Deck 7: The Valuation and Characteristics of Bonds

Question 1

The term ''yield'' is synonymous with the _____ of a security.

A) maturity
B) payout ratio
C) rate of return
D) par value

Answer 1

C

Question 2

A bond with a face value of $1,000 has annual coupon payments of $100 and was issued 7 years ago. The bond currently sells for a premium and has 8 years left to maturity. This bond's ____ must be less than 10%. I. yield to maturity
II) current yield
III) coupon rate

A) I only
B) II only
C) III only
D) II and III only
E) I and II only

Answer 2

E

Question 3

The rate of return on a security is the:

A) interest rate that a security pays over its life.
B) interest rate that equates the current outflow to acquire the security with its current price.
C) capital gains rate that a security promises over its life.
D) interest rate that makes the present value of the security's expected cash flows equal to its price.

Answer 3

D

Question 4

A security's value is equal to:

A) the book value of the firm.
B) the book value of the firm divided by number of shares.
C) the future value of its expected cash flows.
D) the present value of its expected cash flows.

Question 5

Which of the following is an example of an equity investment?

A) Government bond
B) Mortgage on real estate
C) Preferred stock
D) Corporate bond

Question 6

When interest rates move up or down, bond prices move:

A) in the opposite direction.
B) in the same direction.
C) in the opposite direction and further the longer is the term until maturity.
D) a and c

Question 7

A bond's current yield is calculated as:

A) the annual interest payment divided by the bond's current market yield.
B) the annual interest payment divided by the bond's face value.
C) the annual interest payment divided by the bond's current price.
D) the par value divided by the bond's current price.

Question 8

Bonds are referred to as non-amortizable debt, which means:

A) interest is paid regularly during the term, usually semiannually whereas repayments of principal are annual.
B) interest is paid regularly during the term, usually semiannually, and repayments of principal are semiannual.
C) interest is paid regularly during the term, usually semiannually, whereas repayment of principal does not occur until the maturity date.
D) interest and principal are paid regularly during the term, usually annually.

Question 9

A call provision:

A) is exercised when interest rates are falling.
B) increases risk to the bondholder.
C) can be exercised any time after a bond is issued.
D) Both a & b
E) All of the above

Question 10

What does non-amortized debt mean?

A) Interest payments are constant over the life of the bond.
B) Interest payments are based on current market rates for bonds of similar risk.
C) No repayment of principal is made during the life of the bond.
D) The face value of the bond is not repaid to the lender.

Question 11

Which of the following is used to determine the periodic future cash flows from a bond?

A) Coupon rate
B) Current yield
C) Yield to maturity
D) Maturity

Question 12

The ____ a bond has to maturity, the ____ sensitive the bond's price is to changes in market interest rates.

A) longer; less
B) shorter; less
C) longer; more
D) Both b & c

Question 13

Which of the following is TRUE?

A) A bond's price moves to par value as it approaches maturity.
B) Bond ratings measure the maturity risk associated with a given bond.
C) Bonds are referred to as amortized debt due to the fact that interest and principal payments are made to the lender until maturity.
D) Both a & b

Question 14

If a bond is selling at par value, which of the following would be the same as its coupon rate?

A) Current Yield
B) Yield to Maturity
C) Market Interest Rate
D) Both b & c
E) All of the above

Question 15

If a 30-year, $1,000 bond has a 9% coupon and is currently selling for $826, its current yield is:

A) $90.
B) 9.0%.
C) 10.9%.
D) 12.0%.

Question 16

Which of the following risks do debt ratings specifically measure?

A) Interest Rate Risk
B) Maturity Risk
C) Default Risk
D) Both b & c
E) All of the above

Question 17

Which of the following would increase risk to the bondholder?

A) A call provision
B) Change in bond rating from A to AAA
C) Secured by specific assets
D) Restrictive covenants

Question 18

The most common vehicle for debt investments is:

A) bonds.
B) preferred stocks.
C) currency futures.
D) real estate.

Question 19

Holding all other variables constant, as market interest rates increase, bond prices ____.

A) decrease
B) increase
C) remain unchanged
D) None of the above

Question 20

As interest rates move up or down and the longer is a bond's term:

A) the bond's price moves in the same direction.
B) the more drastic is the movement of the bond's price in the same direction.
C) the more drastic is the movement of the bond's price in the opposite direction.
D) a and b

Question 21

Which of the following describes the relationship between changes in market interest rates and the market value of bonds?

