Financial Management: Core Concepts, 4e (Brooks)
Chapter 6 Bonds and Bond Valuation
1) A bond may be issued by ________.
A) companies
B) state governments
C) the federal government
D) all of the above
2) A bond is a ________ instrument by which a borrower of funds agrees to pay back the funds
with interest on specific dates in the future.
A) long-term equity
B) long-term debt
C) short-term debt
D) short-term equity
3) Bonds are sometimes called ________ securities because they pay set amounts on specific
future dates.
A) variable-income
B) fixed-income
C) bully
D) real
4) The ________ is the annual coupon payment divided by the current price of the bond, and is
not always an accurate indicator.
A) current yield
B) yield to maturity
C) bond discount rate
D) coupon rate
5) The ________ is the yield an individual would receive if the individual purchased the bond
today and held the bond to the end of its life.
A) current yield
B) yield to maturity
C) prime rate
D) coupon rate
6) The four steps to determining the price of a bond are ________.
A) determine the amount and timing of the present cash flows, determine the appropriate
discount rate, find the present value of the lump-sum principal and the annuity stream of
coupons, and add the PVs of the principal and coupons
B) determine the amount and timing of the future cash flows, determine the appropriate discount
rate, find the future value of the lump-sum principal and the annuity stream of coupons, and add
the FVs of the principal and coupons
C) determine the amount and timing of the future cash flows, determine the appropriate discount
rate, find the present value of the lump-sum principal and the annuity stream of coupons, and
multiply the PVs of the principal and coupons
D) determine the amount and timing of the future cash flows, determine the appropriate discount
rate, find the present value of the lump-sum principal and the annuity stream of coupons, and add
the PVs of the principal and coupons
7) Creative Solutions Inc. has issued 10-year $1,000 face value, 8% annual coupon bonds, with a
yield to maturity of 9.0%. The annual interest payment for the bond is ________.
A) $80
B) $40
C) $90
D) $45
8) Big House Nursery Inc. has issued 20-year $1,000 face value, 8% annual coupon bonds, with
a yield to maturity of 10%. The current price of the bond is ________.
A) $1,000.00
B) $1,196.36
C) $829.73
D) There is not enough information to answer this question.
9) Portland Brewery Inc. recently issued 30-year $1,000 face value, 12% annual coupon bonds.
The market discount rate for this bond is only 7%. What is the current price of this bond?
A) $387.59
B) $597.24
C) $1,000.00
D) $1,620.45
10) The ________ is the face value of the bond.
A) coupon rate
B) maturity date
C) par value
D) coupon
11) The ________ is the regular interest payment of the bond.
A) dividend
B) par
C) coupon rate
D) coupon
12) The ________ is the return the bondholder receives on the bond if held to maturity.
A) coupon
B) coupon rate
C) yield to maturity
D) par rate
13) The ________ is the expiration date of the bond.
A) future value
B) yield to maturity
C) maturity date
D) coupon
14) Five years ago, Simpson Warehouses Inc. issued twenty-five-year 10% annual coupon bonds
with a $1,000 face value each. Since then, interest rates in general have risen and the yield to
maturity on the Thompson bonds is now 12%. Given this information, what is the price today for
a Thompson Tarps bond?
A) $843.14
B) $850.61
C) $1,181.54
D) $1,170.27
15) Ten years ago Salmon Acqua Farming Inc. issued twenty-five-year 8% annual coupon bonds
with a $1,000 face value each. Since then, interest rates in general have fallen and the yield to
maturity on the Bacon bonds is now 7%. Given this information, what is the price today for such
a bond?
A) $1,000
B) $1,116.54
C) $1,091.08
D) $914.41
16) Ten years ago Pancake House Inc. issued twenty-five-year 8% annual coupon bonds with a
$1,000 face value each. Since then, interest rates in general have risen and the yield to maturity
on the Bacon bonds is now 9%. Given this information, what is the price today for such a bond?
A) $1,000
B) $919.39
C) $901.77
D) $1.085.59
17) The appropriate rate to use to discount the cash flows of a bond in order to determine the
current price is the ________.
A) yield to maturity
B) coupon rate
C) par rate
D) current yield
18) Fifteen years ago McDemott’s Motels Inc. issued twenty-five-year 10% annual coupon bonds
with a $1,000 face value each. Since then, interest rates in general have fallen and the yield to
maturity on the firm’s bonds is now 6%. Given this information, what is the price today for such
a bond?
A) $1,000
B) $1,294.40
C) $1,091.08
D) $914.41
19) Twenty years ago Bison Enterprises Inc. issued thirty-year 9% annual coupon bonds with a
$1,000 face value each. Since then, interest rates in general have risen and the yield to maturity
on the firm’s bonds is now 11%. Given this information, what is the price today for a bond from
this issue?
A) $1,000
B) $1,116.54
C) $882.22
D) $914.41
20) The coupon payment for an annual-coupon corporate bond is equal to the yield to maturity
multiplied by the par value of the bond.
21) Quality Construction Products Inc. issued $1,000 face value 20-year bonds five years ago.
These bonds are currently selling for $1,218.47. From this information we can conclude that the
Quality Construction Products Inc.bonds have a yield-to-maturity greater than the coupon rate on
these bonds.
22) Zero-coupon bonds are more difficult and time-consuming to price because of the extensive
revision of the basic bond pricing formula.
23) The coupon payment for an annual-coupon corporate bond is equal to the coupon rate
multiplied by the current price of the bond.
