978-0133507676 chapter 6 Part 1

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Fundamentals of Corporate Finance, 3e (Berk/DeMarzo/Harford)

Chapter 6 Bonds

6.1 Bond Terminology

1) The coupon value of a bond is the face value of the bond.

AACSB Objective: Analytic Skills

Author: DS

Question Status: Previous Edition

2) A bond is said to mature on the date when the issuer repays its notional value.

AACSB Objective: Analytic Skills

Author: DS

Question Status: Previous Edition

3) Which of the following best illustrates why a bond is a type of loan?

A) The issuers of bonds make regular payments to bondholders.

B) When a company issues a bond, the buyer of that bond becomes an owner of the issuing

company.

C) Funds raised are used to inance long-term projects.

D) When an investor buys a bond from an issuer, the investor is giving money to the issuer,

with the assurance that it will be repaid at a date in the future.

AACSB Objective: Analytic Skills

Author: DS

Question Status: Revised

4) What is the coupon payment of a 25-year $1000 bond with a 4.5% coupon rate with

quarterly payments?

A) $3.75

B) $11.25

C) $22.50

D) $45.00

AACSB Objective: Analytic Skills

Author: DS

Question Status: Revised

5) What is the coupon payment of a 15-year $10,000 bond with a 9% coupon rate with

semiannual payments?

A) $150.00

B) $450

C) $900.00

D) $1800.00

AACSB Objective: Analytic Skills

Author: DS

Question Status: Revised

6) A corporate bond makes payments of $9.67 every month for ten years with a inal

payment of $2009.67. Which of the following best describes this bond?

A) a 10-year bond with a face value of $2,000 and a coupon rate of 4.8% with monthly

payments

B) a 10-year bond with a face value of $2,000 and a coupon rate of 5.8% with monthly

payments

C) a 10-year bond with a face value of $2,009.67 and a coupon rate of 4.8% with monthly

payments

D) a 10-year bond with a face value of $2,009.67 and a coupon rate of 5.8% with monthly

payments

AACSB Objective: Analytic Skills

Author: DS

Question Status: Revised

7) An investor holds a Ford bond with a face value of $5000, a coupon rate of 8.5%, and

semiannual payments that matures on January 15, 2029. How much will the investor

receive on January 15, 2029?

A) $2606.25

B) $5000.00

C) $5212.50

D) $5425.00

AACSB Objective: Analytic Skills

Author: DS

Question Status: Revised

8) Which of the following best shows the timeline for cash lows from a ive-year bond with

a face value of $2,000, a coupon rate of 5.0%, and semiannual payments?

A) 0 1 2 3 4 5

+—–+—–+—–+—–+—–+

$100 $100 $100 $100 $2100

B) 0 1 2 3 9 10

+—–+—–+—–+— . . . —–+—–+

$25 $25 $25 $25 $25

C) 0 1 2 3 9 10

+—–+—–+—–+— . . . —–+—–+

$50 $50 $50 $50 $50

D) 0 1 2 3 9 10

+—–+—–+—–+— . . . —–+—–+

$50 $50 $50 $50 $2050

AACSB Objective: Analytic Skills

Author: DS

Question Status: Revised

9) 0 1 2 3 59 60

+—–+—–+—–+— . . . —–+—–+

$57.5 $57.5 $57.5 $57.5 $5057.5

A corporation issues a bond that generates the above cash lows. If the periods are of 3-

month intervals, which of the following best describes that bond?

A) a 15-year bond with a notional value of $5000 and a coupon rate of 4.6% paid quarterly

B) a 15-year bond with a notional value of $5000 and a coupon rate of 1.2% paid annually

C) a 30-year bond with a notional value of $5000 and a coupon rate of 3.5% paid

semiannually

D) a 60-year bond with a notional value of $5000 and a coupon rate of 4.6% paid quarterly

AACSB Objective: Analytic Skills

Author: DS

Question Status: Revised

10) A university issues a bond with a face value of $5000 and a coupon rate of 4.41% that

matures on July 15, 2018. The holder of such a bond receives coupon payments of $110.25.

