Question 1

Public stock markets in developed countries like the United States have strong-form of market efficiency.

Accepted Answer

A) True 
 B)False

Question 2

Bond price: 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? (Round 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 3

Bond price: Kevin Oh is planning to sell a bond that he owns. This bond has four years to maturity and pays a coupon of 10 percent on a semiannual basis. Similar bonds in the current market will yield 12 percent. What will be the price that he will get for his bond? (Round to the nearest dollar.)

Accepted Answer

A)  $1,044 
B)  $938 
C)  $970 
D)  $1,102 
A)  $1,044 
B)  $938 
C)  $970 
D)  $1,102

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

Realized yield: Five years ago, Shirley Harper bought a 10-year bond that pays 8 percent semiannually for $981.10. Today, she sold it for $1,067.22. What is the realized yield on her investment? (Round to the nearest percent.)

Accepted Answer

A)  7% 
B)  8% 
C)  9% 
D)  10% 
A)  7% 
B)  8% 
C)  9% 
D)  10%

Question 6

Corporate bonds have a thin market relative to stocks.

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

A security's true value is the price that reflects investors' estimates of the value of the cash flows they expect to receive in the future.

Accepted Answer

A) True 
 B)False

Question 9

Which one of the following statements is NOT true?

Accepted Answer

A)  Prices in the corporate bond market also tend to be more volatile than the markets for stocks or money market securities. 
B)  Corporate bonds are more marketable than the securities that have higher daily trading volumes. 
C)  The market for corporate bonds is thin. 
D)  The largest investors in corporate bonds are life insurance companies and pension funds. 
A)  Prices in the corporate bond market also tend to be more volatile than the markets for stocks or money market securities. 
B)  Corporate bonds are more marketable than the securities that have higher daily trading volumes. 
C)  The market for corporate bonds is thin. 
D)  The largest investors in corporate bonds are life insurance companies and pension funds.

Question 10

The risk that the lender may not receive payments as promised is called default risk.

Accepted Answer

A) True 
 B)False

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

A thin market for a security implies a high frequency of trades for that type of security in the markets.

Accepted Answer

A) True 
 B)False

Question 13

Interest rate risk is the risk that bond prices will fluctuate as interest rate changes.

Accepted Answer

A) True 
 B)False

Question 14

With strong-form market efficiency,

Accepted Answer

A)  the price of a security in the market reflects all public information only. 
B)  it would not be possible to earn abnormally high returns by trading on private information. 
C)  investors who have access to inside or private information will be able 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 not be possible to earn abnormally high returns by trading on private information. 
C)  investors who have access to inside or private information will be able to earn abnormal returns. 
D)  None of the above.

Question 15

Higher coupon bonds have greater interest rate risk.

Accepted Answer

A) True 
 B)False

Question 16

Zero coupon bonds: The U.S. Treasury has issued 10-year zero coupon bonds with a face value of $1,000. Assume that coupon payments are normally semiannual. What will be the current market price of these bonds if the opportunity cost for similar investments in the market is 6.75 percent? (Round to the nearest dollar.)

Accepted Answer

A)  $684 
B)  $860 
C)  $515 
D)  $604 
A)  $684 
B)  $860 
C)  $515 
D)  $604

Question 17

Bonds with a call provision sell at lower market yields than comparable noncallable bonds.

Accepted Answer

A) True 
 B)False

Question 18

Why are investors and managers concerned about market efficiency?

Accepted Answer

Market efficiency can be said to be made

Question 19

Bond price: 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? (Round 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 20

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. 
B)  use half the annual coupon. 
C)  use half the annual 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. 
B)  use half the annual coupon. 
C)  use half the annual rate as the discount rate. 
D)  All of the above need to be done.

Public stock markets in developed countries like the United States have strong-form of market efficiency.

Bond price: 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? (Round to the nearest dollar.)

Bond price: Kevin Oh is planning to sell a bond that he owns. This bond has four years to maturity and pays a coupon of 10 percent on a semiannual basis. Similar bonds in the current market will yield 12 percent. What will be the price that he will get for his bond? (Round to the nearest dollar.)

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

Realized yield: Five years ago, Shirley Harper bought a 10-year bond that pays 8 percent semiannually for $981.10. Today, she sold it for $1,067.22. What is the realized yield on her investment? (Round to the nearest percent.)

Corporate bonds have a thin market relative to stocks.

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

A security's true value is the price that reflects investors' estimates of the value of the cash flows they expect to receive in the future.

Which one of the following statements is NOT true?

The risk that the lender may not receive payments as promised is called default risk.

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

A thin market for a security implies a high frequency of trades for that type of security in the markets.

Interest rate risk is the risk that bond prices will fluctuate as interest rate changes.

With strong-form market efficiency,

Higher coupon bonds have greater interest rate risk.

Bonds with a call provision sell at lower market yields than comparable noncallable bonds.

Why are investors and managers concerned about market efficiency?

Bond price: 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? (Round to the nearest dollar.)

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

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

Filters

Exam 8: Bond Valuation and the Structure of Interest Rates

Public stock markets in developed countries like the United States have strong-form of market efficiency.

Bond price: 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? (Round to the nearest dollar.)

Bond price: Kevin Oh is planning to sell a bond that he owns. This bond has four years to maturity and pays a coupon of 10 percent on a semiannual basis. Similar bonds in the current market will yield 12 percent. What will be the price that he will get for his bond? (Round to the nearest dollar.)

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

Realized yield: Five years ago, Shirley Harper bought a 10-year bond that pays 8 percent semiannually for $981.10. Today, she sold it for $1,067.22. What is the realized yield on her investment? (Round to the nearest percent.)

Corporate bonds have a thin market relative to stocks.

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

A security's true value is the price that reflects investors' estimates of the value of the cash flows they expect to receive in the future.

Which one of the following statements is NOT true?

The risk that the lender may not receive payments as promised is called default risk.

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

A thin market for a security implies a high frequency of trades for that type of security in the markets.

Interest rate risk is the risk that bond prices will fluctuate as interest rate changes.

With strong-form market efficiency,

Higher coupon bonds have greater interest rate risk.

Bonds with a call provision sell at lower market yields than comparable noncallable bonds.

Why are investors and managers concerned about market efficiency?

Bond price: 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? (Round to the nearest dollar.)

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

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

Filters