A) When interest rates increase, bond prices increase.
B) When interest rates decrease, bond prices decrease.
C) When interest rates increase, bond prices decrease.
D) When interest rates decrease, bond prices increase.
E) Both c. and d. are correct.

Question 22

Which of the following is TRUE?

A) A bond's price moves to par value as it approaches maturity.
B) The shorter a bond has to maturity, the less sensitive the bond's price is to changes in market interest rates.
C) The longer a bond has to maturity, the more sensitive the bond's price is to changes in market interest rates.
D) Both b & c
E) All of the above

Question 23

The formulation for establishing the current market price of a bond is:

A) P_B = PV(interest payments) + PV(principal repayment).
B) P_B = FV(interest payments) + FV(principal repayment).
C) P_B = Coupon Payment[PVFA _k,n] + Face Value[PVF _k,n].
D) a and c

Question 24

Which of the following events tend to make it less likely that a company will call a bond?

A) A reduction in forecast inflation rates.
B) The company's bonds are downgraded by Moody's rating service.
C) A significant lawsuit is filed against the company.
D) Answers a. and b. are correct.
E) Answers b. and c. are correct.

Question 25

Once a bond has been issued, if the holder of the bond retains it until maturity:

A) the market value of the bond may change, but the cash flows will not.
B) the cash flows associated with the bond may change, but the market value will not.
C) both the market value of the bond and the cash flows may change.
D) neither the market value of the bond or the cash flows will change.

Question 26

If current interest rates are higher than a bond's coupon rate, owners can:

A) hold the bond until maturity, at which point its market value will equal its face value.
B) sell the bond at a premium, because investors are sensitive to price changes in bonds caused by increased interest rates.
C) sell the bond at a discount, because investors recognize that the lower the bond's price the higher is its yield.
D) a and c

Question 27

In valuing bonds, the most important consideration is:

A) the bond's past and future cash flows.
B) the bond's future cash flows.
C) the bond's past cash flows.
D) whether coupon payments are annual or semiannual.

Question 28

Although the maturity value of a bond is fixed, changes in current interest rates will:

A) influence the amount of the semiannual coupon payment.
B) affect the bond's yield.
C) inversely affect the market price of the bond.
D) b and c

Question 29

In general, price changes due to a given interest rate change will be:

A) smaller as the term of the bond extends farther in time.
B) larger as the term of the bond extends farther in time.
C) smaller as the maturity date nears.
D) b and c

Question 30

The coupon rate that is shown on the face of a bond:

A) can be multiplied by the par value of the bond to calculate the semiannual interest payment.
B) should be used as the discount rate when calculating the present value of the future cash flows from the bond.
C) is normally close to the interest rate that a company will have to pay when the bonds are issued.
D) Both a. and c. are correct.
E) All of the above are correct.

Question 31

Which of the following best describes maturity risk?

A) If interest rates increase, bonds with long maturities will increase in price, but bonds with short maturities will decrease in price.
B) If interest rates increase, bonds with short maturities will increase in price, but bonds with long maturities will decrease in price.
C) If interest rates increase, bonds with long maturities will decrease in price more than bonds with short maturities.
D) If interest rates increase, bonds with short maturities will decrease in price more than bonds with long maturities.
E) If interest rates increase, bonds with long maturities will increase in price more than bonds with short maturities.

Question 32

If a bond is selling at par value, the market return on similar bonds must be:

A) higher than the coupon rate.
B) equal to the coupon rate.
C) below the coupon rate.
D) None of the above

Question 33

Which of the following statements is correct?

A) Bond prices and interest rates are not related.
B) When a bond's yield equals the coupon rate, the bond sells at a premium.
C) When a bond's yield is greater than the coupon rate, the bond sells above par.
D) When a bond's yield is less than the coupon rate, the bond sells above par.

Question 34

Two bonds are identical in risk, maturity date, and face value, but one coupon rate is 10% and the other is 8%. The market yield on similar bonds is 9%.

A) The 10% coupon bond would be selling at a premium and the 8% coupon bond would be selling at a discount.
B) The 10% coupon bond would be selling at a discount and the 8% coupon bond would be selling at a premium.
C) At the maturity date, both bonds would be selling at face value.
D) a and c

Question 35

Fifteen years remain on a 25-year, 8% coupon bond payable semiannually with a face value of $1,000. The return on comparable bonds is 10%. The formula for determining the market price of the bond today is:

A) P_B = $40[FVFA_10,25] + $1,000[FVF_10,25]
B) P_B = $40[PVFA_4,30] + $1,000[PVF_4,30]
C) P_B = $80[PVFA_4,15] + $1,000[PVF_4,15]
D) P_B = $40[PVFA_5,30] + $1,000[PVF_5,30]

Question 36

Which of the following statements is most correct?

