80) ________ are secured by stock and/or bonds that are owned by the issuer.
A) Mortgage bonds
B) Equipment trust certificates
C) Collateral trust bonds
D) Subordinated debentures
81) ________ have a short maturities, typically one to five years, and which can be renewed for
a similar period at the option of their holders.
A) Floating rate bonds
B) Extendible notes
C) Putable bonds
D) Junk bonds
82) Payment of interest required only when earnings are made available from which to make a
payment is characteristic of a(n) ________.
A) floating rate bond
B) income bond
C) mortgage bond
D) equipment trust certificate
83) A putable bond gives the bondholder ________.
A) the right to sell the bond back to the corporation at a discount
B) the right to sell the bond back to the corporation at a stated premium
C) the right to sell the bond back to the corporation at the current market value
D) the right to sell the bond back to the corporation at par
84) A significant portion of the return on a zero coupon bond is in the form of ________.
A) interest and gain in value
B) interest
C) gain in value
D) tax reduction
85) ________ are claims that are not satisfied until those of the creditors holding certain (senior)
debts have been fully satisfied.
A) Convertible debentures
B) Subordinated debentures
C) Mortgage bonds
D) Collateral trust bonds
86) Bonds that can be redeemed at par at the option of their holders either at specific date after
the date of issue and every 1 to 5 years thereafter or when and if the firm takes specified actions
such as being acquired, acquiring another company, or issuing a large amount of additional debt
are called ________.
A) zero coupon bonds
B) junk bonds
C) floating-rate bonds
D) putable bonds
87) A foreign bond is issued by a(n) ________.
A) foreign corporation or government and is denominated in the investor’s home currency and
sold in the investor’s home market
B) corporation or government and is denominated in the investor’s foreign currency and sold in
the foreign market
C) international borrower and sold to investors in countries with currencies other than the local
currency
D) international borrower and sold to investors in countries with currencies in which the bond is
denominated
Table 6.1
Assume the below information to answer the following question(s).
88) Based on the table 6.1, the bond price quotation is for a ________ bond.
A) Treasury
B) municipal
C) tax-free
D) corporate
89) Based on the Table 6.1, assume this bond’s face value is $1,000. What is the bond’s current
market price?
A) $65.00
B) $655.00
C) $650.00
D) $6,550.00
90) Based on the Table 6.1, what is the last yield for this bond?
A) 11.0%
B) 14.2%
C) 16.8%
D) 18.9%
45
Copyright © 2019 Pearson Education, Inc.
6.3 Valuation fundamentals
1) The primary goal of financial management is creating value by ________.
A) making investments that are worth more than they cost.
B) making investments that pay off sooner rather than later.
C) taking as little risk as possible.
D) issuing bonds that receive investment-grade ratings.
2) ________ is a process that links risk and return to determine the worth of an asset.
A) Establishing a bond rating
B) The time value of money
C) Valuation
D) The term structure of interest rates
3) The value of an asset depends on the historical cash flow(s) up to the present time.
4) In the valuation process, the higher the risk, the greater is the required return.
5) The level of risk associated with a given cash flow positively affects its value.
6) The value of an asset is determined by discounting the expected cash flows back to its present
value, using an appropriate discount rate.
7) The process that links risk and return in order to determine the worth of an asset is termed
________.
A) securitization
B) valuation
C) discounting
D) compounding
8) The key inputs to the valuation process are ________.
A) risk and risk aversion
B) cash flow, cash flow timing, and risk
C) cash flows and depreciation
D) cash flows and taxes.
9) The less certain a cash flow, the ________ the risk, and the ________ the present value of the
cash flow.
A) lower; higher
B) lower; lower
C) higher; lower
D) higher; higher
10) The value of any asset is the ________.
A) sum of all future cash flows it is expected to provide over the relevant time period
B) sum of the present values of all future cash flows it is expected to provide over the relevant
time period
C) present value of the sum of all future cash flows it is expected to provide over the relevant
time period
D) sum of all compounded future cash flows it is expected to provide over the relevant time
period
11) In the basic valuation model, risk is generally incorporated into the ________.
