5.25% is payable annually. Investors presently require a rate of return of 8.375%. What is the
current market price (intrinsic value) of the bonds? Round off to the nearest $1.
A) $1,050
B) $932
C) $681
D) $1,111
Topic: 9.2 Valuing Corporate Debt
Keywords: bond valuation
Principles: Principle 1: Money Has a Time Value
23) Frazier Fudge has a $1,000 par value bond that is currently selling for $1,300. It has an
annual coupon rate of 7%, paid semiannually, and has nine years remaining until maturity. What
is the annual yield to maturity on the bond? (Round to the nearest whole percentage.)
A) 3%
B) 5%
C) 7%
D) 9%
Topic: 9.2 Valuing Corporate Debt
Keywords: yield to maturity
Principles: Principle 1: Money Has a Time Value
24) You are considering the purchase of Hytec bonds that were issued 14 years ago. When the
bonds were originally sold, they had a 30-year maturity and a 14.375% coupon interest rate that
is payable semiannually. The bond is currently selling for $1,508.72. What is the yield to
maturity on the bonds?
A) 8.50%
B) 14.38%
C) 11.11%
D) 7.67%
Topic: 9.2 Valuing Corporate Debt
Keywords: yield to maturity
Principles: Principle 1: Money Has a Time Value
11
25) Aurand, Inc. has outstanding bonds with an 8% annual coupon rate paid semiannually. The
bonds have a par value of $1,000, a current price of $904, and will mature in 14 years. What is
the annual yield to maturity on the bond?
A) 15.80%
B) 10.47%
C) 9.24%
D) 7.90%
E) 4.62%
Topic: 9.2 Valuing Corporate Debt
Keywords: yield to maturity
Principles: Principle 1: Money Has a Time Value
26) Marshall Manufacturing has a bond outstanding that was issued 20 years ago at a coupon rate
of 9%. The $1,000 par value bond pays interest semiannually and was originally issued with a
term of 30 years. If today’s interest rate is 14%, what is the value of the bond today?
A) $654.98
B) $735.15
C) $814.42
D) $941.87
Topic: 9.2 Valuing Corporate Debt
Keywords: bond valuation
Principles: Principle 1: Money Has a Time Value
27) A $1,000 par value bond is currently listed as selling at 92 1/8. This means:
A) that you can buy the bond for $92.125.
B) that you can buy the bond for $921.25.
C) that if you purchase the bond today, you will receive $921.25 when the bond matures.
D) none of the above.
Topic: 9.2 Valuing Corporate Debt
Keywords: bond pricing
Principles: Principle 4: Market Prices Reflect Information
28) You paid $865.50 for a corporate bond that has a 6.75% coupon rate. What is the bond’s
current yield?
A) 8.375%
B) 7.800%
C) 15.001%
D) 6.667%
Topic: 9.2 Valuing Corporate Debt
Keywords: current yield
12
Topic: 9.2 Valuing Corporate Debt
Keywords: current yield
Principles: Principle 1: Money Has a Time Value
30) Bond ratings are favorably affected by:
A) a greater reliance on equity in financing the firm.
B) high variability in past earnings.
C) large firm size.
D) both A and C.
Topic: 9.2 Valuing Corporate Debt
Keywords: bond rating
Principles: Principle 2: There Is a Risk-Return Tradeoff
31) Miller Motorworks has a $1,000 par value, 8% annual coupon bond with interest payable
6%. What is the bond selling for today? (Round to the nearest whole dollar.)
A) $1,196
B) $1,042
C) $1,000
D) $946
Topic: 9.2 Valuing Corporate Debt
Keywords: bond valuation
Principles: Principle 1: Money Has a Time Value
13
32) 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:
A) 7.20%.
B) 9%.
C) 10.12%.
D) 14.40%.