A) The market value of a bond usually approaches its par value as the bond approaches maturity.
B) If the government unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices.
C) A bond's price depends on the issuer's financial condition as well as the general level of interest rates.
D) Statements a. and c. are correct.
E) All of the statements are correct.

Question 37

Because bond prices are sensitive to changes in interest rates:

A) bonds hardly ever sell in the secondary market at their face value.
B) bond prices are constantly changing.
C) interest rates in excess of the coupon rate cause the bond to sell at a discount, while interest rates below the coupon rate cause the bond to sell at a premium.
D) All of the above

Question 38

If current interest rates are lower than the coupon rate, investors owning a bond can:

A) sell the bond at a premium, because lower interest rates will cause investors to bid price up to the point where their investment yields the market's return.
B) only sell the bond at a discount (below face value), recognizing that the lower the price of the bond, the closer the yield becomes to the market's return.
C) be wise to hold the bond until maturity, at which point the market value will greater than the face value of the bond.
D) None of the above

Question 39

A bond with an annual coupon payment of $100 originally sold at par for $1,000. Market interest rates are currently 12%. This bond would be selling at a ____ in order to compensate ____.

A) premium; the purchaser for the below market coupon rate
B) discount; the purchaser for the below market coupon rate
C) premium; the seller for the below market coupon rate
D) discount; the seller for the below market coupon rate

Question 40

Which of the following is most correct?

A) When coupon rates exceed market rates, bonds will sell at a premium.
B) When market rates exceed coupon rates, bonds will sell at a premium.
C) When coupon rates exceed market rates, bonds could sell at either a premium or a discount.
D) Bonds will always sell at par when the coupon rate equals the market rate.
E) Both a. and d. are correct.

Question 41

Which of the following is TRUE?

A) A bond's price moves to par value as it approaches maturity.
B) Debentures are riskier investments than mortgage bonds.
C) Most bonds are purchased by individual investors rather than by institutions.
D) Both a & b
E) All of the above

Question 42

The contractual document containing restrictive covenants that limit the borrower's activities while a bond is outstanding is called:

A) a debenture.
B) an indenture.
C) a sinking fund.
D) Both a and b
E) All of the above

Question 43

Which of the following is a reason why lenders insist on bond indentures?

A) To ensure that bond-issuing companies prefer debt financing to equity financing
B) To ensure that lenders of rights are comparable to the rights of stockholders
C) To make the bonds easy to sell in secondary markets
D) To ensure that bond-issuing companies do not accept risky projects

Question 44

Three $1,000, 8% coupon rate bonds have 2,10 and 20 years until maturity respectively. If interest rates move up to 10%, the following bond prices will occur: $828.36, $964.54, and $875.39. Which term goes with which price?

A) two years/$875.39, 10 years/$964.54, 20 years/$828.36
B) two years/$964.54, 10 years/$875.39, 20 years/$828.36
C) two years/$875.39, 10 years/$828.36, 20 years/$964.54
D) two years/$964.54, 10 years/$828.36, 20 years/$875.36

Question 45

Call provisions usually arise when the issuing company wants the option to:

A) retire the bonds earlier than planned because it has more capital than it needs.
B) require the retirement of bonds if market interest rates rise substantially above the coupon rate.
C) retire high interest rate bonds replacing them with lower cost debt when interest rates drop.
D) refund their debt because interest rates are escalating.

Question 46

Although bond principal is technically not repaid until maturity, sinking funds reduce bondholder risk by requiring the borrower to make periodic payments to a bank for principal retirement. The same can be accomplished by:

A) randomly calling in bonds for earlier retirement.
B) issuing serial bonds which spread the principal repayment over a number of years.
C) Either of the above
D) None of the above

Question 47

When interest rates change, bond yields adjust through:

A) changes in present value of the principal.
B) changes in price.
C) changes in the term to maturity.
D) changes in the coupon payment.

Question 48

Which of the following statements is most correct?

