Question 1

Bonds sell at a premium when the market rate of interest is:

Accepted Answer

A)  less than the bond's coupon rate. 
B)  greater than the bond's coupon rate. 
C)  equal to the bond's coupon rate. 
D)  None of the above is true. 
A)  less than the bond's coupon rate. 
B)  greater than the bond's coupon rate. 
C)  equal to the bond's coupon rate. 
D)  None of the above is true.

Question 2

Convertible bonds can be converted into shares of common stock at some predetermined ratio at the discretion of the bondholder.

Accepted Answer

A) True 
 B)False

Question 3

Rachel McGovern bought a 10-year bond for $921.77 seven years ago. The bond pays a coupon of 15 percent semiannually. Today, the bond is priced at $961.22. If she sold the bond today, what would be her realized yield? (Round to the nearest percent.)

Accepted Answer

A)  17% 
B)  18% 
C)  9% 
D)  10% 
A)  17% 
B)  18% 
C)  9% 
D)  10%

Question 4

Which of the following statements is true?

Accepted Answer

A)  For a given change in market interest rates, the prices of higher-coupon bonds change more than the prices of lower-coupon bonds. 
B)  If market interest rates rise, a 1-year bond will fall in value more than a 10-year bond. 
C)  If interest rates rise, bond prices will rise. 
D)  If market interest rates rise, a 10-year bond will fall in value more than a 1-year bond. 
A)  For a given change in market interest rates, the prices of higher-coupon bonds change more than the prices of lower-coupon bonds. 
B)  If market interest rates rise, a 1-year bond will fall in value more than a 10-year bond. 
C)  If interest rates rise, bond prices will rise. 
D)  If market interest rates rise, a 10-year bond will fall in value more than a 1-year bond.

Question 5

If investors believe inflation will be increasing in the future, the prevailing yield will be downward sloping.

Accepted Answer

A) True 
 B)False

Question 6

Giant Electronics is issuing 20-year bonds that will pay coupons semiannually. The coupon rate on this bond is 7.8 percent. If the market rate for such bonds is 7 percent, what will the bonds sell for today? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

Accepted Answer

A)  $1,037 
B)  $1,085 
C)  $861 
D)  $923 
A)  $1,037 
B)  $1,085 
C)  $861 
D)  $923

Question 7

Which one of the following statements about vanilla bonds is NOT true?

Accepted Answer

A)  They have fixed coupon payments. 
B)  The face value, or par value, for most corporate bonds is $1,000. 
C)  Coupon payments are usually made quarterly. 
D)  The bond's coupon rate is calculated as the annual coupon payment divided by the bond's face value. 
A)  They have fixed coupon payments. 
B)  The face value, or par value, for most corporate bonds is $1,000. 
C)  Coupon payments are usually made quarterly. 
D)  The bond's coupon rate is calculated as the annual coupon payment divided by the bond's face value.

Question 8

Corporate bonds have a thin market relative to market for corporate stocks.

Accepted Answer

A) True 
 B)False

Question 9

Jenny LePlaz is looking to invest in a five-year bond that pays annual coupons of 6.25 percent and currently sells at $912.34. What is the current market yield on such bonds? (Round to the closest answer.)

Accepted Answer

A)  9.5% 
B)  8.5% 
C)  6.5% 
D)  7.5% 
A)  9.5% 
B)  8.5% 
C)  6.5% 
D)  7.5%

Question 10

Which of the following statements is most true about zero coupon bonds?

Accepted Answer

A)  They typically sell at a premium over par when they are first issued. 
B)  They typically sell for a higher price than similar coupon bonds. 
C)  They are always convertible to common stock. 
D)  They typically sell at a deep discount below par when they are first issued. 
A)  They typically sell at a premium over par when they are first issued. 
B)  They typically sell for a higher price than similar coupon bonds. 
C)  They are always convertible to common stock. 
D)  They typically sell at a deep discount below par when they are first issued.

