Chapter 6: Fixed-Income Securities: Characteristics and Valuation
78. Determine the yield to maturity (to the nearest tenth of 1 percent) of an 8-year zero coupon bond ($1,000
par value) that is currently selling for $521.
a. 6.0%
b. 11.5%
c. 7.9%
d. 8.5%
79. Mid-States Utility Company sold a 10-year note with a 7 7/8% coupon and a par value of $1,000. If the
note sold at a discount for $930, what was the implied yield-to–maturity to the nearest tenth of one
percent? Assume interest is paid semiannually.
a. 8.5%
b. 8.7%
c. 8.9%
d. 9.4%
80. Baywa has an outstanding bond that has a coupon rate of 8.3%. What is the market price of this bond
if it pays interest semi-annually, has 15 years to maturity, and the current required rate of return is 9%
on bonds of similar quality?
a. $943
b. $1059
c. $954
d. $1,000
Chapter 6: Fixed-Income Securities: Characteristics and Valuation
81. Rascal Corporation bonds have a 10.60% coupon and a maturity value of $1,000. The bonds, which pay
interest semi-annually, will mature in 15 years, but the firm has the option to call the bond in 10 years at a
premium of 106. You believe that Rascal will call the bonds in 10 years. If you require a pre-tax return of
9.5% on bonds of this risk, how much would you pay for one of these bonds today?
a. $1,000
b. $1,094
c. $1,034
d. $1,058
82. Zimmer, Inc. issued zero coupon bonds that sold for $190 and are due in 15 years. Determine the yield to
maturity (to the nearest tenth of 1 percent) if you purchased the bond at the issue price.
a. 19.0%
b. 11.4%
c. 10.9%
d. 11.7%
Chapter 6: Fixed-Income Securities: Characteristics and Valuation
83. Crown King zero coupon bonds were issued in 1998 at $124. These bonds will mature in 2018. What will
these bonds sell for in 2008 if the required rate of return in 2008 is 9.5%?
a. $352
b. $404
c. $413
d. $163
84. Determine the value of a LASKA 6.25% cumulative preferred stock, series D, par value $75 to an investor
who requires a 9.5% rate of return on a security with this risk.
a. $65.79
b. $49.37
c. $75.00
d. $114.00
85. Happy Nappy Mattress Company issued a 10-year, 16% bond in 2003 that is callable at $1,100 in 5 years.
In 2008 (today) the required return on bonds of this risk was 11%. The bonds pay interest semi-annually.
What would you be willing to pay for one of these bonds today if you believe the bond will be called today?
a. $1188
b. $832.25
c. $1,100
d. $1,000
Chapter 6: Fixed-Income Securities: Characteristics and Valuation
86. At what price will Gohm have to sell a 10–year zero coupon bond that will yield 8.75% if held to maturity?
a. $453
b. $875.00
c. $87.50
d. $432
87.
What is the issue price of a zero coupon bond with 15 years to maturity if it is sold to yield 7.55%?
a. $250.00
b. $362.31
c. $335.62
d. $1000.00
88.
A U.S. Government bond was quoted at 95:13 “bid” and 95:15 “asked”. How much would you have to
pay for one of these $1,000.00 face value bonds?
a. $951.50
b. $950.13
c. $950.15
d. $954.69
89.
What is the value of an MDI $2.67 perpetual preferred stock to an investor who requires a 7%
annual rate of
return? Assume the par value is $60.00.
a. $85.71
b. $38.14
c. $59.33
d. $60.00
Chapter 6: Fixed-Income Securities: Characteristics and Valuation
90. UOP, a petroleum processing technology firm, issued a 10% coupon, 20 year to maturity first mortgage
bond five years ago. If the current market rate of debt for UOP is 8%, at what price should this bond sell,
to the nearest dollar? Assume a par value of $1,000, and pays interest semi-annually.
a. $1,170.
b. $999
c. $1,095
d. $1,173
91. National Medical has a zero coupon bond outstanding that sells for $242.60 and has 15 years to maturity.
What is the yield to maturity on the bond to the nearest tenth of one percent?
a. 10.5%
b. 9.1%
c. 9.9%
d. 11.0%
92. An Exxon bond carries an 8 percent coupon, pays interest semiannually, and has 10 years to maturity. If
this bond is currently selling for $925, what is the exact yield to maturity (to the nearest tenth of 1 percent)?
a. 9.2%
b. 8.8%
c. 9.8%
d. 10.2%
Chapter 6: Fixed-Income Securities: Characteristics and Valuation
93. The current required rate of return on a bond issued by Who LTD is 11 percent. “Who” has a bond issue
outstanding that pays interest semiannually, is selling for $845 and matures in 8 years. What is the
approximate coupon rate on the outstanding bond?
