Exam 6: Interest Rates and Bond Valuation

Table 6.1 Use the below information to answer the following question(s). -Based on the Table 6.1, assume this bond's face value is $1,000. What is the bond's current market price?

An instrument that give their holders the right to purchase a certain number of shares of the firm's common stock at a specified price over a certain period of time is called

A call premium is the amount by which the call price exceeds the market price of the bond.

The value of an asset is determined by discounting the expected cash flows back to its present value, using the rate of return on the market portfolio as a discount rate.

Upward-sloping yield curves result from higher future inflation expectations, lender preferences for shorter maturity loans, and greater supply of short-term as opposed to long-term loans relative to their respective demand.

A ________ is a restrictive provision on a bond which provides for the systematic retirement of the bonds prior to their maturity.

A yield curve that reflects relatively similar borrowing costs for both short-term and long-term loans is called

The level of risk associated with a given cash flow positively affects its value.

Debentures such as convertible bonds are unsecured bonds that, in general, only the most creditworthy firms can issue.

Stock-purchase warrants are instruments that give their holder the right to purchase a certain number of shares of the firm's common stock at the market price over a certain period of time.

The 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 15 percent

The value of a bond is the present value of the

To sell a callable bond, the issuer must pay a higher interest rate than on an otherwise equivalent noncallable bond.

The price of a bond with a fixed coupon rate and the market required return have a relationship that is best described as

The key inputs to the valuation process include

When the required return is constant but different from the coupon rate, the price of a bond as it approaches its maturity date will

High-quality (high-rated) bonds provide lower returns than lower-quality (low-rated) bonds.

Table 6.2 -(a) Calculate the current value of Bond N. (See Table 6.2) (b) What will happen to value/price as the bond approaches maturity?

A bond will sell at a premium when its required return rises above its coupon interest rate.

Danno is trying to decide which of two bonds to buy. Bond H is a 10 percent coupon, 10-year maturity, $1,000 par, January 1, 2000 issue paying annual interest. Bond F is a 10 percent coupon, 10-year maturity, $1,000 par, January 1, 2000 issue paying semiannual interest. The market required return for each bond is 10 percent. When using present value to determine the prices of the bonds, Danno will find that