond EXCEPT:
A) investors' required rate of return.
B) the recorded value of the firm's assets.
C) the coupon rate of interest.
D) the maturity date of the bond.
Topic: 9.2 Valuing Corporate Debt
Keywords: bond valuation
Principles: Principle 1: Money Has a Time Value
3) A $1,000 par value 10-year bond with a 10% coupon rate recently sold for $900. The yield to
maturity:
A) is 10%.
B) is greater than 10%.
C) is less than 10%.
D) cannot be determined.
Topic: 9.2 Valuing Corporate Debt
Keywords: yield to maturity
Principles: Principle 1: Money Has a Time Value
4) Sterling Corp. bonds pay 10% annual interest and are selling at 97. The market rate of interest:
A) is less than 10%.
B) is greater than 10%.
C) equals 10%.
D) cannot be determined.
Topic: 9.2 Valuing Corporate Debt
Keywords: market interest rate
Principles: Principle 1: Money Has a Time Value
5) The Blackburn Group has recently issued 20-year, unsecured bonds rated BB by Moody's.
These bonds are:
A) low-risk bonds.
B) debentures.
C) premium bonds.
D) mortgage bonds.
Topic: 9.2 Valuing Corporate Debt
Keywords: bonds
Principles: Principle 1: Money Has a Time Value
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Copyright © 2011 Pearson Education, Inc.
6) Colby & Company bonds pay semiannual interest of $50. They mature in 15 years and have a
par value of $1,000. The market rate of interest is 8%. The market value of Colby bonds is
(round to the nearest dollar):
A) $1,173.
B) $743.
C) $1,000.
D) $827.
Topic: 9.2 Valuing Corporate Debt
Keywords: bond valuation
Principles: Principle 1: Money Has a Time Value
7) Caldwell, Inc. sold an issue of 30-year, $1,000 par value bonds to the public. The bonds carry
a 10.85% coupon rate and pay interest semiannually. It is now 12 years later. The current market
rate of interest on the Caldwell bonds is 8.45%. What is the current market price (intrinsic value)
of the bonds? Round off to the nearest $1.
A) $751
B) $1,177
C) $1,220
D) $976
Topic: 9.2 Valuing Corporate Debt
Keywords: bond valuation
Principles: Principle 1: Money Has a Time Value
8) MI has a $1,000 par value, 30-year bond outstanding that was issued 20 years ago at an annual
coupon rate of 10%, paid semiannually. Market interest rates on similar bonds are 7%. Calculate
the bond's price.
A) $956.42
B) $1,000.00
C) $1,168.31
D) $1,213.19
Topic: 9.2 Valuing Corporate Debt
Keywords: bond valuation
Principles: Principle 1: Money Has a Time Value
6
Copyright © 2011 Pearson Education, Inc.
9) Davis & Davis issued $1,000 par value bonds at 102. The bonds pay 12% interest annually
and mature in 30 years. The market rate of interest is (round to the nearest hundredth of a
percent):
A) 12.00%.
B) 11.76%.
C) 10.12%.
D) 11.29%.
Topic: 9.2 Valuing Corporate Debt
Keywords: market interest rate
Principles: Principle 1: Money Has a Time Value
10) What is the yield to maturity of a nine-year bond that pays a coupon rate of 20% per year,
has a $1,000 par value, and is currently priced at $1,407? Round your answer to the nearest
whole percent and assume annual coupon payments.
A) 5%
B) 14%
C) 12%
D) 11%
Topic: 9.2 Valuing Corporate Debt
Keywords: yield to maturity
Principles: Principle 1: Money Has a Time Value
11) 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? Round your answer to the
nearest whole percent and assume annual coupon payments.
A) 13%
B) 14%
C) 15%
D) 16%
Topic: 9.2 Valuing Corporate Debt
Keywords: yield to maturity
Principles: Principle 1: Money Has a Time Value
7
Copyright © 2011 Pearson Education, Inc.
12) What is the expected rate of return on a bond that pays a coupon rate of 9%, has a par value
of $1,000, matures in five years, and is currently selling for $714? Round your answer to the
nearest whole percent and assume annual coupon payments.
A) 18%
B) 13%
C) 16%
D) 17%
Topic: 9.2 Valuing Corporate Debt
Keywords: yield to maturity
Principles: Principle 1: Money Has a Time Value
13) What is the value of a bond that has a par value of $1,000, a coupon rate of $80 (annually),
and matures in 11 years? Assume a required rate of return of 11%, and round your answer to the
nearest $10.
A) $320
B) $500
C) $810
D) $790
Topic: 9.2 Valuing Corporate Debt
Keywords: bond valuation
Principles: Principle 1: Money Has a Time Value
14) What is the value of a bond that matures in three years, has an annual coupon payment of
$110, and a par value of $1,000? Assume a required rate of return of 11%, and round your
answer to the nearest $10.
A) $970
B) $1,330
C) $330
D) $1,000
Topic: 9.2 Valuing Corporate Debt
Keywords: bond valuation
Principles: Principle 1: Money Has a Time Value
15) Bond ratings are usually not affected by:
A) the company's fiscal year end.
B) profitable operations.
C) variability in earnings.
D) firm size.
Topic: 9.2 Valuing Corporate Debt
Keywords: bond valuation
8
Copyright © 2011 Pearson Education, Inc.
Principles: Principle 2: There Is a Risk-Return Tradeoff
16) The discount rate used to value a bond is:
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.
Topic: 9.2 Valuing Corporate Debt
Keywords: bond valuation
Principles: Principle 1: Money Has a Time Value
17) As interest rates, and consequently investors' required rates of return, change over time, the
________ of outstanding bonds will also change.
A) maturity date
B) coupon interest payment
C) par value
D) price
Topic: 9.2 Valuing Corporate Debt
Keywords: bond valuation
Principles: Principle 1: Money Has a Time Value
18) Zoro Sword Company bonds pay an annual coupon rate of 9 1/2%. They have eight years to
maturity and face value, or par, of $1,000. Compute the value of Zoro bonds if investors'
required rate of return is 10%.
A) $1,516.18
B) $973.33
C) $1,027.17
D) $950.00
Topic: 9.2 Valuing Corporate Debt
Keywords: bond valuation
Principles: Principle 1: Money Has a Time Value
9
Copyright © 2011 Pearson Education, Inc.
19) Terminator Bug Company bonds have a 14% coupon rate. Interest is paid semiannually. The
bonds have a par value of $1,000 and will mature 10 years from now. Compute the value of
Terminator bonds if investors' required rate of return is 12%.
A) $1,114.70
B) $1,149.39
C) $894.06
D) $1,000.00
Topic: 9.2 Valuing Corporate Debt
Keywords: bond valuation
Principles: Principle 1: Money Has a Time Value
20) Brookline, Inc. just sold an issue of 30-year bonds for $1,107.20. Investors require a rate of
return on these bonds of 7.75%. The bonds pay interest semiannually. What is the coupon rate of
the bonds?
A) 7.750%
B) 11.072%
C) 9.375%
D) 8.675%
Topic: 9.2 Valuing Corporate Debt
Keywords: coupon rate
Principles: Principle 1: Money Has a Time Value
7.25%. What is the current market price (intrinsic value) of the bonds? Round off to the nearest
$1.
A) $715
B) $1,171
C) $1,225
D) $697
Topic: 9.2 Valuing Corporate Debt
Keywords: bond valuation
Principles: Principle 1: Money Has a Time Value
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