Question 1

Which of the following statements is true about convertible bonds?

Accepted Answer

A)  The most significant disadvantage to a corporation of issuing convertible bonds is that they increase the cash that the firm must use to make interest payments. 
B)  The typical conversion ratio is set so that the firm's stock price must appreciate 5% or less before it is profitable for the holder to convert the bond to stock. 
C)  Firms that issue convertible bonds can do so at a lower interest rate. 
D)  The typical issue of convertible bonds allows the holder of the bond to convert it to preferred stock. 
A)  The most significant disadvantage to a corporation of issuing convertible bonds is that they increase the cash that the firm must use to make interest payments. 
B)  The typical conversion ratio is set so that the firm's stock price must appreciate 5% or less before it is profitable for the holder to convert the bond to stock. 
C)  Firms that issue convertible bonds can do so at a lower interest rate. 
D)  The typical issue of convertible bonds allows the holder of the bond to convert it to preferred stock.

Question 2

The face or par value for bonds is the amount paid to bondholders at maturity and is usually equal to $1,000.

Accepted Answer

A) True 
 B)False

Question 3

Bonds sell at a premium over the par value when market rates for similar bonds are

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)  Market rates are irrelevant in determining a bond's price. 
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)  Market rates are irrelevant in determining a bond's price.

Question 4

It is easy for individuals to trade in the corporate bond market because

Accepted Answer

A)  the corporate bond market is considered to be very transparent. 
B)  prices in the corporate bond market tend to be more stable. 
C)  centralized reporting of deals between buyers and sellers take place. 
D)  None of the above statements are true. 
A)  the corporate bond market is considered to be very transparent. 
B)  prices in the corporate bond market tend to be more stable. 
C)  centralized reporting of deals between buyers and sellers take place. 
D)  None of the above statements are true.

Question 5

Which one of the following statements about bond price is NOT true?

Accepted Answer

A)  To compute a bond's price, one needs to calculate the present value of the bond's expected cash flows. 
B)  The value, or price, of any asset is the future value of its cash flows. 
C)  The required rate of return, or discount rate, for a bond is the market interest rate called the bond's yield to maturity 
D)  Estimate the expected future cash flows using the coupons that the bond will pay and the maturity value to be received. 
A)  To compute a bond's price, one needs to calculate the present value of the bond's expected cash flows. 
B)  The value, or price, of any asset is the future value of its cash flows. 
C)  The required rate of return, or discount rate, for a bond is the market interest rate called the bond's yield to maturity 
D)  Estimate the expected future cash flows using the coupons that the bond will pay and the maturity value to be received.

Question 6

Bonds sell at a discount off the par value when market rates for similar bonds are

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)  Market rates are irrelevant in determining a bond's price. 
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)  Market rates are irrelevant in determining a bond's price.

Question 7

Effective annual yield: Stanley Hart invested in a municipal bond that promised an annual yield of 6.7 percent. The bond pays coupons twice a year. What is the effective annual yield (EAY) on this investment?

Accepted Answer

A)  13.4% 
B)  6.81% 
C)  6.70% 
D)  None of the above 
A)  13.4% 
B)  6.81% 
C)  6.70% 
D)  None of the above

Question 8

The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments

Accepted Answer

A)  exceed the price of the bond. 
B)  equal to zero. 
C)  equal to the price of the bond. 
D)  less than the price of the bond. 
A)  exceed the price of the bond. 
B)  equal to zero. 
C)  equal to the price of the bond. 
D)  less than the price of the bond.

Question 9

Which ONE of the following statements is true?

Accepted Answer

A)  Long-term bonds have lower price volatility than short-term bonds. 
B)  As interest rates decline, the prices of bonds rise; and as interest rates rise, the prices of bonds decline. 
C)  All other things being equal, short-term bonds are more risky than long-term bonds. 
D)  Interest rate risk decreases as maturity increases. 
A)  Long-term bonds have lower price volatility than short-term bonds. 
B)  As interest rates decline, the prices of bonds rise; and as interest rates rise, the prices of bonds decline. 
C)  All other things being equal, short-term bonds are more risky than long-term bonds. 
D)  Interest rate risk decreases as maturity increases.

Question 10

Which ONE of the following statements is true?

Accepted Answer

A)  The lower the transaction costs are, the greater a security's marketability. 
B)  The interest rate, or yield, on a security varies inversely with its degree of marketability. 
C)  U.S. Treasury bills have the largest and most active secondary market and are considered to be the most marketable of all securities. 
D)  All of the above are true. 
A)  The lower the transaction costs are, the greater a security's marketability. 
B)  The interest rate, or yield, on a security varies inversely with its degree of marketability. 
C)  U.S. Treasury bills have the largest and most active secondary market and are considered to be the most marketable of all securities. 
D)  All of the above are true.

Question 11

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

Accepted Answer

Default risk premiums vary over the busi

Question 12

Which ONE of the following statements is true?