How frequently are coupon payments made in this case?

A) monthly

B) quarterly

C) semiannually

D) annually

AACSB Objective: Analytic Skills

Author: DS

Question Status: Previous Edition

11) Which of the following statements regarding bonds and their terms is FALSE?

A) Bonds are securities sold by governments and corporations to raise money from

investors today in exchange for a promised future payment.

B) By convention, the coupon rate is expressed as an efective annual rate.

C) Bonds typically make two types of payments to their holders.

D) The time remaining until the repayment date is known as the term of the bond.

AACSB Objective: Analytic Skills

Author: JN

Question Status: Previous Edition

12) A bond certiicate includes ________.

A) the terms of the bond

B) the individual to whom payments will be made

C) the yield to maturity of the bond

D) the price of the bond

AACSB Objective: Analytic Skills

Author: JP

Question Status: Revised

13) Which of the following is true about the face value of a bond?

A) It is the notional amount we use to compute coupon payments.

B) It is the amount that is repaid at maturity.

C) It is usually denominated in standard increments, such as $1,000.

D) All of the above are true.

AACSB Objective: Analytic Skills

Author: JP

Question Status: New

14) How are the cash lows of a coupon bond diferent from an amortizing loan?

AACSB Objective: Analytic Skills

Author: SS

Question Status: Revised

6.2 Zero-Coupon Bonds

1) The only cash payment an investor in a zero-coupon bond receives is the face value of

the bond on its maturity date.

AACSB Objective: Analytic Skills

Author: DS

Question Status: Previous Edition

2) Prior to its maturity date, the price of a zero-coupon bond is its face value.

AACSB Objective: Analytic Skills

Author: DS

Question Status: Previous Edition

3) How are investors in zero-coupon bonds compensated for making such an investment?

A) Such bonds are purchased at their face value and sold at a premium on a later date.

B) Such bonds make regular interest payments.

C) Such bonds are purchased at a discount, below their face value.

D) Such bonds have a lower face value as compared to other bonds of similar term.

AACSB Objective: Analytic Skills

Author: DS

Question Status: Previous Edition

4) What is the yield to maturity of a one-year, risk-free, zero-coupon bond with a $10,000

face value and a price of $9400 when released?

A) 3.191%

B) 6.000%

C) 6.383%

D) 0.009%

AACSB Objective: Analytic Skills

Author: DS

Question Status: Revised

5) Maturity (years) 1 2 3 4 5

Price $97.25$94.53$91.83 $89.23$87.53

The above table shows the price per $100-face value bond of several risk-free, zero-coupon

bonds. What is the yield to maturity of the two year, zero-coupon, risk-free bond shown?

A) 1.43%

B) 5.71%

C) 0.05%

D) 2.85%

AACSB Objective: Analytic Skills

Author: DS

Question Status: Revised

6) Why is the yield to maturity of a zero-coupon, risk-free bond that matures at the end of a

given period the risk-free interest rate for that period?

A) Since such a bond provides a risk-free return over that period, the Law of One Price

guarantees that the risk–free interest rate equals the yield to maturity.

B) Since a bond’s price will converge on its face value as the bond approaches the maturity

date, the Law of One Price dictates that the risk-free interest rate will relect this

convergence.

C) Since interest rates will rise and fall in response to the movement in bond prices.

D) Since there is, by deinition, no risk in investing in such bonds, the return from such

bonds is the best that can be expected from any investment over the period.

AACSB Objective: Relective Thinking Skills

Author: DS

Question Status: Revised

Use the igure for the question(s) below.

7) The current zero-coupon yield curve for risk-free bonds is shown above. What is the

price of a zero-coupon, four-year, risk-free bond of $100?

