978-0132757089 Chapter 09 Part 3

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3) If current market interest rates fall, 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

4) Cassel Corp. bonds pay an annual coupon rate of 10%. If investors’ required rate of return is

now 8% on these bonds, they will be priced at:

A) par value.

B) a premium to par value.

C) a discount to par value.

D) cannot be determined from information given.

Topic: 9.3 Bond Valuation: Four Key Relationships

Keywords: bond valuation

Principles: Principle 1: Money Has a Time Value

5) Which of the following statements is true?

A) A bond that has a rating of AA is considered to be a junk bond.

B) A bond will sell at a premium if the prevailing required rate of return is less than the bond’s

coupon rate.

C) A zero coupon is a bond that is secured by a lien on real property.

D) The legal document that describes all of the terms and conditions of a bond issue is called a

debenture agreement.

Topic: 9.3 Bond Valuation: Four Key Relationships

Keywords: bond valuation

Principles: Principle 1: Money Has a Time Value

6) Quirk Drugs sold an issue of 30-year, $1,000 par value bonds to the public that carry a 10.85%

coupon rate, payable semiannually. It is now 10 years later, and the current market rate of interest

is 9.00%. If interest rates remain at 9.00% until Quirk’s bonds mature, what will happen to the

value of the bonds over time?

A) The bonds will sell at a premium and decline in value until maturity.

B) The bonds will sell at a discount and rise in value until maturity.

C) The bonds will sell at a premium and rise in value until maturity.

D) The bonds will sell at a discount and fall in value until maturity.

Topic: 9.3 Bond Valuation: Four Key Relationships

Keywords: bond valuation

Principles: Principle 1: Money Has a Time Value

7) Which of the following statements is true?

A) When investors’ required rate of return equals the bond’s coupon rate, then the market value

of the bond may be selling at par value.

B) When investors’ required rate of return exceeds the bond’s coupon rate, then the market value

of the bond will be greater than par value.

C) When investors’ required rate of return is less than the bond’s coupon rate, then market value

of the bond will be greater than par value.

D) When investors’ required rate of return is less than the bond’s coupon rate, then the market

value of the bond will be less than par value.

Topic: 9.3 Bond Valuation: Four Key Relationships

Keywords: bond valuation

Principles: Principle 1: Money Has a Time Value

8) A bond with a face value of $1,000 has annual coupon payments of $100 and was issued seven

years ago. The bond currently sells for a premium and has eight years left to maturity. This

bond’s ________ must be less than 10%.

A) yield to maturity

B) current yield

C) coupon rate

D) current yield and coupon rate

E) yield to maturity and current yield

Topic: 9.3 Bond Valuation: Four Key Relationships

Keywords: yield to maturity

Principles: Principle 1: Money Has a Time Value

9) A bond has a coupon rate of 10% and yield to maturity of 12%. Which of the following must

be true?

A) The bond is selling at a discount.

B) The bond is selling at a premium.

C) The bond‘s current yield is less than the coupon rate.

D) Both A and C.

E) Both B and C.

Topic: 9.3 Bond Valuation: Four Key Relationships

Keywords: bond valuation

Principles: Principle 1: Money Has a Time Value

10) Which of the following statements about bonds is true?

A) Bond prices move in the same direction as market interest rates.

B) If market interest rates change, long-term bonds will fluctuate more in value than short-term

bonds.

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.

Topic: 9.3 Bond Valuation: Four Key Relationships

Keywords: interest rate risk

Principles: Principle 1: Money Has a Time Value

11) Which of the following statements about bonds is true?

A) As the maturity date of a bond approaches, the market value of a bond will become more

volatile.

B) Long-term bonds have less interest rate risk than do short-term bonds.

C) Bond prices move in the same direction as market interest rates.

D) If market interest rates are above a bond’s coupon interest rate, then the bond will sell below

its par value.

E) None of the above.

Topic: 9.3 Bond Valuation: Four Key Relationships

Keywords: bond valuation

Principles: Principle 1: Money Has a Time Value

12) Which of the following statements about bonds is true?

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.

