Deck 9: Debt Valuation and Interest Rates

Question 1

Bonds with ratings lower than Standard & Poor's BBB or Moody's Baa are classified as

A)in default.
B)investment grade.
C)not investment grade.
D)medium quality.

Answer 1

C

Question 2

All of the following affect the value of a bond EXCEPT

A)investors' required rate of return.
B)the recorded value of the firm's assets.
C)the coupon rate of interest.
D)the maturity date of the bond.

Answer 2

B

Question 3

Which of the following features allows a borrower to redeem or repurchase a bond issue before its maturity date?

A)The call provision
B)Convertibility
C)Floating rate
D)The priority of claims

Answer 3

A

Question 4

Advantages to borrowing in the private market include

A)less restrictive covenants.
B)reduced initial costs.
C)lower interest costs.
D)avoiding future registration with the Australian Securities and Investments Commission.

Question 5

The interest on corporate bonds is typically paid

A)half-yearly.
B)annually.
C)quarterly.
D)monthly.

Question 6

On any given day,a bond can be issued at

A)a discount.
B)a premium.
C)par.
D)all of the above.

Question 7

Corporate debt can be privately placed with

A)individual investors.
B)managed funds.
C)superannuation funds.
D)all of the above

Question 8

The face value of a corporate bond indicates the level of interest payments that will be paid to investors.

Question 9

Advantages of privately placing debt include all of the following except

A)speed.
B)reduced placement costs.
C)restrictive covenants.
D)flexibility.

Question 10

Which of the following is generally NOT a characteristic of a bond?

A)Voting rights
B)Face value
C)Claims on assets and income
D)Indenture

Question 11

Any unsecured long-term debt instrument is a debenture.

Question 12

A(n)________ is used to outline the issuing company's contractual obligations to bondholders.

A)mortgage
B)debenture
C)bond rating
D)indenture

Question 13

The yield to maturity on a bond

A)is fixed in the indenture.
B)is lower for higher-risk bonds.
C)is the required return on the bond.
D)is generally equal to the coupon interest rate.

Question 14

A conversion feature confers the option of redeeming a bond for the company's shares rather than cash.

Question 15

The detailed legal agreement between a bond's issuer and its trustees is known as the

A)collateral agreement.
B)call provision.
C)indenture.
D)covenant.

Question 16

The face value of a bond

A)never equals its market value.
B)is determined by the investor.
C)generally is $1,000.
D)is never returned to the bondholder.

Question 17

The debenture is the legal agreement between the firm issuing a bond and the bond trustee who represents the bondholders.

Question 18

The current yield is the average rate of interest a bond will from the time of purchase until it matures.

Question 19

The issuance of bonds to raise capital for a corporation

A)magnifies the returns to the shareholders.
B)increases risk to the shareholders.
C)is a cheaper form of capital than the issuance of ordinary shares.
D)all of the above.

Question 20

If the issuing company becomes insolvent,the claims of the bondholders are honored before those of preferred shareholders.

Question 21

Caldwell,Inc.sold an issue of 30-year,$1,000 face value bonds to the public.The bonds carry a 10.85% coupon rate and pay interest semiannually.It is now 12 years later.The current market rate of interest on the Caldwell bonds is 8.45%.What is the current market price (intrinsic value)of the bonds? Round off to the nearest $1.

A)$751
B)$1,177
C)$1,220
D)$976

Question 22

As interest rates,and consequently investors' required rates of return,change over time,the ________ of outstanding bonds will also change.

A)maturity date
B)coupon interest payment
C)face value
D)price

Question 23

The Blackburn Group has recently issued 20-year,unsecured bonds rated BB by Moody's.These bonds yield 443 basis points above the U.S.Treasury yield of 2.76%.The yield to maturity on these bonds is

A)4.43%.
B)7.19%.
C)12.23%.
D)2.76%.

Question 24

What is the expected rate of return on a bond that matures in seven years,has a face value of $1,000,a coupon rate of 14%,and is currently selling for $911? Assume annual coupon payments.

A)7.81%
B)15.36%
C)15.61%
D)16.22%

Question 25

What is the yield to maturity of a nine-year bond that pays a coupon rate of 20% per year,has a $1,000 face value,and is currently priced at $1,407? Assume annual coupon payments.

A)21.81%
B)6.14%
C)12.28%
D)11.43%

Question 26

Colby & Company bonds pay half-yearly interest of $50.They mature in 15 years and have a face value of $1,000.The market rate of interest is 8%.The market value of Colby bonds is (round to the nearest dollar)

A)$1,173.
B)$743.
C)$1,000.
D)$827.

Question 27

Bond ratings directly affect a bond's

A)spread over the Treasury yield.
B)coupon rate.
C)maturity date.
D)call provisions.

Question 28

Davis & Davis issued $1,000 face value bonds at 102.The bonds pay 12% interest annually and mature in 30 years.The market rate of interest is (round to the nearest hundredth of a percent)

A)12.00%.
B)11.71%.
C)10.12%.
D)11.29%.

Question 29

A $1,000 face value 10-year bond with a 10% coupon rate recently sold for $900.The yield to maturity

A)is 10%.
B)is greater than 10%.
C)is less than 10%.
D)cannot be determined.

Question 30

What is the expected rate of return on a bond that pays a coupon rate of 9% paid semi-annually,has a face value of $1,000,matures in five years,and is currently selling for $1071?

A)7.28%
B)8.40%
C)3.64%
D)4.21%

Question 31

What is the value of a bond that has a face value of $1,000,a coupon rate of $80 (annually),and matures in 11 years? Assume a required rate of return of 11%,and round your answer to the nearest $10.

