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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.
6.4 Bond valuation
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
21) Zheng Corporation plans to issue new bonds to finance its expansion plans. In its efforts to price the
issue, Zheng Corporation has identified a company of similar risk with an outstanding bond issue that
has an 8 percent coupon rate having a maturity of ten years. This firm's bonds are currently selling for
$1,091.96. If interest is paid annually for both bonds, what must the coupon rate of the new bonds be in
order for the issue to sell at par?
A) 5.78%
B) 6.88%
C) 6.50%
D) 6.71%
22) If the coupon rate of a bond is equal to its required rate of return, then ________.
A) the market value is less than par value
B) the market value is equal to par value
C) the market value is greater than par value
D) the bond has just been issued
23) Bonds that sell at less than face value are priced at a ________, while bonds which sell at greater than
face value sell at a ________.
A) par; premium
B) discount; par
C) discount; premium
D) coupon; premium
24) The price of a bond that pays a fixed coupon rate and the bond's required return have a relationship
that is best described as ________.
A) perfect positive correlation
B) constant
C) direct
D) inverse
25) When the required return is constant and equal to the coupon rate, the price of a bond as it
approaches its maturity date will ________.
A) remain at par
B) increase
C) decrease
D) change depending on whether it is a discount or premium bond
26) Interest rate risk and the time to maturity have a relationship that is best characterized as ________.
A) constant
B) varying
C) direct
D) inverse
27) If the required return is less than the coupon rate, a bond will sell at ________.
A) par
B) a discount
C) a premium
D) book value
28) When the required return is constant but different from the coupon rate, the price of a bond as it
approaches its maturity date will ________.
A) remain constant
B) increase
C) decrease
D) approach par
29) If the required return is greater than the coupon rate, a bond will sell at ________.
A) par
B) a discount
C) a premium
D) book value
30) ABC company has two bonds outstanding that are the same except for the maturity date. Bond D
matures in 4 years, while Bond E matures in 7 years. If the required return changes by 5 percent, then
________.
A) bond D will have a greater change in price
B) bond E will have a greater change in price
C) the price of the bonds will be constant
D) the percentage price change for the bonds will be equal
31) Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent annual coupon
interest rate. The issue has ten years remaining to the maturity date. Bonds of similar risk are currently
selling to yield a 12 percent rate of return. The current value of each Hewitt bond is ________.
A) $791.00
B) $1,000
C) $1,052.24
D) $1,113.00
32) A bond will sell ________ when the stated rate of interest exceeds the required rate of return, ________
when the stated rate of interest is less than the required return, and ________ when the stated rate of
interest is equal to the required return.
A) at a premium; at a discount; equal to the par value
B) at a premium; equal to the par value; at a discount
C) at a discount; at a premium; equal to the par value
D) equal to the par value; at a premium; at a discount
33) If a corporate bond is issued with a coupon rate that varies directly with the required return, the price
of the bond will ________.
A) equal the face value
B) be less than the face value
C) be greater than the face value
D) be greater than or less than the face value depending on how interest rates vary
Table 6.2
34) (a) Calculate the current value of Bond L. (See Table 6.2)
(b) What will happen to the value/price as the bond approaches maturity?
35) Calculate the current value of Bond M. (See Table 6.2)
36) Calculate the current value of Bond M if the time of maturity is six years. (See Table 6.2)
37) (a) Calculate the current value of Bond N. (See Table 6.2)
(b) What will happen to value/price as the bond approaches maturity?
38) Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent coupon interest
rate outstanding. The issue pays interest semiannually and has 10 years remaining to its maturity date.
Bonds of similar risk are currently selling to yield a 12 percent rate of return. What is the value of these
Hewitt Packing Company bonds?
39) To expand its business, the Kingston Outlet factory would like to issue a bond with par value of
$1,000, coupon rate of 10 percent, and maturity of 10 years from now. What is the value of the bond if the
required rate of return is 1) 8 percent, 2) 10 percent, and 3) 12 percent?
40) To finance a new line of product, the Tangshan Toys has issued a bond with a par value of $1,000,
coupon rate of 8 percent, and maturity of 30 years. Compute the price of the bond if the opportunity cost
is 11 percent.
41) Zhen Yi Computers has an outstanding issue of bond with a par value of $1,000, paying 12 percent
coupon rate semiannually. The bond was issued 25 years ago and has 5 years to maturity. What is the
value of the bond assuming 14 percent rate of interest?
42) Tangshan Coal Inc. just issued a 10 percent, 25-year bond with a $1,000 par value that pays interest
semiannually.
(a) How much can the investor expect in annual interest (in dollars)?
(b) How much can the investor expect in interest every six months (in dollars)?
(c) How much can the investor expect in par value at the end of the 25th year?
43) Yantai Food, Inc. has issued a bond with par value of $1,000, a coupon rate of 9 percent that is paid
semi-annually, and that matures in 10 years. What is the value of the bond if the required rate of return is
12 percent?
44) Gong Li has recently inherited $10,000 and is considering purchasing 10 bonds of the Lucky
Corporation. The bond has a par value of $1,000 with 10 percent coupon rate and will mature in 10 years.
Does Gong Li have enough money to buy 10 bonds if the required rate of return is 9 percent?
45) Yield to maturity (YTM) is the rate investors earn if they buy the bond at a specific price and hold it
until maturity.
46) The yield to maturity on a bond with a current price equal to its par or face value, will always be
equal to the coupon interest rate.
47) If a bond's required return always equals its coupon interest rate, the bond's value will remain at par
until it matures.
48) When a bond's value differs from par, its yield to maturity will differ from its coupon interest rate.
49) Yield to call represents the rate of return that investors earn if they buy a callable bond at a specific
price and hold it until it is called back and they receive the call price, which would be set above the
bond's par value.
50) For an investor who plans to purchase a bond maturing in one year, the primary consideration should
be ________.
A) retained earnings
B) face value
C) yield to maturity
D) net income
51) The yield to maturity on a bond with price equal to its par value will ________.
A) be less than the coupon rate
B) be more than the coupon rate
C) always be equal to the coupon rate
D) be less than or equal to the coupon rate depending on the required return
52) What is the current price of a $1,000 par value bond maturing in 9 years with a coupon rate of 8
percent, paid annually, that has a YTM of 9 percent?
A) $700
B) $945
C) $940
D) $1,062
53) What is the approximate yield to maturity for a $1,000 par value bond selling for $1,120 that matures
in 6 years and pays 12 percent interest annually?
A) 8.5 percent
B) 9.3 percent
C) 12.0 percent
D) 13.2 percent
54) Tangshan Industries has issued a bond which has a $1,000 par value and a 15 percent annual coupon
interest rate. The bond will mature in ten years and currently sells for $1,250. Using this information, the
yield to maturity on the Tangshan Industries bond is ________.
A) 10.79 percent
B) 11.39 percent
C) 12.19 percent
D) 13.29 percent
55) What is the yield to maturity, to the nearest percent, for the following bond: current price is $908,
coupon rate is 11 percent, $1,000 par value, interest paid annually, eight years to maturity?
A) 11 percent
B) 12 percent
C) 13 percent
D) 14 percent
56) What is the current price of a $1,000 par value bond maturing in 12 years with a coupon rate of 14
percent, paid semiannually, that has a YTM of 13 percent?
A) $604
B) $1,090
C) $1,060
D) $1,073
57) Nico Corp issued bonds bearing a coupon rate of 12 percent, pay coupons semiannually, have 3 years
remaining to maturity, and are currently priced at $940 per bond. What is the yield to maturity?
A) 12.00%
B) 13.99%
C) 14.54%
D) 15.25%
