7.6 Learning Objective 6
1) John and Karen are both considering buying a corporate bond with a coupon rate of 8%, a face
value of $1,000, and a maturity date of January 1, 2025. Which of the following statements is
most correct?
A) Because both John and Karen will receive the same cash flows if they each buy a bond, they
both must assign the same value to the bond.
B) If John decides to buy the bond, then Karen will also decide to buy the bond, if markets are
efficient.
C) John and Karen will only buy the bonds if the bonds are rated BBB or above.
D) John may determine a different value for a bond than Karen because each investor may have
a different level of risk aversion, and hence a different required return.
2) Suppose interest rates have been at historically low levels the past two years. A reasonable
strategy for bond investors during this time period would be to
A) invest in long-term bonds to reduce interest rate risk.
B) invest in short-term bonds to reduce interest rate risk.
C) buy only junk bonds which have higher interest rates.
D) invest in long-term bonds to lock in a bond position for when interest rates increase in the
future.
3) Aaron Corporation has two bonds outstanding. Both bonds mature in 10 years, have a face
value of $1,000, and have a yield to maturity of 8%. One bond is a zero coupon bond and the
other bond has a coupon rate of 8%. Which of the following statements is true?
A) Both bonds must sell for the same price if markets are in equilibrium.
B) The zero coupon bond must have a higher price because of its greater capital gain potential.
C) The zero coupon bond must sell for a lower price than the bond with an 8% coupon rate.
D) All rational investors will prefer the 8% bond because it pays more interest.
4) Two investors are considering the purchase of Corporation XYZ bonds. The bonds are selling
at a price of $1,100 each. Investor A decides to buy the bonds and Investor B does not buy the
bonds.
A) Investor A must have a required return lower than the required return for Investor B.
B) The yield to maturity for Investor A must be higher than the yield to maturity for Investor B.
C) The yield to maturity for Investor A must be less than the yield to maturity for Investor B.
D) The yield to maturity for this bond must be higher than the coupon rate.
5) A bond issued by Barney, Inc. 10 years ago has a coupon rate of 8% and a face value of
$1,000. The bond will mature in 15 years. What is the value to an investor with a required return
of 12.5%?
A) $800
B) $750.86
C) $658.94
D) $701.52
6) Which of the following will cause the value of a bond to increase, other things held the same?
A) investors’ required rate of return increases.
B) the company’s debt rating drops from AAA to BBB.
C) interest rates decrease.
D) the bond is callable.
7) The interest on corporate bonds is typically paid
A) semi-annually.
B) annually.
C) quarterly.
D) monthly.
8) International Cruise Lines sold an issue of 12-year $1,000 par bonds to build new ships. The
bonds pay 4.85% interest, semi-annually. Today’s required rate of return is 9.7%. How much
should these bonds sell for today? Round off to the nearest $1.
A) $771.86
B) $732.93
C) $660.45
D) $598.33
9) Which of the following statements is true?
A) Short-term bonds have greater interest rate risk than do long-term bonds.
B) Long-term bonds have greater interest rate risk than do short-term bonds.
C) All bonds have equal interest rate risk.
D) Interest rate risk is highest during periods of high interest rates.
10) Cranston Industries just issued $1,000 par 30-year bonds. The bonds sold for $1,107.20 and
pay interest semi-annually. Investors require a rate of 7.75% on the bonds. What is the bonds’
coupon rate?
A) 9.333%
B) 7.750%
C) 4.125%
D) 8.675%
11) Metal Fabricators just issued $1,000 par 20-year bonds. The bonds sold for $758.18 and pay
interest semi-annually. Investors require a rate of 9% on the bonds. What is the bonds’ coupon
rate?
A) 6%
B) 7%
C) 8%
D) 9%
12) Which of the following statements is true?
A) The value of a bond is inversely related to changes in investors’ present required rate of
return.
B) If interest rates decrease, the value of a bond will decrease.
C) If interest rates increase, the value of a bond will increase.
D) If interest rates remain constant, the value of premium bonds will increase over time.
13) If market interest rates rise
A) short-term bonds will decline in value more than long-term bonds.
B) short-term bonds will rise in value more than long-term bonds.
C) long-term bonds will decline in value more than short-term bonds.
D) long-term bonds will rise in value more than short-term bonds.
14) If market interest rates decline
A) short-term bonds will decline in value more than long-term bonds.
B) short-term bonds will rise in value more than long-term bonds.
C) long-term bonds will decline in value more than short-term bonds.
D) long-term bonds will rise in value more than short-term bonds.