24) The coupon rate for a bond is the interest rate for the coupons, stated in annual terms, and
printed on the bond. It normally remains the same throughout the life of the bond.
25) Assume that today’s date is August 15, 2015 and that the Kroger Bond is an annual-coupon
bond. Describe what each of the following terms mean and how each value was determined if
appropriate.
Company
Price
Coupon
Rate
Maturity
Date
Current
Yield
Rating
Kroger
84.00
6.875%
8-15-2020
8.185%
B2
26) Progressive Plastics Inc. issued 30-year 7% annual coupon bonds five years ago. Currently,
the yield to maturity is 9.65% on these $1,000 par value bonds. What is the current price per
bond?
1) The ExecUfind Corporation has issued 20-year semiannual coupon bonds with a face value of
$1,000. If the annual coupon rate is 10% and the current yield to maturity is 12%, what is the
firm’s current price per bond?
A) $850.61
B) $849.54
C) $1,170.27
D) $1,171.59
2) TravelEasy Inc. has issued 30-year semiannual coupon bonds with a face value of $1,000. If
the annual coupon rate is 14% and the current yield to maturity is 8%, what is the firm’s current
price per bond?
A) $578.82
B) $579.84
C) $1,675.47
D) $1,678.70
3) TravelEasy Enterprises Inc. has issued 30-year semiannual coupon bonds with a face value of
$1,000. If the annual coupon rate is 14% and the current yield to maturity is 15%, what is the
firm’s current price per bond?
A) $934.20
B) $1,000.00
C) $934.34
D) $466.79
4) Quality Production Products Inc. has issued 20-year semiannual coupon bonds with a face
value of $1,000. If the annual coupon rate is 12% and the current yield to maturity is 10%, what
is the firm’s current price per bond?
A) $934.20
B) $1,000.00
C) $1,171.59
D) $1,362.74
5) Douglas Distributing Inc. has issued 30-year semiannual coupon bonds with a face value of
$1,000. If the annual coupon rate is 6% and the current yield to maturity is 7%, what is the firm’s
current price per bond?
A) $875.28
B) $1,000.00
C) $934.34
D) $466.79
6) Most U.S. corporate and government bonds choose to make ________ coupon payments.
A) annual
B) semiannual
C) quarterly
D) monthly
7) Which of the following types of bonds, as characterized by a feature, by definition has two
coupon payments per year?
A) Consol
B) Semiannual
C) Zero-coupon
D) Putable
8) RadicaL CREATIONS Inc. just issued zero-coupon bonds with a par value of $1,000. If the
bond has a maturity of 15 years and a yield to maturity of 10%, what is the current price of the
bond if it is priced in the conventional manner?
A) $1,000
B) $239.39
C) $231.38
D) This question cannot be answered because the coupon payment information is missing.
9) Zero-coupon U.S. Government bonds are known as ________.
A) STRIPS
B) muni-bonds
C) Uncle Sam’s Empty Pockets
D) BLANKS
10) The difference between the price and the par value of a zero-coupon bond represents
________.
A) taxes payable by the bond buyer
B) the accumulated principal over the life of the bond
C) the bond premium
D) the accumulated interest over the life of the bond
11) Flashstream Productions Inc. is issuing a zero-coupon bond that will have a maturity of fifty
years. The bond’s par value is $1,000, and the current yield on similar bonds is 7.5%. What is the
expected price of this bond, using the semiannual convention?
A) $25.19
B) $250.19
C) $750.00
D) $1,000.00
12) Almost all corporate and government bonds pay coupons on an annual basis.
13) When pricing a zero-coupon bond, the convention is to use the semiannual pricing formula
rather than the annual pricing formula.
14) Zero-coupon bonds are priced at deep discounts.
15) Zero-coupon bonds are priced at steep premiums.
16) Rogue Recovery Inc. has twenty years remaining on $1,000 par value semiannual coupon
bonds paying semiannual coupons of $40. If the yield to maturity on these bonds is 6% per year,
what is the current price?
17) Complete the following zero-coupon amortization schedule.
T (Periods)
Beginning
Price
Interest
Earned (6%)
Ending
Price
1
$839.62
$890.00
2
$53.40
3
$943.40
$1,000.00
T (Periods)
Beginning
Price
Interest
Earned (6%)
Ending
Price
1
$839.62
$50.38
$890.00
2
$890.00
$53.40
$943.40
3
$943.40
$56.60
$1,000.00
18) Complete the following zero-coupon amortization schedule.
T (Periods)
Beginning
Price
Interest
Earned (8%)
Ending
Price
1
$63.51
$857.34
2
$68.59
3
$925.93
$1,000.00
T (Periods)
Beginning
Price
Interest
Earned (8%)
Ending
Price
1
$793.83
$63.51
$857.34
2
$857.34
$68.59
$925.93
3
$925.93
$74.07
$1,000.00
1) The ________ is a market derived interest rate used to discount the future cash flows of the
bond.
A) coupon rate
B) semiannual coupon rate
C) yield to maturity
D) compound rate
2) The ________ is the interest rate printed on the bond.
A) coupon rate
B) semiannual coupon rate
C) yield to maturity
D) compound rate
3) Rogue Recovery Inc. wishes to issue new bonds but is uncertain how the market would set the
yield to maturity. The bonds would be 20-year, 7% annual coupon bonds with a $1,000 par
value. The firm has determined that these bonds would sell for $1,050 each. What is the yield to
maturity for these bonds?
A) 7.00%
B) 6.55%
C) 7.35%
D) 6.54%