Topic: 9.2 Valuing Corporate Debt
Keywords: yield to maturity
Principles: Principle 1: Money Has a Time Value
33) Generic, Inc. has bonds outstanding that mature in 20 years. The bonds have $1,000 par
value, pay interest annually at a rate of 10%, and have a current selling price of $875.25. The
yield to maturity on the bonds is:
A) 10%.
B) 8.75%.
C) 11.63%.
D) 7.24%.
Topic: 9.2 Valuing Corporate Debt
Keywords: yield to maturity
Principles: Principle 1: Money Has a Time Value
34) Beta, Inc. has bonds outstanding that mature in 10 years. The bonds have $1,000 par value
and pay interest annually at a rate of 10%, which is also the current required rate of return on the
bonds. The bonds’ duration is:
A) 10.00.
B) 6.76.
C) 5.
D) unable to be determined based on the information given.
Topic: 9.2 Valuing Corporate Debt
Keywords: bond valuation
Principles: Principle 1: Money Has a Time Value
14
35) Assume that you wish to purchase a 20-year bond that has a maturity value of $1,000 and a
coupon interest rate of 8%, paid semiannually. If you require a 10% rate of return on this
investment, what is the maximum price that you would be willing to pay for this bond?
A) $619
B) $674
C) $761
D) $828
E) $902
Topic: 9.2 Valuing Corporate Debt
Keywords: bond valuation
Principles: Principle 1: Money Has a Time Value
36) Assume that you wish to purchase a 30-year bond that has a maturity value of $1,000 and a
coupon interest rate of 9.5%, paid semiannually. If you require a 6.75% rate of return on this
investment, what is the maximum price that you should be willing to pay for this bond?
A) $1,111
B) $1,450
C) $1,352
D) $675
E) $1,000
Topic: 9.2 Valuing Corporate Debt
Keywords: bond valuation
Principles: Principle 1: Money Has a Time Value
37) Dry Seal plans to issue bonds to expand operations. The bonds will have a par value of
$1,000, a 10-year maturity, and a coupon interest rate of 9%, paid semiannually. Current market
conditions are such that the bonds will be sold to net $937.79. What is the yield-to-maturity of
these bonds?
A) 11%
B) 10%
C) 9%
D) 8%
E) 7%
Topic: 9.2 Valuing Corporate Debt
Keywords: yield to maturity
Principles: Principle 1: Money Has a Time Value
15
38) You purchased Photon, Inc. bonds exactly one year ago today for $875. During the latest
year, you received $65 in interest on the bonds. What is your current yield on these bonds?
A) 11.3%
B) 7.4%
C) 6.5%
D) 10.5%
E) 9.1%
Topic: 9.2 Valuing Corporate Debt
Keywords: current yield
Principles: Principle 1: Money Has a Time Value
39) You purchased Gibraltar Corp. bonds exactly one year ago today for $1,075. During the
latest year, you received $85 in interest on the bonds. What is your current yield on these bonds?
A) 11.3%
B) 8.5%
C) 6.5%
D) 7.9%
E) 9.1%
Topic: 9.2 Valuing Corporate Debt
Keywords: current yield
Principles: Principle 3: Cash Flows Are the Source of Value
40) The longer the time to maturity, the more sensitive a bond’s price to changes in market
interest rates.
Topic: 9.2 Valuing Corporate Debt
Keywords: bond valuation
Principles: Principle 1: Money Has a Time Value
41) A bond’s value equals the present value of interest and principal the owner will receive.
Topic: 9.2 Valuing Corporate Debt
Keywords: bond valuation
Principles: Principle 1: Money Has a Time Value
42) The higher the bond rating, the more default risk associated with the bond.
Topic: 9.2 Valuing Corporate Debt
Keywords: risk, return
Principles: Principle 2: There Is a Risk-Return Tradeoff
16
43) Bond ratings measure the interest rate risk of a given bond issue.
Topic: 9.2 Valuing Corporate Debt
Keywords: risk, return
Principles: Principle 2: There Is a Risk-Return Tradeoff
44) When referring to bonds, expected rate of return and yield to maturity are often used
interchangeably.