15) Halverson, Inc. just issued $1,000 par 20-year bonds. The bonds sold for $936 and pay
interest semi-annually. Investors require a rate of 7.00% on the bonds. What is the amount of the
semi-annual interest payment on the bonds?
A) $64.50
B) $55.00
C) $32.00
D) $21.75
16) Due to a number of lawsuits related to toxic wastes, a major chemical company has recently
experienced a market revaluation. The firm has bonds outstanding that were issued 8 years ago
at their par value of $1,000. These bonds have 12 years to maturity and a coupon rate of 6
percent, with interest paid semiannually. The required return on these bonds has increased to 14
percent. What is the current value of one of these bonds?
17) A bond with a $1,000 face value and a 10 percent annual coupon rate matures in 15 years.
a. Determine the value of the bond to a friend of yours with a required rate of return of 13%.
b. A zero coupon bond with similar risk is selling for $180. The bond has a face value of
$1,000 and matures in 15 years. Your friend asks you which bond she should invest in, the zero
coupon bond or the bond in part (a). Which bond do you recommend, and why? Assume the
market price of the bond in part (a) is $820.
18) GART, Inc. has issued a $1,000 par 4% annual coupon bond that is to mature in 18 years. If
your required rate of return is 6.5%, what price would you be willing to pay for the bond?
19) Calculate the value of a bond that is expected to mature in 18 years with a $1,000 face value.
The coupon rate is 4%, and the required rate of return is 8%. Interest is paid annually.
7.7 Learning Objective 7
1) If a bond sells for its par value, the coupon interest rate and yield to maturity are equal.
2) A bond with a coupon rate of 8% will also have a yield to maturity of 8%.
3) If a bond is selling below its face value, then its yield to maturity must be less than the bond’s
coupon rate.
4) If two bonds have the same yield to maturity, they also have the same current yield.
5) The yield to maturity is the discount rate that equates the present value of the interest and
principal payments with the current market price of the bond.
6) The yield-to-maturity is the discount rate that equates the present value of the interest and
principal payments with the face value of the bond.
7) The current yield is greater than the coupon rate for a bond selling above par value.
8) The less risky the bond (or the higher the bond rating) the lower will be the yield to maturity
on the bond.
9) Bond A has a current yield of 6% and Bond B has a current yield of 8%. If the market price of
both bonds is the same, then the yield to maturity on Bond B must be higher than the yield to
maturity on Bond A.
10) The current yield for a bond is constant over time because the coupon rate is fixed.
11) A bond’s yield to maturity varies from investor to investor because each investor has his or
her own required return.
12) In Excel, the variable PV stands for a bond’s par value.
13) When using the PV (present value) function in Excel to calculate bond values, the bond’s
coupon rate is entered as the Rate variable.
14) Leveraged buyouts (LBOs) are used by existing corporate bondholders to increase the rate of
return earned on their bonds.
15) The yield to maturity on a bond
A) is fixed in the indenture.
B) is lower for higher risk bonds.
C) is the required rate of return on the bond.
D) is generally below the coupon interest rate.
16) The yield to maturity on a bond is the rate of return that equates the present value of the
bond’s future cash flows with the bond’s
A) face value.
B) market value.
C) liquidation value.
D) book value.
17) In 1998 Fischer Corp issued bonds with an 8 percent coupon rate and a $1,000 face value.
The bonds mature on March 1, 2023. If an investor purchased one of these bonds on March 1,
2010, determine the yield to maturity if the investor paid $1,100 for the bond.
A) 7%
B) The yield to maturity is $900 ($1,000 interest less $100 capital loss).
C) The yield to maturity must be greater than 8% because the price paid for the bond exceeds the
face value.
D) 5.4%
18) 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 (interest 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 correct.
19) Zevo Corp. bonds have a coupon rate of 7%, a yield to maturity of 10%, a face value of
$1,000, and mature in 10 years. Which of the following statements is most correct?
A) An investor who purchases the bond today will earn a return of 10% if he sells the bond after
one year.
B) An investor who purchases the bond today will earn a return of 7% if he sells the bond after
one year.
C) An investor who purchases the bond today will earn a return of 17% per year if he holds the
bond until it matures.
D) An investor who purchases the bond today will earn a return of 10% per year if he holds the
bond until it matures.
20) A corporate bond has a coupon rate of 9%, a face value of $1,000, and matures in 15 years.
Which of the following statements is most correct?
A) An investor with a required return of 10% will value the bond at more than $1,000.
B) An investor who buys the bond for $900 and holds the bond until maturity will have a capital
loss.
