978-0134083285 Chapter 7 Part 4

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26) The yield to maturity on long-term bonds

A) is equal to the current yield if the bond is selling for face value.

B) is equal to the coupon rate on the bond.

C) is equal to the net present value of the bond’s future cash flows.

D) is set by the indenture agreement and will not change over the life of the bond.

Keywords: Yield to Maturity, Current Yield

Learning Obj.: L.O. 7.7

AACSB: Reflective Thinking

27) A bond’s yield to maturity depends upon all of the following EXCEPT

A) the individual investor‘s required return.

B) the maturity of the bond.

C) the coupon rate.

D) the bond’s risk as reflected by the bond rating.

Keywords: Yield to Maturity

Learning Obj.: L.O. 7.7

AACSB: Reflective Thinking

28) A corporate bond has a coupon rate of 9%, a face value of $1,000, a market price of $850, and the bond

matures in 15 years. Therefore, the bond‘s yield to maturity is

A) 9%.

B) 24%.

C) 11.1%.

D) 13.45%.

Keywords: Yield to Maturity

Learning Obj.: L.O. 7.7

AACSB: Analytical Thinking

29) Two bonds are identical except for their maturity. The bonds have a coupon rate that is greater than

their yield to maturity. Which of the following is true when comparing the two bonds?

A) The longer maturity bond has a greater premium (is priced farther above par).

B) The longer maturity bond has a smaller premium (is priced above par but closer to par).

C) The longer maturity bond has a greater discount (is priced farther below par).

D) The longer maturity bond has a smaller discount (is priced below par but closer to par).

Keywords: Intrinsic Value, Yield to Maturity, Maturity

Learning Obj.: L.O. 7.7

AACSB: Reflective Thinking

30) ND Electric Company issued $1,000 bonds that have an annual coupon rate of 6.5%. The present

market value of the bonds is $1,225. If the bonds have 17 years remaining until maturity, what is the

current yield on ND Electric Company bonds?

A) 5.3%

B) 6.5%

C) 7.2%

D) 13.2%

Keywords: Current Yield

Learning Obj.: L.O. 7.7

AACSB: Analytical Thinking

31) Messenger, Inc. bonds have a 4% coupon rate with semiannual coupon payments and a $1,000 par

value. The bonds have 11 years until maturity, and sell for $925. What is the current yield for Messenger‘s

bonds?

A) 2.16%

B) 3.45%

C) 4.32%

D) 5.52%

Keywords: Current Yield

Learning Obj.: L.O. 7.7

AACSB: Analytical Thinking

32) Facade Securities has an issue of $1,000 par value bonds with 18 years remaining to maturity. The

bonds pay 7.7% interest on a semiannual basis. The current market price of the bonds is $1,175. What is

the yield-to-maturity of the bonds?

A) 6.09%

B) 6.87%

C) 7.24%

D) 8.38%

Keywords: Yield to Maturity, Semiannual Interest

Learning Obj.: L.O. 7.7

AACSB: Analytical Thinking

33) Two investors are considering the purchase of Corporation LMQ bonds. The bonds are selling at their

par value of $1,000 with a coupon rate of 9%. Investor A decides to buy the bonds and Investor B does not

buy the bonds.

A) Investor A must have a required return higher than the bond’s yield to maturity.

B) The yield to maturity for Investor A must be higher than the yield to maturity for Investor B.

C) Investor B must have required return lower than the bond’s yield to maturity.

D) Investor A must have a required return less than or equal to 9%.

Keywords: Yield to Maturity, Required Return

Learning Obj.: L.O. 7.7

AACSB: Analytical Thinking

34) A zero coupon bond is selling for $476. The bond has a face value of $1,000 and matures in 8 years.

Your friend asks you if he should buy the bond. He tells you his required return is 9 percent. Would you

recommend he buy the bond or not? Explain your answer.

Keywords: Yield to Maturity, Zero Coupon Bond

Learning Obj.: L.O. 7.7

AACSB: Reflective Thinking

35) Jackson Corp. $1,000 par value bonds currently sell for $752.18. The coupon rate is 7 percent, paid

semiannually. If the bonds have 6 years before maturity, what is the yield to maturity on the bonds?

Keywords: Yield to Maturity

Learning Obj.: L.O. 7.7

AACSB: Analytical Thinking

36) If you are willing to pay $1,077 for a 15-year $1,000 par value bond that pays 9 percent interest

semiannually, what is your expected rate of return?

Keywords: Yield to Maturity, Expected Rate of Return

Learning Obj.: L.O. 7.7

AACSB: Analytical Thinking

37) Graystone bonds have a maturity value of $1,000. The bonds carry a coupon rate of 12 percent.

Interest is paid semiannually. The bonds will mature in nine years. If the current market price is $976.50,

a. what is the yield to maturity on the bond?

b. what is the current yield on the bond?

Answer:

a. Yield to maturity = 12.44%

b. Current yield = $120/$976.50 = 12.29%

Diff: 1 Page Ref: 252, 254

Keywords: Yield to Maturity, Current Yield

Learning Obj.: L.O. 7.7

AACSB: Analytical Thinking

Learning Objective 7.8

1) Long-term bonds have greater interest rate risk than shorter-term bonds.

Keywords: Interest Rate Risk

Learning Obj.: L.O. 7.8

AACSB: Reflective Thinking

2) A bond selling at a discount will have a built-in capital gain if the bond is held to maturity.