A) $85.64

B) $87.99

C) $92.15

D) $96.67

AACSB Objective: Analytic Skills

Author: DS

Question Status: Revised

8) The current zero-coupon yield curve for risk-free bonds is shown above. What is the risk–

free interest rate on a 4-year maturity?

A) 3.00%

B) 3.15%

C) 3.25%

D) 6.34%

AACSB Objective: Analytic Skills

Author: DS

Question Status: Revised

9) A risk-free, zero-coupon bond with a face value of $10,000 has 15 years to maturity. If

the YTM is 6.1%, which of the following would be closest to the price this bond will trade

at?

A) $4937

B) $5760

C) $6582

D) $4114

AACSB Objective: Analytic Skills

Author: DS

Question Status: Previous Edition

10) A risk-free, zero-coupon bond has 15 years to maturity. Which of the following is closest

to the price per $1000 of face value that the bond will trade at if the YTM is 6.1%?

A) $663.78

B) $774.42

C) $553.15

D) $885.05

AACSB Objective: Analytic Skills

Author: DS

Question Status: Revised

11) A risk-free, zero-coupon bond with a $5000 face value has 15 years to maturity. The

bond currently trades at $3750. What is the yield to maturity of this bond?

A) 1.936%

B) 0.968%

C) 62.500%

D) 75.000%

AACSB Objective: Analytic Skills

Author: DS

Question Status: Previous Edition

12) Which of the following risk-free, zero-coupon bonds could be bought for the lowest

price?

A) one with a face value of $1,000, a YTM of 4.8%, and 5 years to maturity

B) one with a face value of $1,000, a YTM of 3.2%, and 8 years to maturity

C) one with a face value of $1,000, a YTM of 6.8%, and 10 years to maturity

D) one with a face value of $1,000, a YTM of 5.9%, and 20 years to maturity

AACSB Objective: Analytic Skills

Author: DS

Question Status: Revised

13) Which of the following statements regarding bonds and their terms is FALSE?

A) The bond certiicate typically speciies that the coupons will be paid periodically until

the maturity date of the bond.

B) The bond certiicate indicates the amounts and dates of all payments to be made.

C) The only cash payments the investor will receive from a zero-coupon bond are the

interest payments that are paid up until the maturity date.

D) The face value of a bond is repaid at maturity.

AACSB Objective: Analytic Skills

Author: JN

Question Status: Revised

14) Which of the following statements regarding bonds and their terms is FALSE?

A) The amount of each coupon payment is determined by the coupon rate of the bond.

B) Prior to its maturity date, the price of a zero-coupon bond is always greater than its face

value.

C) The zero-coupon bond has no periodic interest payments.

D) Treasury bills are U.S. government bonds with a maturity of up to one year.

AACSB Objective: Analytic Skills

Author: JN

Question Status: Revised

15) Which of the following statements regarding bonds and their terms is FALSE?

A) One advantage of quoting the yield to maturity rather than the price is that the yield is

independent of the face value of the bond.

B) Unlike the case of bonds that pay coupons, for zero-coupon bonds, there is no formula to

solve for the yield to maturity.

C) Because we can convert any bond price into a yield, and vice versa, bond prices and

yields are often used interchangeably.

D) The internal rate of return (IRR) of a bond is given a special name, the yield to maturity

(YTM).

AACSB Objective: Analytic Skills

Author: JN

Question Status: Revised

16) Which of the following statements regarding bonds and their terms is FALSE?

A) The internal rate of return (IRR) of an investment in a zero-coupon bond is the rate of

return that investors will earn on their money if they buy a default-free bond at its current

price and hold it to maturity.

B) The yield to maturity of a bond is the discount rate that sets the future value (FV) of the

promised bond payments equal to the current market price of the bond.

C) Financial professionals also use the term spot interest rates to refer to the default-free

zero-coupon yields.

D) When we calculate a bond’s yield to maturity by solving the formula,

Price of an n-period bond = + + … + ,

the yield we compute will be a rate per coupon interval.

AACSB Objective: Analytic Skills

Author: JN

Question Status: Revised