C) An investor who buys the bond for $900 will have a yield to maturity on the bond greater than
9%.
D) If the bond’s market price is $900, then the annual interest payments on the bond will be $81.
21) SWH Corporation issued bonds on January 1, 2004. The bonds had a coupon rate of 5.5%,
with interest paid semiannually. The face value of the bonds is $1,000 and the bonds mature on
January 1, 2019. What is the yield to maturity for an SWH Corporation bond on January 1, 2010
if the market price of the bond on that date is $950?
A) 5.50%
B) 6.23%
C) 8.43%
D) 10.50%
22) Jeffrey Corp. Bonds have a current yield of 7% and mature in 10 years. Jones Corp. Bonds
have a current yield of 5% and mature in 10 years. Given this information, which of the
following statements is most correct?
A) Jeffrey Corp. Bonds will have a higher yield to maturity than Jones Corp. Bonds.
B) Jones Corp. Bonds will sell for a lower price than Jeffrey Corp. Bonds.
C) Jones Corp. Bonds are riskier than Jeffrey Corp. Bonds.
D) If both bonds have the same yield to maturity, then the price of Jones Corp. Bonds must be
less than the price of Jeffrey Corp. Bonds.
23) While checking the Wall Street Journal bond listings you notice that the price of an AT&T
bond is the same as the price of a K-Mart bond. Based on this information you know that
A) the bond with the lower coupon rate will have the lower current yield.
B) both bonds have the same yield to maturity.
C) both bonds will have the same bond rating.
D) the bond with the longest time to maturity will have the highest yield to maturity.
24) A $1,000 par value 14-year bond with a 10 percent coupon rate recently sold for $965. The
yield to maturity is
A) 10.49%.
B) 10.00%.
C) 8.87%.
D) 6.50%.
25) Which of the following is NOT a definition of yield to maturity?
A) discount rate that equates present value of future cash flows with a bond’s price.
B) investors’ required rate of return on a bond investment.
C) return that an investor will earn if they buy the bond for its market price and hold it until
maturity.
D) discount rate that equates present value of future cash flows with a bond’s face value.
26) If the market price of a bond decreases, then
A) the yield to maturity decreases.
B) the coupon rate increases.
C) the yield to maturity increases.
D) the coupon rate decreases.
27) Ajax Corp issued 25 year bonds in 2002 with a coupon rate of 6% and a face value of
$1,000. The bonds sold for face value when issued. Since 2002, interest rates have increased, so
the going rate on similar bonds is now 9%. Which of the following statements is most accurate?
A) An investor who purchased an Ajax bond in 2002 and plans to keep the bond until it matures
expects to earn 6% per year over the life of the bond.
B) Ajax Corp must now pay bondholders interest payments of $90 per year due to the increase in
interest rates.
C) An investor who purchased an Ajax bond in 2002 and plans to keep the bond until it matures
expects an increase in return from 6% per year to 9% per year.
D) The price of an Ajax Corp bond should be higher than $1,000 due to the increase in rates.
28) What is the yield to maturity of a corporate bond with 13 years to maturity, a coupon rate of
8% per year, a $1,000 par value, and a current market price of $1,250? Assume semi-annual
coupon payments.
A) 4.2%
B) 4.7%
C) 6.0%
D) 5.3%
29) What is the expected rate of return on a bond that matures in 5 years, has a par value of
$1,000, a coupon rate of 11.5%, and is currently selling for $982? Assume annual coupon
payments.
A) 12.5%
B) 12.0%
C) 12.7%
D) 13.4%
30) What is the yield to maturity of a bond that pays an 5% coupon rate with annual coupon
payments, has a par value of $1,000, matures in 15 years, and is currently selling for $769?
A) 2.4%
B) 5.7%
C) 7.6%
D) 9.5%
31) Plasma TV Corporation bonds are currently priced at $1,088. They have a par value of
$1,000 and 12 years to maturity. They pay an annual coupon rate of 6%. What is the yield to
maturity on this bond?
A) 6.7%
B) 6.1%
C) 5.4%
D) 5.0%
32) The yield to maturity on long-term bonds
A) is equal to the current yield if the bond is selling for face value.
B) is equal to the coupon rate on the bond.
C) is equal to the net present value of the bond’s future cash flows.
D) is set by the indenture agreement and will not change over the life of the bond.
33) A bond’s yield to maturity depends upon all of the following except:
A) the individual investor’s required return.
B) the maturity of the bond.
C) the coupon rate.
D) the bond’s risk as reflected by the bond rating.
