978-0133423822 chapter 9 Part 1

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Financial Management, 12e (Titman/Keown/Martin)

Chapter 9 Debt Valuation and Interest Rates

9.1 Overview of Corporate Debt

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.

Question Status: Previous edition

Objective: 9.1 Identify the key features of bonds and describe the diferences between private and

public debt markets.

Keywords: bond features

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.

Question Status: Previous edition

Objective: 9.1 Identify the key features of bonds and describe the diferences between private and

public debt markets.

Keywords: bond features

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.

Question Status: Previous edition

Objective: 9.1 Identify the key features of bonds and describe the diferences between private and

public debt markets.

Keywords: bond features

Principles: Principle 1: Money Has a Time Value

4) Advantages to borrowing in the private market include

A) less restrictive covenants.

B) reduced initial costs.

C) lower interest costs.

D) avoiding future SEC registration.

Question Status: New question

Objective: 9.1 Identify the key features of bonds and describe the diferences between private and

public debt markets.

Keywords: bond features

Principles: Principle 2: There Is a Risk–Return Tradeof

5) Advantages of privately placing debt include all of the following EXCEPT

A) speed.

B) reduced placement costs.

C) restrictive covenants.

D) lexibility.

Question Status: New question

Objective: 9.1 Identify the key features of bonds and describe the diferences between private and

public debt markets.

Keywords: bond features

Principles: Principle 2: There Is a Risk–Return Tradeof

6) Corporate debt can be privately placed with

A) union pension funds.

B) life insurance companies.

C) state pension funds.

D) all of the above

Question Status: New question

Objective: 9.1 Identify the key features of bonds and describe the diferences between private and

public debt markets.

Keywords: bond features

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

Question Status: Previous edition

Objective: 9.1 Identify the key features of bonds and describe the diferences between private and

public debt markets.

Keywords: bond features

Principles: Principle 1: Money Has a Time Value

8) The detailed legal agreement between a bond’s issuer and its trustees is known as the

A) collateral agreement.

B) call provision.

C) indenture.

D) covenant.

Question Status: New question

Objective: 9.1 Identify the key features of bonds and describe the diferences between private and

public debt markets.

Keywords: bond features

Principles: Principle 2: There Is a Risk–Return Tradeof

9) The issuance of bonds to raise capital for a corporation

A) magniies 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.

Question Status: Previous edition

Objective: 9.1 Identify the key features of bonds and describe the diferences between private and

public debt markets.

Keywords: bond features

Principles: Principle 2: There Is a Risk–Return Tradeof

10) A(n)________ is used to outline the issuing company’s contractual obligations to

bondholders.

A) mortgage

B) debenture

C) bond rating

D) indenture

Question Status: Previous edition

Objective: 9.1 Identify the key features of bonds and describe the diferences between private and

public debt markets.

Keywords: bond features

Principles: Principle 2: There Is a Risk–Return Tradeof

11) Bonds with ratings lower than Standard & Poor’s BBB or Moody’s Baa are classiied as

A) in default.

B) investment grade.

C) not investment grade.

D) medium quality.

Question Status: New question

Objective: 9.1 Identify the key features of bonds and describe the diferences between private and

public debt markets.

Keywords: bond features

Principles: Principle 2: There Is a Risk–Return Tradeof

12) Which of the following features allows a borrower to redeem or repurchase a bond

issue before its maturity date?

A) The call provision

B) Convertibility

C) Floating rate

D) The priority of claims

Question Status: Previous edition

Objective: 9.1 Identify the key features of bonds and describe the diferences between private and

public debt markets.

Keywords: bond features

Principles: Principle 2: There Is a Risk–Return Tradeof

13) The par value of a corporate bond indicates the level of interest payments that will be

paid to investors.

Question Status: Previous edition

Objective: 9.1 Identify the key features of bonds and describe the diferences between private and

public debt markets.

Keywords: bond features

Principles: Principle 1: Money Has a Time Value

14) Any unsecured long-term debt instrument is a debenture.

Question Status: Previous edition

Objective: 9.1 Identify the key features of bonds and describe the diferences between private and

public debt markets.

Keywords: bond features

Principles: Principle 2: There Is a Risk–Return Tradeof

15) A conversion feature confers the option of redeeming a bond for the company’s stock

rather than cash.

Question Status: New question

Objective: 9.1 Identify the key features of bonds and describe the diferences between private and

public debt markets.

