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CFIN4
Chapter 6 – Bonds (Debt) – Characteristics and Valuation
62. Which of the following statements is correct?
a. Other things held constant, a callable bond would have a lower required rate of return than a noncallable
bond.
b. Other things held constant, a corporation would rather issue noncallable bonds than callable bonds.
c. Reinvestment rate risk is worse from a typical investor's standpoint than interest rate price risk.
d. If a 10-year, $1,000 par, zero coupon bond were issued at a price which gave investors a 10 percent rate of
return, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond
would sell at a premium over its $1,000 par value.
e. If a 10-year, $1,000 par, zero coupon bond were issued at a price which gave investors a 10 percent rate of
return, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond
would sell at a discount below its $1,000 par value.
63. Which of the following statements is correct?
a. Rising inflation makes the actual yield to maturity on a bond greater than the quoted yield to maturity which is
based on market prices.
b. The yield to maturity for a coupon bond that sells at its par value consists entirely of an interest yield; it has a
zero expected capital gains yield.
c. On an expected yield basis, the expected capital gains yield will always be positive because an investor
would not purchase a bond with an expected capital loss.
d. The market value of a bond will always approach its par value as its maturity date approaches. This holds
true even if the firm enters bankruptcy.
e. All of the above statements are false.
CFIN4
Chapter 6 – Bonds (Debt) – Characteristics and Valuation
64. Which of the following statements is correct?
a. The discount or premium on a bond can be expressed as the difference between the coupon payment on an
old bond which originally sold at par and the coupon payment on a new bond, selling at par, where the
difference in payments is discounted at the new market rate.
b. The price of a coupon bond is determined primarily by the number of years to maturity.
c. On a coupon paying bond, the final interest payment is made one period before maturity and then, at
maturity, the bond's face value is paid as the final payment.
d. The actual capital gains yield for a one-year holding period on a bond can never be greater than the current
yield on the bond.
e. All of the above statements are false.
65. If you buy a bond that is selling for less than its face, or maturity, value what will happen to the price (value) of the
bond as the maturity date nears if market interest rates do not change during the life of the bond?
a. Because interest rates remain constant, nothing happens to the market value of the bond.
b. The price of the bond should decrease even further below the bond's face value because the rates in the
market are too high.
c. The price of the bond will increase as the bond gets closer to its maturity because the bond's value has to
equal its face value at maturity.
d. This question cannot be answered without additional information.
e. None of the above is a correct answer.
66. Omega Software Corporation's bond is currently selling at a discount in the financial markets. If the bond's yield to
maturity is 11.5 percent, what is its coupon rate of interest?
a. greater than 11.5 percent
b. less than 11.5 percent
c. equal to 11.5 percent
d. There is not enough information to answer this question.
e. None of the above is a correct answer.
67. Stephanie just purchased a corporate bond that matures in three years. The bond has a coupon interest rate equal to
9 percent and its yield to maturity is 6 percent. If market conditions do not change that is market interest rates
remain constant and Stephanie sells the bond in 12 months, what will be her capital gain from holding the bond?
a. Positive; because she bought the bond for a discount, which means its price has to increase as the maturity
date nears.
b. Negative; because she bought the bond for a premium, which means its price has to decrease as the maturity
date nears.
c. Zero, because she must have bought the bond for par, which means its price will not change as the maturity
date nears.
d. This question cannot be answered, because the face (maturity) value of the bond is not given.
e. None of the above is correct.
68. Which of the following is not true about bonds? In all of the statements, assume other things are held constant?
a. Price sensitivity, that is, the change in price due to a given change in the required rate of return, increases as
a bond's maturity increases.
b. For a given bond of any maturity, a given percentage point increase in the interest rate (rd) causes a larger
dollar capital loss than the capital gain stemming from an identical decrease in the interest rate.
c. For any given maturity, a given percentage point increase in the interest rate causes a smaller dollar capital
loss than the capital gain stemming from an identical decrease in the interest rate.
d. From a borrower's point of view, interest paid on bonds is tax-deductible.
e. A 20-year zero-coupon bond has less reinvestment rate risk than a 20-year coupon bond.