A) Bonds are non-amortized debt.
B) Bonds are promissory notes and serve as legal evidence of debt.
C) Bondholders are creditors of the companies that issue the bonds.
D) Both a. and b. are correct.
E) All of the above are correct.

Question 49

Which of the following S&P rating(s) would be considered investment grade?

A) BBB
B) BB
C) B
D) Both a and b
E) None of the above

Question 50

An unsecured bond is referred to as a(n):

A) indenture.
B) debenture.
C) mortgage bond.
D) subordinated mortgage bond.

Question 51

Which of the following might be senior debt?

A) Debentures
B) Callable unsecured bonds
C) Subordinated debentures
D) Both a and b
E) All of the above

Question 52

Which of the following statements is not correct?

A) Bond prices and interest rates are inversely related.
B) When a bond's yield to maturity equals the coupon rate, the bond sells for par.
C) When a bond's yield to maturity is greater than the coupon rate, the bond sells above par.
D) When a bond's yield to maturity is less than the coupon rate, the bond sells above par.

Question 53

List the following types of bonds in order of interest rates from low to high, all other factors being equal: Subordinated debt; Senior debt; Senior debt that is also convertible

A) Subordinated, Senior, Convertible
B) Senior, Convertible, Subordinated
C) Convertible, Senior, Subordinated
D) Convertible, Subordinated, Senior
E) Senior, Subordinated, Convertible

Question 54

Companies attempt to issue bonds at coupon rates that are equal to market rates at the time of issue. Because of the time delay necessary to print and issue bonds:

A) there is usually some discount or premium associated with new issues.
B) the market temporarily modifies its yield to permit the bond to sell at face value at issue.
C) the issuing company modifies the coupon rate on the issue date to equal the market's yield.
D) All of the above

Question 55

Holding all other variables constant, which of the following will DECREASE the risk of a bond to the investor?

A) Increase in restrictive covenants
B) Change in bond rating from B to BBB
C) Secured with specific assets of the firm
D) Both a & c
E) All of the above

Question 56

The term maturity risk emphasizes the fact that:

A) repayment is less assured as maturity lengthens.
B) shorter-term bonds are worth more than longer-term bonds.
C) bond prices change when interest rates change.
D) the prices of longer term bonds change more than the prices of shorter term bonds when interest rates change.

Question 57

The original sale of a bond by the issuing company is a primary market transaction, a secondary market transaction is:

A) a subsequent bond issue from the same company.
B) subsequent trading among investors of the original bond.
C) Both of the above
D) None of the above

Question 58

Maturity risk exists because the prices of longer-term bonds fluctuate more in response to:

A) government policy changes.
B) company policy changes.
C) industry changes.
D) interest rate changes.

Question 59

Which of the following statements is correct?

A) The market value of a bond will always approach the bond's maturity price as maturity approaches, even if the firm is insolvent.
B) Bond prices and interest rates always move in the same direction.
C) The yield to maturity will always be the coupon yield.
D) None of the above

Question 60

Which of the following bond ratings indicate junk bonds?

A) A/A
B) Baa/BBB
C) Ba/BB
D) B/B
E) Both c. and d.

Question 61

Addleson Corp. has a $1,000 par value bond outstanding that was issued for 30 years 5 years ago at a coupon rate of 15%. The yield on similar bonds is now 12%. What is its price?

A) $1235.27
B) $2418.58
C) $836.74
D) $1236.44

Question 62

J&J Manufacturing issued a bond with a $1,000 par value. The bond has a coupon rate of 7% and makes payments semiannually. If the bond has 30 years remaining and the annual market interest rate is 9.4%, what will the bond sell for today?

A) $760.91
B) $861.29
C) $937.42
D) $1,000.00
E) $1,025.32

Question 63

Which of the following statements about leasing is correct?

A) Approximately 30% of all equipment is leased.
B) Financial leases must be capitalized on the balance sheet.
C) Leased assets are depreciated.
D) Lease obligations are amortized as loans.
E) All of the above

Question 64

The amount the issuer intends to borrow at the coupon rate of interest is generally the:

A) par value.
B) face value.
C) present value.
D) Both a and b
E) None of the above

Question 65

The owners of registered bonds are recorded with the(a):

A) SEC.
B) transfer agent.
C) registration agent.
D) company.
E) Both a and d

Question 66

Bark Corporation's 10% coupon rate bond was issued for 30 years 25 years ago at a par value of $1000. Today's interest rate is 10%, what is it selling for today?