a. 4.00%
b. 8.00%
c. 10.68%
d. 6.05%
94. An EAL bond has a coupon rate of 16 percent, pays interest semiannually, and matures in 15 years. If the
bond is selling for $968.82, what is its yield to maturity?
a. 8.3%
b. 16.1%
c. 16.6%
d. 14.3%
Chapter 6: Fixed-Income Securities: Characteristics and Valuation
95. How many semiannual interest payments remain on a bond that is selling for $917.25? The coupon rate of
the bond is 8 percent, interest is payable semiannually, and the current market rate of return on a similar
risk bond is 10 percent.
a. 5
b. 10
c. 11
d. 7
96. CUP Company 8% bonds are currently selling for $950. These bonds (par value of $1,000) mature in one
year and pay interest annually. Determine the yield to maturity (to the nearest tenth of 1 percent) on this
bond issue.
a. 13.7%
b. 13.0%
c. 13.3%
d. 5.0%
Chapter 6: Fixed-Income Securities: Characteristics and Valuation
97. What is the yield to maturity of a TVA bond that has a 9 1/2 percent coupon, pays interest semi-annually,
has 12 years to maturity, and sells for $871.50?
a. 11.3%
b. 11.5%
c. 11.8%
d. 12.1%
98. Grace Corp. has a zero-coupon bond outstanding that matures in 15 years. This bond is selling for $327.50
today and will pay $1,000 at maturity. What is the yield to maturity to the investor who buys the bond and
holds it until maturity?
a. 7.73%
b. 9.33%
c. 9.23%
d. 9.77%
Chapter 6: Fixed-Income Securities: Characteristics and Valuation
99. WPI has a bond issue outstanding that has a coupon rate of 10%, and a current yield of 11%. The yield to
maturity on this bond is 12%. What is the market price, to the nearest dollar, of the WPI bond if it pays
interest semi- annually and has 10 years to mature?
a. $ 941
b. $1021
c. $1000
d. $ 885
100. What is the yield to maturity of a bond with 10 years to maturity, and a coupon of 15%? The current price of
this bond is $1,109. Assume interest is paid annually.
a. 12.0%
b. 12.5%
c. 13.0%
d. 13.5%
101. What is the yield–to–maturity of an Acme bond selling for $1107.50 with 5 years to maturity, a 12 1/2%
coupon, and semi-annual compounding?
a. 10.36%
b. 11.29%
c. 9.74%
d. 10.20%
Chapter 6: Fixed-Income Securities: Characteristics and Valuation
102. WXAM has an outstanding bond issue with a coupon rate of 6 1/8%, and a current yield of 6.9%. The yield
to maturity on this bond is 7 5/8%. What is the market price of this bond if it pays interest semi-annually and
has 12 years to maturity?
a. $883.42
b. $937.45
c. $943.65
d. $1000.00
103. What is the yield–to–maturity of a Viacom bond which is selling for $948.75 with 6 years to maturity and a
7% coupon?
a. 7.01%
b. 8.11%
c. 8.38%
d. 7.38%
104. What would a GMA 6% coupon bond maturing in 14 years sell (approximately) for if the current yield is
6.8633% and the yield-to–maturity is 7.48%?
a. $950.20
b. $920.02
c. $1051.54
d. $874.21
Chapter 6: Fixed-Income Securities: Characteristics and Valuation
105. Which of the following is NOT one of the many differences between long-term debt and preferred stock?
a. Long-term debt pays interest which is tax-deductible to the borrower.
b. Preferred stockholders are paid before bondholders if the company bankrupts.
c. Preferred stockholders are considered non-voting owners of the company.
d. The firm is not legally required to pay preferred stock dividends, but must pay interest to bondholders.
106. There are consequences associated with not paying interest to bondholders. Which of the following apply?
I. Not paying an interest payment automatically puts the company in default making the entire loan
due.
II. Interest on debt is not required to be paid, but the corporation generally pays it for public
relations reasons.
a. Only statement I is correct
b. Only statement II is correct
c. Both statements I and II are correct
d. Neither statement I nor II is correct
107. Which of the following is/are correct regarding the maturity date on securities?
I. Long-term debt has a shorter maturity date than preferred stock.
II. Preferred stock can have no specific maturity date, so can be perpetual.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
108. Debt is usually issued with a par value of
a. $500.
b. $0.
c. $1000.
d. $5000.
109. Which of the following is NOT one of the various types of long-term debt?
a. Junior debentures
b. Secured loans
c. Senior debentures
d. Preferred stock
Chapter 6: Fixed-Income Securities: Characteristics and Valuation
110. The largest user of mortgage bonds is
a. credit unions.
b. commercial banks.
c. utility companies.
d. small companies.