69. If interest rates fall from 8 percent to 7 percent, which of the following bonds will have the largest percentage
increase in its value?
a. A 10-year zero-coupon bond.
b. A 10-year bond with a 10 percent semiannual coupon.
c. A 10-year bond with a 10 percent annual coupon.
d. A 5-year zero-coupon bond.
e. A 5-year bond with a 12 percent annual coupon.
70. Which of the following statements is most correct?
a. If a bond's yield to maturity exceeds its coupon rate, the bond's current yield must also exceed its coupon
rate.
b. If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value.
c. If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should
sell for the same price regardless of the bond's coupon rate.
d. Answers b and c are both correct.
e. None of the above answers are correct.
71. Which of the following statements is most correct?
a. All else equal, an increase in interest rates will have a greater effect on the prices of long-term bonds than it
will on the prices of short-term bonds.
b. All else equal, and increase in interest rate will have a greater effect on higher-coupon bonds than it will
have on lower-coupon bonds.
c. An increase in interest rates will have a greater effect on a zero-coupon bond with 10 years maturity than it
will have on a 9-year bond with a 10 percent annual coupon.
d. All of the above are correct.
e. Answers a and c are both correct.
72. Which of the following statements is correct?
a. A 10-year bond would have more interest rate price risk than a 5-year bond, but all 10-year bonds have the
same interest rate price risk.
b. A 10-year bond would have more reinvestment rate risk than a 5-year bond, but all 10-year bonds have the
same reinvestment rate risk.
c. If their maturities were the same, a 5 percent coupon bond would have more interest rate price risk than a 10
percent coupon bond.
d. If their maturities were the same, a 5 percent coupon bond would have less interest rate price risk than a 10
percent coupon bond.
e. Zero-coupon bonds have more interest rate price risk than any other type bond, even perpetuities.
73. You have just purchased a 10-year, $1,000 par value bond. The coupon rate on this bond is 8 percent annually, with
interest being paid each 6 months. If you expect to earn a 10 percent simple rate of return on this bond, how much
did you pay for it?
a. $1,122.87
b. $1,003.42
c. $875.38
d. $950.75
e. $812.15
74. Assume that you wish to purchase a 20-year bond that has a maturity value of $1,000 and makes semiannual interes
payments of $40. If you require a 10 percent simple yield to maturity on this investment, what is the maximum price
should be willing to pay for the bond?
a. $619
b. $674
c. $761
d. $828
e. $902
CFIN4
Chapter 6 – Bonds (Debt) – Characteristics and Valuation
75. A $1,000 par value bond pays interest of $35 each quarter and will mature in 10 years. If your simple annual require
rate of return is 12 percent with quarterly compounding, how much should you be willing to pay for this bond?
a. $941.36
b. $1,051.25
c. $1,115.57
d. $1,391.00
e. $825.49
76. Assume that a 15-year, $1,000 face value bond pays interest of $37.50 every 3 months. If you require a simple annu
rate of return of 12 percent, with quarterly compounding, how much should you be willing to pay for this bond?
a. $821.92
b. $1,207.57
c. $986.43
d. $1,120.71
e. $1,358.24
77. Due to a number of lawsuits related to toxic wastes, a major chemical manufacturer has recently experienced a
market reevaluation. The firm has a bond issue outstanding with 15 years to maturity and a coupon rate of 8
percent, with interest being paid semiannually. The required simple rate on this debt has now risen to 16 percent.