34) A corporate bond has a coupon rate of 9%, a face value of $1,000, a market price of $850,
and the bond matures in 15 years. Therefore, the bond’s yield to maturity is:
A) 9%.
B) 24%.
C) 11.1%.
D) 13.45%.
35) Two bonds are identical except for their maturity. The bonds have a coupon rate that is
greater than their yield to maturity. Which of the following is true when comparing the two
bonds?
A) The longer maturity bond has a greater premium (is priced farther above par).
B) The longer maturity bond has a smaller premium (is priced above par but closer to par).
C) The longer maturity bond has a greater discount (is priced farther below par).
D) The longer maturity bond has a smaller discount (is priced below par but closer to par).
36) Alaska Power Company issued $1,000 bonds that have an annual coupon rate of 6.5%. The
present market value of the bonds is $1,225. If the bonds have 17 years remaining until maturity,
what is the current yield on Alaska Power Company bonds?
A) 5.3%
B) 6.5%
C) 7.2%
D) 13.2%
37) Bartiromo, Inc. bonds have a 4% coupon rate with semi-annual coupon payments and a
$1,000 par value. The bonds have 11 years until maturity, and sell for $925. What is the current
yield for Bartiromo’s bonds?
A) 2.16%
B) 3.45%
C) 4.32%
D) 5.52%
38) Peerless Securities has an issue of $1,000 par value bonds with 18 years remaining to
maturity. The bonds pay 7.7% interest on a semi-annual basis. The current market price of the
bonds is $1,175. What is the yield-to-maturity of the bonds?
A) 6.09%
B) 6.87%
C) 7.24%
D) 8.38%
39) Two investors are considering the purchase of Corporation ABC bonds. The bonds are
selling at their par value of $1,000 with a coupon rate of 9%. Investor A decides to buy the
bonds and Investor B does not buy the bonds.
A) Investor A must have a required return higher than the bond’s yield to maturity.
B) The yield to maturity for Investor A must be higher than the yield to maturity for Investor B.
C) Investor B must have required return lower than the bond’s yield to maturity.
D) Investor A must have a required return less than or equal to 9%.
40) A zero coupon bond is selling for $476. The bond has a face value of $1,000 and matures in
8 years. Your friend asks you if he should buy the bond. He tells you his required return is 9
percent. Would you recommend he buy the bond or not? Explain your answer.
41) Jackson Corp $1,000 par value bonds currently sell for $752.18. The coupon rate is 7
percent, paid semi-annually. If the bonds have 6 years before maturity, what is the yield to
maturity on the bonds?
42) If you are willing to pay $1,077 for a 15-year $1,000 par value bond that pays 9 percent
interest semi-annually, what is your expected rate of return?
43) Graystone bonds have a maturity value of $1,000. The bonds carry a coupon rate of 12
percent. Interest is paid semi-annually. The bonds will mature in nine years. If the current market
price is $976.50,
a. what is the yield to maturity on the bond?
b. what is the current yield on the bond?
7.8 Learning Objective 8
1) Long-term bonds have greater interest rate risk than shorter-term bonds.
2) A bond selling at a discount will have a built-in capital gain if the bond is held to maturity.
3) A bond that matures in 5 years has less interest rate risk than a bond that matures in 25 years
because regardless of changes in interest rates, the bond can be redeemed for face value 20 years
earlier.
4) The value of a bond is equal to the present value of the bond’s interest payments plus the
present value of the bond’s maturity value, all discounted at the bond’s coupon rate.
5) Cabell Corp. bonds pay an annual coupon rate of 10%. If investors’ required rate of return is
now 12% on these bonds, they will be priced at
A) par value.
B) a premium to par value.
C) a discount to par value.
D) Cannot be determined without knowing the number of years to maturity.
6) The correct relationship for a premium bond is
A) current yield > yield to maturity > coupon rate.
B) current yield > coupon rate > yield to maturity.
C) coupon rate > yield to maturity > current yield.
D) coupon rate > current yield > yield to maturity.
7) A bond will sell at a premium (above par value) if
A) the market value of the bond is greater than the discount rate of the bond.
B) investor’s current required rate of return is below the coupon rate of the bond.
C) current market interest rates are moving in the same direction as bond values.
D) the economy is in a recession.
8) A bond will sell at a discount (below par value) if
A) the market value of the bond is less than the present value of the discount rate of the bond.
B) current market interest rates are moving in the same direction as bond values.
C) investor’s current required rate of return is above the coupon rate of the bond.
D) the economy is booming.
9) Define interest rate risk. How does a bond’s level of interest rate risk depend on its maturity?