111. Which of the following statements is/are correct about long-term loans?
I. Debentures are generally sold with a lower interest rate than mortgage bonds or secured bonds.
II. The quality of a debenture depends on the general creditworthiness of the issuing company.
a. Only statement I is correct
b. Only statement II is correct
c. Both statements I and II are correct
d. Neither statement I nor II is correct
112. An indenture on long-term debt does all of the following EXCEPT:
a. It lists restrictions placed on the borrower by the lender.
b. It specifies the manner in which the principal must be repaid.
c. It allows the borrower to borrow extensively so that the interest may be regularly paid.
d. It details the nature of the debt issue.
113. Mighty Mollusk, Inc. issued a 30-year bond which is callable in 8 years. It has a coupon rate of 5.5% payable
semi-annually, a yield to maturity of 8% and a call premium of one year’s interest. What is the yield to call?
a. 6.75%
b. 13,67%
c. 4.82%
d. 11.42%
Chapter 6: Fixed-Income Securities: Characteristics and Valuation
114. An advantage of preferred stock financing is:
a. Preferred stockholders can vote for the Board of Directors and be an integral part of the direction of the
company.
b. Preferred stock dividends are tax-deductible for the investor.
c. Preferred stock dividends are flexible. The penalties for not paying a dividend are not severe.
d. Preferred stock is the most preferred method of raising capital.
115. Unsecured income bonds are considered securities.
a. strong
b. government
c. weak
d. non–corruptible
116. There are various types of government debt securities. Which of the following is considered a long term
government debt instrument?
a. Treasury bills
b. Treasury notes
c. Commercial paper
d. Debentures
Chapter 6: Fixed-Income Securities: Characteristics and Valuation
117. Yummy Tummy Bakeries has issued a 30 year par value bond that is callable in 5 years. If the coupon
rate is 5.5% payable semi-annually, what is the bond’s yield to call if the yield to maturity is 8% and the
call premium is one year’s interest?
a. 12.65%
b. 18.91%
c. 14.42%
d. 10.62%
118. List the restrictions that an indenture places on the borrower of long-term debt.
119. What is the collateral used in collateral trust bonds and who is its primary user?
Chapter 6: Fixed-Income Securities: Characteristics and Valuation
120. List the advantages and disadvantages of long-term debt financing:
121. How does a firm value an asset?
122. What is a “paymentinkind” bond and why is it considered a “weak security”?
123. Explain a sinking fund.
124. What is a eurobond?
a. A bond issued in Europe and sold in the United States
b. A bond issued in Japan and sold in Europe
c. A bond issued by a U.S. corporation and sold to investors in Europe
d. A bond issued by U.S. corporations, denominated in euros, and sold to investors in the United States
125. Foreign bonds have all of the following characteristics EXCEPT:
a. They are underwritten by an investment banking syndicate.
b. They are denominated in the currency of the country of sale.
c. They are denominated in euros.
d. The bond issuer is from a country other than the country in which the bonds are being issued.
Chapter 6: Fixed-Income Securities: Characteristics and Valuation
126. The length of time that an investor keeps an asset is called:
a. the retention period
b. the holding period
c. the maintenance period
d. none of the answers listed is correct.
127. When an investor is trying to find the market value of an asset, he/she is trying to determine:
a. the exchange rate
b. the par value
c. the interest payment
d. the market price
128. When does market equilibrium for an asset exist?
a. when there is no tendency for the price of the asset to move higher or lower
b. when the bid price equals the ask price
c. when the asset can be resold at a profit
d. when the asset can be bought at a discount
129. A unique characteristic of bearer bonds is:
a. The name and country of the bond owner is on the bond.
b. The name and country of the bond owner is not on the bond.
c. The name and country of the bond owner is on the bond but the owner does not need to pay taxes on
interest received.
d. The bond is heavily regulated and requires full disclosure to avoid fraud.
130. All of the following are characteristics of leveraged buyouts EXCEPT:
a. A large amount of the purchase price is borrowed.
b. The purchased assets of the bought firm are used as collateral for the buyout.
c. LBOs have led to enormous wealth increases for the common stockholders of the acquired firm.
d. The impact of most LBOs has been an increase in the bond ratings of the acquired firm because of the
decrease in perceived risk.
Chapter 6: Fixed-Income Securities: Characteristics and Valuation
131. Penny Pincher Discount Grocers has issued a bond with a coupon rate of 11%. It recently closed at a price of
$1023.75. What is the bond‘s current yield?
a. 10.75%
b. 3.25%%
c. 12.8%
d. 8.9%