Chapter 07: Bonds and Their Valuation
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73. A company is planning to raise $1,000,000 to finance a new plant. Which of the following statements is CORRECT?
a. The company would be especially eager to have a call provision included in the indenture if its management
thinks that interest rates are almost certain to rise in the foreseeable future.
b. If debt is used to raise the million dollars, but $500,000 is raised as first mortgage bonds on the new plant and
$500,000 as debentures, the interest rate on the first mortgage bonds would be lower than it would be if the entire $1
million were raised by selling first mortgage bonds.
c. If two classes of debt are used (with one senior and the other subordinated to all other debt), the subordinated debt
will carry a lower interest rate.
d. If debt is used to raise the million dollars, the cost of the debt would be lower if the debt were in the form of a
fixed-rate bond rather than a floating-rate bond.
e. If debt is used to raise the million dollars, the cost of the debt would be higher if the debt were in the form of a
mortgage bond rather than an unsecured term loan.
74. Assuming all else is constant, which of the following statements is CORRECT?
a. Other things held constant, a 20-year zero coupon bond has more reinvestment risk than a 20-year coupon bond.
b. Other things held constant, for any given maturity, a 1.0 percentage point decrease in the market interest rate
would cause a smaller dollar capital gain than the capital loss stemming from a 1.0 percentage point increase in the
interest rate.
c. From a corporate borrower’s point of view, interest paid on bonds is not tax-deductible.
d. Other things held constant, price sensitivity as measured by the percentage change in price due to a given change
in the required rate of return decreases as a bond’s maturity increases.
e. For a bond of any maturity, a 1.0 percentage point increase in the market interest rate (rd) causes a larger dollar
capital loss than the capital gain stemming from a 1.0 percentage point decrease in the interest rate.
Chapter 07: Bonds and Their Valuation
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e. 6.96%
79. Radoski Corporation’s bonds make an annual coupon interest payment of 7.35% every year. The bonds have a par
value of $1,000, a current price of $1,470, and mature in 12 years. What is the yield to maturity on these bonds?
a. 2.06%
b. 3.14%
c. 2.63%
d. 2.52%
e. 2.71%
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80. Sadik Inc.’s bonds currently sell for $1,250 and have a par value of $1,000. They pay a $105 annual coupon and have a
15-year maturity, but they can be called in 5 years at $1,100. What is their yield to call (YTC)?
a. 5.97%
b. 6.28%
c. 5.84%
d. 7.79%
e. 5.03%
81. Malko Enterprises’ bonds currently sell for $1,150. They have a 6-year maturity, an annual coupon of $75, and a par
value of $1,000. What is their current yield?
a. 5.74%
b. 7.30%
c. 5.22%
d. 7.76%
e. 6.52%
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85. Taussig Corp.’s bonds currently sell for $1,150. They have a 6.35% annual coupon rate and a 20-year maturity, but
they can be called in 5 years at $1,067.50. Assume that no costs other than the call premium would be incurred to call and
refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into
the future. Under these conditions, what rate of return should an investor expect to earn if he or she purchases these
bonds?
a. 3.40%
b. 4.20%
c. 3.99%
d. 3.57%
e. 5.04%
86. A 25-year, $1,000 par value bond has an 8.5% annual payment coupon. The bond currently sells for $825. If the yield
to maturity remains at its current rate, what will the price be 5 years from now?
a. $801.76
b. $626.38
c. $843.52
d. $835.17
e. $726.60
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88. In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures from
historical book values to market values. KJM Corporation’s balance sheet (book values) as of today is as follows:
Long-term debt (bonds, at par) $23,500,000
Preferred stock 2,000,000
Common stock ($10 par) 10,000,000
Retained earnings 4,000,000
Total debt and equity $39,500,000
The bonds have a 8.4% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from
today. The yield to maturity is 11%, so the bonds now sell below par. What is the current market value of the firm’s debt?
a. $19,849,158
b. $21,238,599
c. $15,085,360
d. $18,459,717
e. $22,231,057
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89. Keenan Industries has a bond outstanding with 15 years to maturity, an 8.25% nominal coupon, semiannual payments,
and a $1,000 par value. The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of
$1,085. What is the bond’s nominal yield to call?
a. 6.83%
b. 5.55%
c. 4.88%
d. 5.91%
e. 6.10%
90. O’Brien Ltd.’s outstanding bonds have a $1,000 par value, and they mature in 25 years. Their nominal annual, not
semiannual yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $700. What is the bond’s
nominal coupon interest rate?
a. 4.86%
b. 7.01%
c. 6.15%
d. 5.72%
e. 6.58%