Topic: 9.3 Bond Valuation: Four Key Relationships

Keywords: bond valuation

Principles: Principle 1: Money Has a Time Value

13) Which of the following statements is FALSE?

A) A debenture would usually be more risky than a mortgage bond that is issued by the same

firm.

B) A bond will sell at a discount if the prevailing required rate of return is more than the bond’s

coupon rate.

C) A short-term bond will fluctuate less in value than a long-term bond if interest rates fluctuate.

D) Interest rates and bond prices usually move in the same direction.

Topic: 9.3 Bond Valuation: Four Key Relationships

Keywords: bond valuation

Principles: Principle 1: Money Has a Time Value

14) Which of the following statements about bonds is true?

A) If market interest rates are below a bond’s coupon interest rate, then the bond will sell above

its par value.

B) Long-term bonds have less interest rate risk than do short-term bonds.

C) Bond prices move in the same direction as market interest rates.

D) As the maturity date of a bond approaches, the market value of a bond will become more

volatile.

E) None of the above.

Topic: 9.3 Bond Valuation: Four Key Relationships

Keywords: bond valuation

Principles: Principle 1: Money Has a Time Value

15) Bonds cannot be worth less than their book value.

Topic: 9.3 Bond Valuation: Four Key Relationships

Keywords: bond valuation

Principles: Principle 2: There Is a Risk-Return Tradeoff

16) So long as a bond sells for an amount above its par value, the coupon interest rate and yield

to maturity remain equal.

Topic: 9.3 Bond Valuation: Four Key Relationships

Keywords: bond valuation

Principles: Principle 1: Money Has a Time Value

17) As market interest rates increase, bond prices decrease.

Topic: 9.3 Bond Valuation: Four Key Relationships

Keywords: bond valuation

Principles: Principle 2: There Is a Risk-Return Tradeoff

18) Bonds that sell at a discount have a coupon rate lower than the market interest rate.

Topic: 9.3 Bond Valuation: Four Key Relationships

Keywords: market interest rate

Principles: Principle 1: Money Has a Time Value

19) Bonds with a longer time to maturity have less interest rate risk.

Topic: 9.3 Bond Valuation: Four Key Relationships

Keywords: interest rate risk

Principles: Principle 1: Money Has a Time Value

20) As investors’ required rate of return on a bond increases, the value of the bond increases also.

Topic: 9.3 Bond Valuation: Four Key Relationships

Keywords: bond valuation

Principles: Principle 1: Money Has a Time Value

21) As the maturity date of a bond approaches, the bond’s market value approaches its par value.

Topic: 9.3 Bond Valuation: Four Key Relationships

Keywords: time to maturity

Principles: Principle 1: Money Has a Time Value

22) Shorter-term bonds have greater interest rate risk than do longer-term bonds.

Topic: 9.3 Bond Valuation: Four Key Relationships

Keywords: interest rate risk

Topic: 9.3 Bond Valuation: Four Key Relationships

Keywords: bond pricing relationships

Principles: Principle 1: Money Has a Time Value

1) Eurobonds are:

A) issued in a country different from the one in whose currency the bond is denominated.

B) issued only in Europe.

C) the European equivalent of a junk bond.

D) none of the above.

Topic: 9.4 Types of Bonds

Keywords: bonds

Principles: Principle 1: Money Has a Time Value

2) Which of the following statements about zero coupon bonds is FALSE?

A) When the bonds mature, the issuing firm is faced with a small cash outflow relative to the

cash inflow the firm receives when the bonds are initially issued.

B) Zero coupon bonds are disadvantageous to the issuing firm if interest rates fall.

C) Yields tend to be bid down on zero coupon bonds due to investor demand for the bonds.

D) Zero coupon bonds provide a positive annual cash flow to the issuing firm over the life of the

bonds.

Topic: 9.4 Types of Bonds

Keywords: zero coupon bond

Principles: Principle 1: Money Has a Time Value

3) Eurobonds:

A) are registered with the SEC.

B) are frequently offered to U.S. citizens and residents during their initial distribution.

C) take relatively longer periods of time to issue.

D) have none of the above characteristics.