Accepted Answer

A)  The longer the maturity of a security, the greater its interest rate risk. 
B)  If investors believe inflation will be subsiding in the future, the prevailing yield will be upward sloping. 
C)  The real rate of interest varies with the business cycle, with the lowest rates seen at the end of a period of business expansion and the lowest at the bottom of a recession. 
D)  The interest risk premium always adds a downward bias to the slope of the yield curve. 
A)  The longer the maturity of a security, the greater its interest rate risk. 
B)  If investors believe inflation will be subsiding in the future, the prevailing yield will be upward sloping. 
C)  The real rate of interest varies with the business cycle, with the lowest rates seen at the end of a period of business expansion and the lowest at the bottom of a recession. 
D)  The interest risk premium always adds a downward bias to the slope of the yield curve.

Question 13

Most secondary market transactions for corporate bonds take place on the New York Stock Exchange.

Accepted Answer

A) True 
 B)False

Question 14

In an efficient capital market, security prices fully reflect the knowledge and expectations of all investors at a particular point in time.

Accepted Answer

A) True 
 B)False

Question 15

Zero coupon bonds: Jarmine Corp. is planning to fund a project by issuing 10-year zero coupon bonds with a face value of $1,000. Assuming semiannual coupons to be the norm, what will be the price of these bonds if the appropriate discount rate is 14 percent? (Round to the closest answer.)

Accepted Answer

A)  $852 
B)  $258 
C)  $419 
D)  $841 
A)  $852 
B)  $258 
C)  $419 
D)  $841

Question 16

The largest investors in corporate bonds are banks and state government agencies.

Accepted Answer

A) True 
 B)False

Question 17

What economic factors affect the shape of the yield curve? Explain.

Accepted Answer

Three economic factors determine the sha

Question 18

With semistrong-form market efficiency,

Accepted Answer

A)  the price of a security in the market reflects all public information only. 
B)  it would be possible to earn abnormally high returns by trading on public information. 
C)  investors who have access to inside or private information will be unable to earn abnormal returns. 
D)  None of the above. 
A)  the price of a security in the market reflects all public information only. 
B)  it would be possible to earn abnormally high returns by trading on public information. 
C)  investors who have access to inside or private information will be unable to earn abnormal returns. 
D)  None of the above.

Question 19

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 20

Bond price: Regatta, Inc., has six-year bonds outstanding that pay a 8.25 percent coupon rate. Investors buying the bond today can expect to earn a yield to maturity of 6.875 percent. What should the company's bonds be priced at today? Assume annual coupon payments. (Round to the nearest dollar.)

Accepted Answer

A)  $972 
B)  $1,066 
C)  $1,014 
D)  $923 
A)  $972 
B)  $1,066 
C)  $1,014 
D)  $923

Exam 8: Bond Valuation and the Structure of Interest Rates

Which of the following statements is true about convertible bonds?

The face or par value for bonds is the amount paid to bondholders at maturity and is usually equal to $1,000.

Bonds sell at a premium over the par value when market rates for similar bonds are

It is easy for individuals to trade in the corporate bond market because

Which one of the following statements about bond price is NOT true?

Bonds sell at a discount off the par value when market rates for similar bonds are

Effective annual yield: Stanley Hart invested in a municipal bond that promised an annual yield of 6.7 percent. The bond pays coupons twice a year. What is the effective annual yield (EAY) on this investment?

The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments

Which ONE of the following statements is true?

Which ONE of the following statements is true?

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

Which ONE of the following statements is true?

Most secondary market transactions for corporate bonds take place on the New York Stock Exchange.

In an efficient capital market, security prices fully reflect the knowledge and expectations of all investors at a particular point in time.

Zero coupon bonds: Jarmine Corp. is planning to fund a project by issuing 10-year zero coupon bonds with a face value of $1,000. Assuming semiannual coupons to be the norm, what will be the price of these bonds if the appropriate discount rate is 14 percent? (Round to the closest answer.)

The largest investors in corporate bonds are banks and state government agencies.

What economic factors affect the shape of the yield curve? Explain.

With semistrong-form market efficiency,

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

Bond price: Regatta, Inc., has six-year bonds outstanding that pay a 8.25 percent coupon rate. Investors buying the bond today can expect to earn a yield to maturity of 6.875 percent. What should the company's bonds be priced at today? Assume annual coupon payments. (Round to the nearest dollar.)

The Financial Manager and the Company

The Financial System and the Level of Interest Rates

Financial Statements, Cash Flows and Tax

Analysing Financial Statements

The Time Value of Money

Discounted Cash Flows and Valuation

Risk and Return

Share Valuation

The Fundamentals of Capital Budgeting

Cash Flows and Capital Budgeting

Evaluating Project Economics and Capital Rationing

The Cost of Capital

Working Capital Management

How Companies Raise Capital

Capital Structure Policy

Dividends and Dividend Policy

Business Formation, Growth and Valuation

Strategic Financial Planning and Forecasting

Options and Corporate Finance

International Financial Management

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