Question 11

The face or par value for most corporate bonds is equal to $1,000, and it is the principal amount owed to bondholders at maturity.

Accepted Answer

A) True 
 B)False

Question 12

Zero coupon bonds sell well above their par value because they offer no coupons.

Accepted Answer

A) True 
 B)False

Question 13

In calculating the current price of a bond paying semiannual coupons, one needs to

Accepted Answer

A)  use double the number of years for the number of payments made. 
B)  use the semiannual coupon. 
C)  use the semiannual rate as the discount rate. 
D)  All of the above need to be done. 
A)  use double the number of years for the number of payments made. 
B)  use the semiannual coupon. 
C)  use the semiannual rate as the discount rate. 
D)  All of the above need to be done.

Question 14

Prices in the corporate bond market tend to be more volatile than securities sold in markets with greater trading volumes.

Accepted Answer

A) True 
 B)False

Question 15

Which one of the following statements about zero coupon bonds is NOT true?

Accepted Answer

A)  Zero coupon bonds have no coupon payments but promise a single payment at maturity. 
B)  Zero coupon bonds must sell for less than similar bonds that make periodic coupon payments. 
C)  Zero coupon bonds make coupon payments but no principal payment at maturity. 
D)  All of the above statements are true. 
A)  Zero coupon bonds have no coupon payments but promise a single payment at maturity. 
B)  Zero coupon bonds must sell for less than similar bonds that make periodic coupon payments. 
C)  Zero coupon bonds make coupon payments but no principal payment at maturity. 
D)  All of the above statements are true.

Question 16

The value, or price, of any asset is the present value of its future cash flows.

Accepted Answer

A) True 
 B)False

Question 17

Kevin Rogers is interested in buying a five-year bond that pays a coupon of 10 percent on a semiannual basis. The current market rate for similar bonds is 8.8 percent. What should be the current price of this bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

Accepted Answer

A)  $1,048 
B)  $965 
C)  $1,099 
D)  $982 
A)  $1,048 
B)  $965 
C)  $1,099 
D)  $982

Question 18

Your friend recommends that you invest in a three-year bond issued by Trimer, Inc., that will pay annual coupons of 10 percent. Similar investments today will yield 6 percent. How much should you pay for the bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

Accepted Answer

A)  $1,024 
B)  $979 
C)  $886 
D)  $1,107 
A)  $1,024 
B)  $979 
C)  $886 
D)  $1,107

Question 19

Which of the following statements is true?

Accepted Answer

A)  To secure the conversion option on a bond, bondholders would be willing to pay a premium. 
B)  Typically, the conversion ratio is set so that the firm's stock price must appreciate at least 15 to 20 percent before it is profitable to convert bonds into stock. 
C)  Convertible bonds can be converted into shares of common stock at some predetermined ratio at the discretion of the bondholder. 
D)  All of the above are true. 
A)  To secure the conversion option on a bond, bondholders would be willing to pay a premium. 
B)  Typically, the conversion ratio is set so that the firm's stock price must appreciate at least 15 to 20 percent before it is profitable to convert bonds into stock. 
C)  Convertible bonds can be converted into shares of common stock at some predetermined ratio at the discretion of the bondholder. 
D)  All of the above are true.

Question 20

Why does the default risk premium vary over the business cycle?

Accepted Answer

Default risk premiums vary over the busi

Bonds sell at a premium when the market rate of interest is:

Convertible bonds can be converted into shares of common stock at some predetermined ratio at the discretion of the bondholder.

Rachel McGovern bought a 10-year bond for $921.77 seven years ago. The bond pays a coupon of 15 percent semiannually. Today, the bond is priced at $961.22. If she sold the bond today, what would be her realized yield? (Round to the nearest percent.)

Which of the following statements is true?

If investors believe inflation will be increasing in the future, the prevailing yield will be downward sloping.