A) $1000.00
B) $1150.00
C) $955.60
D) $988.00

Question 67

A $1,000, 10% coupon rate bond with 10 years remaining until maturity is selling for $788.10. Its yield to maturity at this price is:

A) 7.00%.
B) 10.00%.
C) 14.00%.
D) None of the above

Question 68

Which of the following is true of bonds?

A) A subordinated debt ranks higher in priority for payment of principal than senior debt.
B) A convertible bond pays a higher interest rate than a traditional bond.
C) A junk bond pays a higher interest rate than rates paid by strong companies.
D) A junk bond usually has priority over a subordinated debt instrument.

Question 69

You are considering the purchase of an AT&P bond with a 13% coupon rate. Interest is paid and compounded semiannually. The bond will mature in 8 years, and has a $1,000 face value. The bond currently sells for $867. Calculate the ANNUAL yield to maturity for this bond. (Round to nearest percentage)

A) 9%
B) 11%
C) 16%
D) 18%

Question 70

Willamson Inc.'s bonds have a coupon rate of 12% and a par value of $1,000. The bonds have 15 years left to maturity. If Williamson's bonds are currently selling for $1,430, calculate their yield to maturity. Assume semiannual coupon payments.

A) 3.1%
B) 5.3%
C) 7.2%
D) 9.8%

Question 71

Addleson Corp. has a $1,000 par value bond outstanding that was issued for 30 years 5 years ago at a coupon rate of 15%. What is it yielding if it is selling for $938.81?

A) 10%
B) 14%
C) 16%
D) 18%

Question 72

Alpha Inc. has a $1,000 par value bond that was issued ten years ago for a thirty year term. Interest rates were very high at that time and the bond's coupon rate is 22%. The relevant bond market interest rate is now 10%. All of Alpha's bonds have a call feature. It allows the company to pay off the bond any time after the first fifteen years, but requires that bondholders be compensated with an extra year's interest at the coupon rate if such a payoff is exercised. What is the bond's market price assuming investors expect it will be called as soon as possible?

A) $1463.29
B) $1598.35
C) $2029.50
D) $1600.74

Question 73

Webley Corp. issued a $1,000 bond at a coupon rate of 12%. The bond has 30 years remaining, until maturity. Comparable bonds are yielding 8%. What should Webley's bond sell for today? (Round to nearest $)

A) $878
B) $932
C) $1,147
D) $1,381
E) $1,452

Question 74

As per FASB 13, which of the following is a rule for a lease to qualify as an operating lease?

A) There is a transfer of ownership at lease expiration.
B) There is a bargain purchase option.
C) The lease term is for over 75% of the asset's economic life.
D) The present value of lease payments is less than 90% of the fair market value at lease origination.

Question 75

Which of the following statements about convertible bonds is true?

A) A convertible bond is exchangeable for a fixed number of shares.
B) Conversion is at the company's discretion.
C) Convertibles are always secured bonds.
D) The conversion price equals the bond's par value.

Question 76

Which of the following is true of senior debt?

A) It is the lowest ranked debt and is riskier than subordinated debt.
B) In case of failure, it is paid after subordinated debt.
C) It is lowest in priority for interest payments.
D) It generally requires a lower yield than subordinated debt.

Question 77

Riordan Inc. has a bond outstanding that has a $1,000 par value, semiannual coupon rate of 4% and a current yield of 7.9%. What is the price of the bond? (Round to nearest $)

A) $605
B) $867
C) $1,013
D) $1,152
E) $1,457

Question 78

If a 30-year bond with a quoted price of $810, pays $40 interest semiannually, its current yield would be about:

A) 8.0%.
B) 4.0%.
C) 5.5%.
D) 9.9%.

Question 79

Marshall Industries has a bond outstanding that has a $1,000 par value and a market price of $1,322. The bond has 25 years remaining to maturity. Assuming an annual market interest rate of 8% and that the bond pays interest semiannually, calculate the ANNUAL coupon rate on the bond. (Round to nearest whole percentage)

A) 5%
B) 7%
C) 9%
D) 11%
E) 13%

Question 80

Which of the following are advantages of convertible debt to issuing companies?

A) Convertible bonds offer owners a chance to limit their risk of stock investment.
B) Convertible bond owners can participate in stock appreciation.
C) Convertible bonds usually have an above average number of restrictive clauses.
D) Convertible features can induce lenders to accept lower interest rates.