What is the current value of this bond?
a. $1,273
b. $1,000
c. $7,783
d. $550
e. $450
78. You are the owner of 100 bonds issued by Euler, Ltd. These bonds have 8 years remaining to maturity, an annual
coupon payment of $80, and a par value of $1,000. Unfortunately, Euler is on the brink of bankruptcy. The creditors
including yourself, have agreed to a postponement of the next 4 interest payments (otherwise, the next interest paym
would have been due in 1 year). The remaining interest payments, for Years 5 through 8, will be made as scheduled
The postponed payments will accrue interest at an annual rate of 6 percent, and they will then be paid as a lump sum
maturity 8 years hence. The required rate of return on these bonds, considering their substantial risk, is now 28 perc
What is the present value of each bond?
a. $538.21
b. $426.73
c. $384.84
d. $266.88
e. $249.98
79. You are contemplating the purchase of a 20-year bond that pays $50 in interest each six months. You plan to hold th
bond for only 10 years, at which time you will sell it in the marketplace. You require a 12 percent annual return, but
believe the market will require only an 8 percent return when you sell the bond 10 years hence. Assuming you are a
rational investor, how much should you be willing to pay for the bond today?
a. $1,126.85
b. $1,081.43
c. $737.50
d. $927.68
e. $856.91
80. JRJ Corporation recently issued 10-year bonds at a price of $1,000. These bonds pay $60 in interest each six month
Their price has remained stable since they were issued, i.e., they still sell for $1,000. Due to additional financing nee
the firm wishes to issue new bonds that would have a maturity of 10 years, a par value of $1,000, and pay $40 in
interest every six months. If both bonds have the same yield, how many new bonds must JRJ issue to raise $2,000,0
cash?
a. 2,400
b. 2,596
c. 3,000
d. 5,000
e. 4,275
81. Assume that you are considering the purchase of a $1,000 par value bond that pays interest of $70 each six months
and has 10 years to go before it matures. If you buy this bond, you expect to hold it for 5 years and then to sell it in
the market. You (and other investors) currently require a simple annual rate of 16 percent, but you expect the
market to require a rate of only 12 percent when you sell the bond due to a general decline in interest rates. How
much should you be willing to pay for this bond?
a. $842.00
b. $1,115.81
c. $1,359.26
d. $966.99
e. $731.85
82. Cold Boxes Ltd. has 100 bonds outstanding (maturity value = $1,000). The required rate of return on these bonds is
currently 10 percent, and interest is paid semiannually. The bonds mature in 5 years, and their current market value
$768 per bond. What is the annual coupon interest rate?
a. 8%
b. 6%
c. 4%
d. 2%
e. 0%
83. The current price of a 10-year, $1,000 par value bond is $1,158.91. Interest on this bond is paid every six months,
and the simple annual yield is 14 percent. Given these facts, what is the annual coupon rate on this bond?
a. 10%
b. 12%
c. 14%
d. 17%
e. 21%
84. Rick bought a bond when it was issued by Macroflex Corporation 14 years ago. The bond, which has a $1,000 face
value and a coupon rate equal to 10 percent, matures in six years. Interest is paid every six months; the next
interest payment is scheduled for six months from today. If the yield on similar risk investments is 14 percent, what
is the current market value (price) of the bond?
a. $841.15
b. $1,238.28
c. $904.67
d. $757.26
e. $844.45
85. Devine Divots issued a bond a few years ago that has a face value equal to $1,000 and pays investors $30 interest
every six months. The bond has eight years remaining until maturity. If you require a 7 percent rate of return to
invest in this bond, what is the maximum price you should be willing to pay to purchase the bond?
a. $761.15
b. $939.53
c. $940.29
d. $965.63
e. $1,062.81
86. Recently, Ohio Hospitals Inc. filed for bankruptcy. The firm was reorganized as American Hospitals Inc., and the
court permitted a new indenture on an outstanding bond issue to be put into effect. The issue has 10 years to maturit
and a coupon rate of 10 percent, paid annually. The new agreement allows the firm to pay no interest for 5 years.
Then, interest payments will be resumed for the next 5 years. Finally, at maturity (Year 10), the principal plus the
interest that was not paid during the first 5 years will be paid. However, no interest will be paid on the deferred
interest. If the required return is 20 percent, what should the bonds sell for in the market today?
a. $242.26
b. $281.69
c. $578.31
d. $362.44
e. $813.69
87. Refer to Gargoyle Unlimited. What is the dollar value of the interest tax savings to the firm in the third year of
the issue?
a. $32.58
b. $40.29
c. $100.72
d. $60.43
e. $109.10