Giant Electronics is issuing 20-year bonds that will pay coupons semiannually. The coupon rate on this bond is 7.8 percent. If the market rate for such bonds is 7 percent, what will the bonds sell for today? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

Which one of the following statements about vanilla bonds is NOT true?

Corporate bonds have a thin market relative to market for corporate stocks.

Jenny LePlaz is looking to invest in a five-year bond that pays annual coupons of 6.25 percent and currently sells at $912.34. What is the current market yield on such bonds? (Round to the closest answer.)

Which of the following statements is most true about zero coupon bonds?

The face or par value for most corporate bonds is equal to $1,000, and it is the principal amount owed to bondholders at maturity.

Zero coupon bonds sell well above their par value because they offer no coupons.

In calculating the current price of a bond paying semiannual coupons, one needs to

Prices in the corporate bond market tend to be more volatile than securities sold in markets with greater trading volumes.

Which one of the following statements about zero coupon bonds is NOT true?

The value, or price, of any asset is the present value of its future cash flows.

Which of the following statements is true?

Why does the default risk premium vary over the business cycle?

The Financial Manager and the Firm

The Financial System and the Level of Interest Rates

The Financial System and the Level of Interest Rates

Analyzing Financial Statements

The Time Value of Money

Discounted Cash Flows and Valuation

Risk and Return

Stock Valuation

The Fundamentals of Capital Budgeting

Cash Flows and Capital Budgeting

Evaluating Project Economics

The Cost of Capital

Working Capital Management

How Firms Raise Capital

Capital Structure Policy

Dividends, Stock Repurchases, and Payout Policy

Business Formation, Growth, and Valuation

Financial Planning and Managing Growth

Options and Corporate Finance

International Financial Management

Filters

Exam 8: Bond Valuation and the Structure of Interest Rates

Bonds sell at a premium when the market rate of interest is:

Convertible bonds can be converted into shares of common stock at some predetermined ratio at the discretion of the bondholder.

Rachel McGovern bought a 10-year bond for $921.77 seven years ago. The bond pays a coupon of 15 percent semiannually. Today, the bond is priced at $961.22. If she sold the bond today, what would be her realized yield? (Round to the nearest percent.)

Which of the following statements is true?

If investors believe inflation will be increasing in the future, the prevailing yield will be downward sloping.

Giant Electronics is issuing 20-year bonds that will pay coupons semiannually. The coupon rate on this bond is 7.8 percent. If the market rate for such bonds is 7 percent, what will the bonds sell for today? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

Which one of the following statements about vanilla bonds is NOT true?

Corporate bonds have a thin market relative to market for corporate stocks.

Jenny LePlaz is looking to invest in a five-year bond that pays annual coupons of 6.25 percent and currently sells at $912.34. What is the current market yield on such bonds? (Round to the closest answer.)

Which of the following statements is most true about zero coupon bonds?

The face or par value for most corporate bonds is equal to $1,000, and it is the principal amount owed to bondholders at maturity.

Zero coupon bonds sell well above their par value because they offer no coupons.

In calculating the current price of a bond paying semiannual coupons, one needs to

Prices in the corporate bond market tend to be more volatile than securities sold in markets with greater trading volumes.

Which one of the following statements about zero coupon bonds is NOT true?

The value, or price, of any asset is the present value of its future cash flows.

Which of the following statements is true?

Why does the default risk premium vary over the business cycle?

The Financial Manager and the Firm

The Financial System and the Level of Interest Rates

The Financial System and the Level of Interest Rates

Analyzing Financial Statements

The Time Value of Money

Discounted Cash Flows and Valuation

Risk and Return

Stock Valuation

The Fundamentals of Capital Budgeting

Cash Flows and Capital Budgeting

Evaluating Project Economics

The Cost of Capital

Working Capital Management

How Firms Raise Capital

Capital Structure Policy

Dividends, Stock Repurchases, and Payout Policy

Business Formation, Growth, and Valuation

Financial Planning and Managing Growth

Options and Corporate Finance

International Financial Management

Filters