A) cash flows
B) timing
C) discount rate
D) total value
12) A record collector has agreed to sell her entire collection to a historical museum in three
years at a price of $100,000. Assume that an appropriate discount rate is 7 percent. At what price
should she value her collection today?
13) A corporate financial analyst must calculate the value of an asset which produces year-end
annual cash flows of $0 the first year, $2,000 the second year, $3,000 the third year, and $2,500
the fourth year. Assuming a discount rate of 15 percent, what is the value of this asset?
14) What is the value of an asset which pays $200 a year for the next 5 years (the first payment
comes one year from today) and can be sold for $1,500 after 5 years? Assume that the
opportunity cost is 10 percent.
1) As a bond approaches maturity, the price of the bond will approach its par value until, the
bond is worth its face value at maturity.
2) The longer the maturity of a Treasury security, the smaller the interest rate risk.
3) The value of a bond that pays semiannual interest is greater than that of an otherwise
equivalent annual coupon interest paying bond.
4) Interest rate risk is the risk that results from the changes in interest rates and thereby impact
the bond value.
5) When the required return is different from the coupon interest rate and is constant until
maturity, the value of the bond will approach its par value as it nears maturity.
6) When a bond’s required return is greater than its coupon interest rate, the bond value will be
less than its par value.
7) A bond with short maturity has less “interest rate risk” than a bond with long maturity when
all other features—coupon interest rate, par value, and interest payment frequency—are the
same.
8) The shorter the amount of time until a bond’s maturity, the more responsive is its market value
to a given change in the required return.
9) Increases in the basic cost of long-term funds or in risk will raise the required return on a
bond.
10) A bond will sell at a premium when its required return rises above its coupon interest rate.
11) The required return on a bond is likely to differ from the stated interest rate for either of two
reasons: 1) economic conditions have changed, causing a shift in the basic cost of long-term
funds, or 2) the firm’s risk has changed.
12) Corporate bonds usually have a ________.
A) face value of $5,000
B) market price of $1,000
C) specified coupon rate paid annually
D) par value of $1,000
13) Bonds are ________.
A) a series of perpetual short-term debt instruments
B) a form of equity financing that pays interest
C) long-term debt instruments used to raise large sums of money
D) a hybrid form of financing used to raise large sums of money from a diverse group of lenders
14) A type of long-term financing used by both corporations and government entities is
________.
A) common stocks
B) bonds
C) preferred stocks
D) retained earnings
15) The value of a bond is the present value of the ________.
A) dividends and maturity value
B) interest and dividend payments
C) maturity value
D) interest payments and maturity value
16) A firm has an issue of $1,000 par value bonds with a 12 percent stated interest rate
outstanding. The issue pays interest annually and has 10 years remaining to its maturity date. If
bonds of similar risk are currently earning 8 percent, the firm’s bond will sell for ________
today.
A) $1,000
B) $805.20
C) $1,115.50
D) $1,268.40
17) The value of a bond is the present value of its interest payments plus ________.
A) future value of its par value
B) present value of its par value
C) its face value
D) present value of interest payment
18) A firm has an issue of $1,000 par value bonds with a 9 percent stated interest rate
outstanding. The issue pays interest annually and has 20 years remaining to its maturity date. If
bonds of similar risk are currently earning 11 percent, the firm’s bond will sell for ________
today.
A) $1,000
B) $716.67
C) $840.73
D) $1,123.33
19) Calculate the value of a $1,000 bond which has 10 years until maturity and pays quarterly
interest at an annual coupon rate of 12 percent. The required return on similar-risk bonds is 20
percent.
A) $656.82
B) $835.45
C) $845.66
D) $2,201.08
20) Jia Hua Enterprises wants to issue sixty 20-year, $1,000 par value, zero-coupon bonds. If
each bond is priced to yield 7 percent, how much will Jia Hua receive (ignoring issuance costs)
when the bonds are first sold?
A) $11,212
B) $12,393
C) $15,505
D) $18,880