Keywords: bond features

Principles: Principle 2: There Is a Risk–Return Tradeof

16) The debenture is the legal agreement between the irm issuing a bond and the bond

trustee who represents the bondholders.

Question Status: Previous edition

Objective: 9.1 Identify the key features of bonds and describe the diferences between private and

public debt markets.

Keywords: bond features

Principles: Principle 2: There Is a Risk–Return Tradeof

17) The current yield is the average rate of interest a bond will from the time of purchase

until it matures.

Question Status: New question

Objective: 9.1 Identify the key features of bonds and describe the diferences between private and

public debt markets.

Keywords: bond features

Principles: Principle 2: There Is a Risk–Return Tradeof

18) If the issuing company becomes insolvent, the claims of the bondholders are honored

before those of preferred stockholders.

Question Status: New question

Objective: 9.1 Identify the key features of bonds and describe the diferences between private and

public debt markets.

Keywords: bond features

Principles: Principle 2: There Is a Risk–Return Tradeof

9.2 Valuing Corporate Debt

1) The yield to maturity on a bond

A) is ixed 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 Status: Previous edition

Objective: 9.2 Calculate the value of a bond and relate it to the yield to maturity on the bond.

Keywords: bond pricing

Principles: Principle 1: Money Has a Time Value

2) All of the following afect the value of a bond EXCEPT

A) investors’ required rate of return.

B) the recorded value of the irm’s assets.

C) the coupon rate of interest.

D) the maturity date of the bond.

Question Status: Previous edition

Objective: 9.2 Calculate the value of a bond and relate it to the yield to maturity on the bond.

Keywords: bond pricing

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.

Question Status: Previous edition

Objective: 9.2 Calculate the value of a bond and relate it to the yield to maturity on the bond.

Keywords: bond pricing

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.

Question Status: Previous edition

Objective: 9.2 Calculate the value of a bond and relate it to the yield to maturity on the bond.

Keywords: bond pricing

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 yield 443 basis points above the U.S. Treasury yield of 2.76%. The

yield to maturity on these bonds is

A) 4.43%.

B) 7.19%.

C) 12.23%.

D) mortgage bonds.

Question Status: New question

Objective: 9.2 Calculate the value of a bond and relate it to the yield to maturity on the bond.

Keywords: bond pricing

Principles: Principle 1: Money Has a Time Value

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.

Question Status: Previous edition

Objective: 9.2 Calculate the value of a bond and relate it to the yield to maturity on the bond.

Keywords: bond pricing

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 of to the nearest $1.

A) $751

B) $1,177

C) $1,220

D) $976

Question Status: Previous edition

Objective: 9.2 Calculate the value of a bond and relate it to the yield to maturity on the bond.

Keywords: bond pricing

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

Question Status: Previous edition

Objective: 9.2 Calculate the value of a bond and relate it to the yield to maturity on the bond.

Keywords: bond pricing

Principles: Principle 1: Money Has a Time Value

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) 11.71%.

C) 10.12%.

D) 11.29%.

Question Status: Revised

Objective: 9.2 Calculate the value of a bond and relate it to the yield to maturity on the bond.

Keywords: bond pricing

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? Assume annual coupon

payments.

A) 21.81%

B) 6.14%

C) 12.28%

D) 11.43%

Question Status: Revised

Objective: 9.2 Calculate the value of a bond and relate it to the yield to maturity on the bond.

Keywords: bond pricing

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? Assume annual

coupon payments.

A) 7.81%

B) 15.36%

C) 15.61%

D) 16.22%

Question Status: Previous edition

Objective: 9.2 Calculate the value of a bond and relate it to the yield to maturity on the bond.

Keywords: bond pricing

Principles: Principle 1: Money Has a Time Value

12) What is the expected rate of return on a bond that pays a coupon rate of 9% paid semi-

annually, has a par value of $1,000, matures in ive years, and is currently selling for

$1071?

A) 7.28%

B) 8.40%

C) 3.64%

D) 4.21%

Question Status: New question

Objective: 9.2 Calculate the value of a bond and relate it to the yield to maturity on the bond.

Keywords: bond pricing

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) $320.66

B) $1,011.00

C) $813.80

D) $790.79

Question Status: New question

Objective: 9.2 Calculate the value of a bond and relate it to the yield to maturity on the bond.

Keywords: bond pricing

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

Question Status: Previous edition

Objective: 9.2 Calculate the value of a bond and relate it to the yield to maturity on the bond.

Keywords: bond pricing

Principles: Principle 1: Money Has a Time Value