Keywords: Discount Bond, Capital Gain

Learning Obj.: L.O. 7.8

AACSB: Reflective Thinking

3) A bond that matures in 5 years has less interest rate risk than a bond that matures in 25 years because

regardless of changes in interest rates, the bond can be redeemed for face value 20 years earlier.

Keywords: Interest Rate Risk

Learning Obj.: L.O. 7.8

AACSB: Reflective Thinking

4) The value of a bond is equal to the present value of the bond’s interest payments plus the present value

of the bond’s maturity value, all discounted at the bond‘s coupon rate.

Keywords: Bond Valuation, Present Value, Coupon Rate

Learning Obj.: L.O. 7.8

AACSB: Reflective Thinking

5) Bond prices are inversely related to market interest rates.

Keywords: Bond Prices, Interest Rates

Learning Obj.: L.O. 7.8

AACSB: Reflective Thinking

6) If a bond sells for its par value, the coupon interest rate and yield to maturity are equal.

Keywords: Par Value, Coupon Rate, Yield to Maturity

Learning Obj.: L.O. 7.8

AACSB: Reflective Thinking

7) A bond with a coupon rate of 8% will also have a yield to maturity of 8%.

Keywords: Yield to Maturity, Coupon Rate

Learning Obj.: L.O. 7.8

AACSB: Analytical Thinking

8) If a bond is selling below its face value, then its yield to maturity must be less than the bond’s coupon

rate.

Keywords: Yield to Maturity, Face Value, Coupon Rate

Learning Obj.: L.O. 7.8

AACSB: Analytical Thinking

9) Cabell Corp. bonds pay an annual coupon rate of 10%. If investors’ required rate of return is now 12%

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 without knowing the number of years to maturity.

Keywords: Bond Valuation, Premium Bond

Learning Obj.: L.O. 7.8

AACSB: Reflective Thinking

10) The correct relationship for a premium bond is

A) current yield > yield to maturity > coupon rate.

B) current yield > coupon rate > yield to maturity.

C) coupon rate > yield to maturity > current yield.

D) coupon rate > current yield > yield to maturity.

Keywords: Premium Bond, Current Yield, Yield to Maturity, Coupon Rate

Learning Obj.: L.O. 7.8

AACSB: Reflective Thinking

11) A bond will sell at a premium (above par value) if

A) the market value of the bond is greater than the discount rate of the bond.

B) investor’s current required rate of return is below the coupon rate of the bond.

C) current market interest rates are moving in the same direction as bond values.

D) the economy is in a recession.

Keywords: Premium Bond, Required Return, Coupon Rate

Learning Obj.: L.O. 7.8

AACSB: Analytical Thinking

12) A bond will sell at a discount (below par value) if

A) the market value of the bond is less than the present value of the discount rate of the bond.

B) current market interest rates are moving in the same direction as bond values.

C) investor’s current required rate of return is above the coupon rate of the bond.

D) the economy is booming.

Keywords: Discount Bond, Required Return, Coupon Rate

Learning Obj.: L.O. 7.8

AACSB: Analytical Thinking

13) Suppose interest rates have been at historically low levels the past two years. A reasonable strategy

for bond investors during this time period would be to

A) invest in long-term bonds to reduce interest rate risk.

B) invest in short-term bonds to reduce interest rate risk.

C) buy only junk bonds which have higher interest rates.

D) invest in long-term bonds to lock in a bond position for when interest rates increase in the future.

Keywords: Interest Rate Risk, Bond Valuation

Learning Obj.: L.O. 7.8

AACSB: Reflective Thinking

14) Which of the following statements is true?

A) Short-term bonds have greater interest rate risk than do long-term bonds.

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

C) All bonds have equal interest rate risk.

D) Interest rate risk is highest during periods of high interest rates.

Keywords: Interest Rate Risk

Learning Obj.: L.O. 7.8

AACSB: Reflective Thinking

15) Which of the following statements is true?

A) The value of a bond is inversely related to changes in investors’ present required rate of return.

B) If interest rates decrease, the value of a bond will decrease.

C) If interest rates increase, the value of a bond will increase.

D) If interest rates remain constant, the value of premium bonds will increase over time.

Keywords: Required Return, Intrinsic Value

Learning Obj.: L.O. 7.8

AACSB: Analytical Thinking

16) If market interest rates rise

A) short-term bonds will decline in value more than long-term bonds.

B) short-term bonds will rise in value more than long-term bonds.

C) long-term bonds will decline in value more than short-term bonds.

D) long-term bonds will rise in value more than short–term bonds.

Keywords: Interest Rates, Intrinsic Value, Short-term Bonds, Long-term Bonds

Learning Obj.: L.O. 7.8

AACSB: Analytical Thinking

17) If market interest rates decline,

A) short-term bonds will decline in value more than long-term bonds.

B) short-term bonds will rise in value more than long-term bonds.

C) long-term bonds will decline in value more than short-term bonds.

D) long-term bonds will rise in value more than short–term bonds.

Keywords: Interest Rates, Intrinsic Value, Short-term Bonds, Long-term Bonds

Learning Obj.: L.O. 7.8

AACSB: Analytical Thinking

18) Define interest rate risk. How does a bond’s level of interest rate risk depend on its maturity?

Keywords: Interest Rate Risk

Learning Obj.: L.O. 7.8

AACSB: Reflective Thinking

19) Why does a bond sell at a discount when the coupon rate is lower than the required rate of return and

vice versa?

Keywords: Interest Rate Risk

Learning Obj.: L.O. 7.8

AACSB: Reflective Thinking