Topic: 9.4 Types of Bonds

Keywords: bonds

Principles: Principle 1: Money Has a Time Value

4) Which of the following bonds is sold by a corporation at a discount and pays no interest?

A) An indenture bond

B) A zero coupon bond

C) A junk bond

D) A eurobond

Topic: 9.4 Types of Bonds

Keywords: zero coupon bond

Principles: Principle 1: Money Has a Time Value

5) Which of the following is an advantage of zero coupon bonds?

A) Small cash outflow at maturity

B) Lower yield due to low demand

C) Ability to deduct annual amortization of discount

D) Both A and C

E) All of the above

Topic: 9.4 Types of Bonds

Keywords: zero coupon bond

Principles: Principle 1: Money Has a Time Value

6) Debentures are unsecured long-term debt.

Topic: 9.4 Types of Bonds

Keywords: debenture

Principles: Principle 1: Money Has a Time Value

7) Zero coupon bonds are disadvantageous to the issuing firm if interest rates fall.

Topic: 9.4 Types of Bonds

Keywords: bond valuation

Principles: Principle 1: Money Has a Time Value

8) Eurobonds are bonds issued in a country different from the one in whose currency the bond is

denominated.

Topic: 9.4 Types of Bonds

Keywords: bonds

Principles: Principle 1: Money Has a Time Value

9) The duration of a zero coupon bond is the same as the bond’s maturity.

Topic: 9.4 Types of Bonds

Keywords: zero coupon bond

Principles: Principle 1: Money Has a Time Value

1) Which of the following statements about debentures is FALSE?

A) The earning ability of the issuing corporation is of great concern to the bondholder.

B) Debentures are viewed as less risky than secured bonds.

C) Debentures must provide investors with a higher yield than secured bonds.

D) Debentures allow the firm to issue debt and still preserve some future borrowing power.

Topic: 9.5 Determinants of Interest Rates

Keywords: debenture

Principles: Principle 2: There Is a Risk-Return Tradeoff

2) Government bonds have lower yield to maturity than do corporate bonds of the same maturity

because the ________ premium is lower for government bonds.

A) interest rate risk

B) inflation

C) default

D) maturity

Topic: 9.5 Determinants of Interest Rates

Keywords: risk

Principles: Principle 2: There Is a Risk-Return Tradeoff

3) Pursuant to the Fisher Effect, the real interest rate is exactly equal to the nominal interest rate

less the rate of inflation

Topic: 9.5 Determinants of Interest Rates

Keywords: inflation

Principles: Principle 2: There Is a Risk-Return Tradeoff

4) When inflation rates go up, bond prices go up as well.

Topic: 9.5 Determinants of Interest Rates

Keywords: bond valuation

Principles: Principle 2: There Is a Risk-Return Tradeoff

5) As the time to maturity increases, the maturity premium increases.

Topic: 9.5 Determinants of Interest Rates

Keywords: interest rate risk

Principles: Principle 2: There Is a Risk-Return Tradeoff

6) Explain why an increase in the inflation rate will cause the yield to maturity on a bond to

increase.

Topic: 9.5 Determinants of Interest Rates

Keywords: bond valuation

Principles: Principle 2: There Is a Risk-Return Tradeoff

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

Topic: 9.5 Determinants of Interest Rates

Keywords: yield to maturity

Principles: Principle 2: There Is a Risk-Return Tradeoff

8) Given the anticipated rate of inflation (i) of 6.3% and the real rate of interest (R) of 4.7%, find

the nominal rate of interest (r).

Topic: 9.5 Determinants of Interest Rates

Keywords: inflation

Principles: Principle 2: There Is a Risk-Return Tradeoff

5.5%, what is the real rate of interest (R)?

Topic: 9.5 Determinants of Interest Rates

Keywords: inflation

Principles: Principle 2: There Is a Risk-Return Tradeoff

10) Given the anticipated rate of inflation (i) of 6.13% and the real rate of interest (R) of 7.56%,

what is the true inflation premium?

Topic: 9.5 Determinants of Interest Rates

Keywords: fisher effect

Principles: Principle 2: There Is a Risk-Return Tradeoff