978-0133423822 chapter 9 Part 3

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55) Garvin, Inc.’s bonds have a par value of $1,000. The bonds pay semiannual interest of

$40 and mature in ive 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%?

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

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

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

9.3 Bond Valuation: Four Key Relationships

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.

Question Status: Previous edition

Objective: 9.3 Describe the four key bond valuation relationships.

Keywords: bond pricing

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.

Question Status: Previous edition

Objective: 9.3 Describe the four key bond valuation relationships.

Keywords: bond pricing

Principles: Principle 1: Money Has a Time Value

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.

Question Status: Previous edition

Objective: 9.3 Describe the four key bond valuation relationships.

Keywords: bond pricing

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.

Question Status: Previous edition

Objective: 9.3 Describe the four key bond valuation relationships.

Keywords: bond pricing

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.

Question Status: Previous edition

Objective: 9.3 Describe the four key bond valuation relationships.

Keywords: bond pricing

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.

Question Status: Previous edition

Objective: 9.3 Describe the four key bond valuation relationships.

Keywords: bond pricing

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.

Question Status: Previous edition

Objective: 9.3 Describe the four key bond valuation relationships.

Keywords: bond pricing

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 $1,085, has eight years left to maturity. This

bond’s ________ must be less than 10%.

A) current yield

B) coupon rate

C) current yield and coupon rate

D) yield to maturity and current yield

Question Status: Revised

Objective: 9.3 Describe the four key bond valuation relationships.

Keywords: bond pricing

Principles: Principle 1: Money Has a Time Value

9) A bond has a coupon rate of 6% paid semi-annually, a par value of $1,000, and matures

tomorrow. The bond will sell for

A) approximately $1,030 .

B) approximately $1,000.

C) approximately $1,060.

D) The price cannot be estimated without knowing the market rate of interest.

Question Status: New question

Objective: 9.3 Describe the four key bond valuation relationships.

Keywords: bond pricing

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 luctuate 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.

Question Status: Previous edition

Objective: 9.3 Describe the four key bond valuation relationships.

Keywords: bond pricing

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.

Question Status: Revised

Objective: 9.3 Describe the four key bond valuation relationships.

Keywords: bond pricing

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.

Question Status: Previous edition

Objective: 9.3 Describe the four key bond valuation relationships.

Keywords: bond pricing

Principles: Principle 1: Money Has a Time Value

13) A bond investor seeking capital gains should purchase

A) bonds with short maturity dates when interest rates are expected to rise.

B) bonds with distant maturity dates when interest rates are expected to rise.

C) bonds with short maturity dates when interest rates are expected to decline.

D) bonds with distant maturity dates when interest rates are expected to decline.

Question Status: New question

Objective: 9.3 Describe the four key bond valuation relationships.

Keywords: bond pricing

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.

Question Status: Revised

Objective: 9.3 Describe the four key bond valuation relationships.

Keywords: bond pricing

Principles: Principle 1: Money Has a Time Value

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

Question Status: Previous edition

Objective: 9.3 Describe the four key bond valuation relationships.

Keywords: bond pricing

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

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

yield to maturity remain equal.

Question Status: Previous edition

Objective: 9.3 Describe the four key bond valuation relationships.

Keywords: bond pricing

Principles: Principle 1: Money Has a Time Value

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

Question Status: Previous edition

Objective: 9.3 Describe the four key bond valuation relationships.

Keywords: bond pricing

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

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

Question Status: Previous edition

Objective: 9.3 Describe the four key bond valuation relationships.

Keywords: bond pricing

Principles: Principle 1: Money Has a Time Value

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

Question Status: Previous edition

Objective: 9.3 Describe the four key bond valuation relationships.

Keywords: bond pricing

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.

Question Status: Previous edition

Objective: 9.3 Describe the four key bond valuation relationships.

Keywords: bond pricing

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.

Question Status: Previous edition

Objective: 9.3 Describe the four key bond valuation relationships.

Keywords: bond pricing

Principles: Principle 1: Money Has a Time Value

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

Question Status: Previous edition

Objective: 9.3 Describe the four key bond valuation relationships.

Keywords: bond pricing

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

23) Why are longer-term bonds more sensitive to changes in interest rates than shorter-

term bonds?

Question Status: Previous edition

Objective: 9.3 Describe the four key bond valuation relationships.

Keywords: bond pricing

Principles: Principle 1: Money Has a Time Value