Topic: 9.2 Valuing Corporate Debt
Keywords: bonds
Principles: Principle 1: Money Has a Time Value
45) Junk bonds are rated BB or higher.
Topic: 9.2 Valuing Corporate Debt
Keywords: bonds
Principles: Principle 2: There Is a Risk-Return Tradeoff
46) The current yield of a bond will equal its coupon rate when the bond is selling at par value.
Topic: 9.2 Valuing Corporate Debt
Keywords: current yield
Principles: Principle 1: Money Has a Time Value
47) The better the bond rating, the lower the rate of return demanded in the capital markets.
Topic: 9.2 Valuing Corporate Debt
Keywords: risk, return
Principles: Principle 2: There Is a Risk-Return Tradeoff
48) The sensitivity of a bond’s value to changing interest rates depends on both the bond’s time to
maturity and its pattern of cash flows.
Topic: 9.2 Valuing Corporate Debt
Keywords: bond valuation
Principles: Principle 1: Money Has a Time Value
17
49) Compare and contrast current yield and yield to maturity.
Topic: 9.2 Valuing Corporate Debt
Keywords: yield to maturity
Principles: Principle 1: Money Has a Time Value
50) BCD’s $1,000 par value bonds currently sell for $798.50. The coupon rate is 10%, paid
semiannually. If the bonds have five years before maturity, what is the yield to maturity or
expected rate of return?
Topic: 9.2 Valuing Corporate Debt
Keywords: yield to maturity
Principles: Principle 1: Money Has a Time Value
51) If you are willing to pay $1,392.05 for a 15-year, $1,000 par value bond that pays 10%
interest semiannually, what is your expected rate of return?
Topic: 9.2 Valuing Corporate Debt
Keywords: yield to maturity
Principles: Principle 1: Money Has a Time Value
52) DAH, Inc. has issued a 12% bond that is to mature in nine years. The bond had a $1,000 par
value, and interest is due to be paid semiannually. If your required rate of return is 10%, what
price would you be willing to pay for the bond?
Topic: 9.2 Valuing Corporate Debt
Keywords: bond valuation
Principles: Principle 1: Money Has a Time Value
18
53) Calculate the value of a bond that is expected to mature in 13 years with a $1,000 face value.
The interest coupon rate is 8%, and the required rate of return is 10%. Interest is paid annually.
Topic: 9.2 Valuing Corporate Debt
Keywords: bond valuation
Principles: Principle 1: Money Has a Time Value
54) The market price of a 20-year, $1,000 bond that pays 9% interest semiannually is $774.31.
What is the bond’s yield to maturity?
Topic: 9.2 Valuing Corporate Debt
Keywords: yield to maturity
Principles: Principle 1: Money Has a Time Value
55) Garvin, Inc.’s bonds have a par value of $1,000. The bonds pay semiannual interest of $40
and mature in five years.
a. How much would you pay for Garvin bonds if your required rate of return is 10%?
b. How much would you pay if your required rate of return is 8%?
Topic: 9.2 Valuing Corporate Debt
Keywords: bond valuation
Principles: Principle 1: Money Has a Time Value
19
56) 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
Topic: 9.2 Valuing Corporate Debt
Keywords: bond valuation
Principles: Principle 1: Money Has a Time Value
1) If the market price of a bond increases, then:
A) the yield to maturity decreases.
B) the coupon rate increases.
C) the yield to maturity increases.
D) none of the above.
Topic: 9.3 Bond Valuation: Four Key Relationships
Keywords: yield to maturity
Principles: Principle 1: Money Has a Time Value
2) If current market interest rates rise, what will happen to the value of outstanding bonds?
A) It will rise.
B) It will fall.
C) It will remain unchanged.
D) There is no connection between current market interest rates and the value of outstanding
bonds.
Topic: 9.3 Bond Valuation: Four Key Relationships
Keywords: interest rate risk
Principles: Principle 1: Money Has a Time Value
20