A)$320.66
B)$1,011.00
C)$813.80
D)$790.79

Question 32

Mango Company bonds pay a semiannual coupon rate of 6.4%.They have eight years to maturity and face value,or par,of $1,000.Compute the value of Mango bonds if investors' required rate of return is 5%.

A)$1,090.48
B)$883.66
C)$1,006.83
D)$950.00

Question 33

Sterling Corp.bonds pay 10% annual interest and are selling at 97.The market rate of interest

A)is less than 10%.
B)is greater than 10%.
C)equals 10%.
D)cannot be determined.

Question 34

What is the value of a bond that matures in three years,has an annual coupon payment of $110,and a face value of $1,000? Assume a required rate of return of 11%,and round your answer to the nearest $10.

A)$970
B)$1,330
C)$330
D)$1,000

Question 35

The discount rate used to value a bond is

A)the coupon interest rate.
B)determined by the issuing company.
C)fixed for the life of the bond.
D)the market rate of interest.

Question 36

MI has a $1,000 face value,30-year bond outstanding that was issued 20 years ago at an annual coupon rate of 10%,paid semiannually.Market interest rates on similar bonds are 7%.Calculate the bond's price.

A)$956.42
B)$1,000.00
C)$1,168.31
D)$1,213.19

Question 37

Six years ago,Colt,Inc.sold an issue of 30-year,$1,000 face value bonds.The coupon rate of 5.25% is payable annually.Investors presently require a rate of return of 8.375%.What is the current market price (intrinsic value)of the bonds? Round off to the nearest $1.

A)$1,050
B)$932
C)$681
D)$1,111

Question 38

Terminator Bug Company bonds have a 14% coupon rate.Interest is paid semiannually.The bonds have a face value of $1,000 and will mature 10 years from now.Compute the value of Terminator bonds if investors' required rate of return is 12%.

A)$1,114.70
B)$1,149.39
C)$894.06
D)$1,000.00

Question 39

Brookline,Inc.just sold an issue of 30-year bonds for $1,107.20.Investors require a rate of return on these bonds of 7.75%.The bonds pay interest semiannually.What is the coupon rate of the bonds?

A)7.750%
B)11.072%
C)9.375%
D)8.675%

Question 40

Applebee sold an issue of 30-year,$1,000 face value bonds to the public.The coupon rate of 8.75% is payable annually.It is now five years later,and the current market rate of interest is 7.25%.What is the current market price (intrinsic value)of the bonds? Round off to the nearest $1.

A)$715
B)$1,171
C)$1,225
D)$697

Question 41

Marshall Manufacturing has a bond outstanding that was issued 20 years ago at a coupon rate of 9%.The $1,000 face value bond pays interest semiannually and was originally issued with a term of 30 years.If today's interest rate is 14%,what is the value of the bond today?

A)$654.98
B)$735.15
C)$814.42
D)$941.87

Question 42

Blue's Chips Inc.has a $1,000 face value bond that is currently selling for $1,300.It has an annual coupon rate of 7%,paid semiannually,and has nine years remaining until maturity.What is the annual yield to maturity on the bond? (Round to the nearest whole percentage. )

A)3.15%
B)1.57%
C)3.12%
D)6.24%

Question 43

You purchased Photon,Inc.bonds exactly one year ago today for $875.During the latest year,you received $65 in interest on the bonds.The current yield on these bonds is 6.5%.

Question 44

A basis point is equal to one hundredth of a percentage point.

Question 45

The higher the bond rating,the more default risk associated with the bond.

Question 46

You paid $865.50 for a corporate bond that has a 6.75% coupon rate.What is the bond's current yield?

A)8.375%
B)7.800%
C)15.001%
D)6.667%

Question 47

The longer the time to maturity,the more sensitive a bond's price to changes in market interest rates.

Question 48

Dry Seal plans to issue bonds to expand operations.The bonds will have a face value of $1,000,a 10-year maturity,and a coupon interest rate of 9%,paid semiannually.Current market conditions are such that the bonds will be sold to net $937.79.The yield-to-maturity of these bonds is 10%.

Question 49

When a bond's coupon rate is higher than the required rate of return,the bond

A)will sell at a discount from par.
B)will sell at a premium over par.
C)may sell at either a discount or a premium.
D)will sell at face value.

Question 50

A $1,000 face value bond with a 12% coupon rate currently selling for $825 has a current yield of

A)14.55%.
B)12.44%.
C)7.27%.
D)5.61%.

Question 51

Miller Motorworks has a $1,000 face value,8% annual coupon bond with interest payable semiannually with a remaining term of 15 years.The annual market yield on similar bonds is 6%.This bond will at a discount from par.

Question 52

A bond issued by Pomme Computers has a coupon rate of #5 paid semi-annually.If the market's required rate of return on this bond is also 3%,the bond will sell at face value.

Question 53

A bond's value equals the present value of interest and principal the owner will receive.

Question 54

You are considering the purchase of Hytec bonds that were issued 14 years ago.When the bonds were originally sold,they had a 30-year maturity and a 14.375% coupon interest rate that is payable semiannually.The bond is currently selling for $1,508.72.What is the yield to maturity on the bonds?

A)8.50%
B)14.38%
C)11.11%
D)7.67%

Question 55

A bond's "spread" refers to the difference between its Moody's rating and its Standard & Poor's rating.

Question 56

Aurand,Inc.has outstanding bonds with an 8% annual coupon rate paid semiannually.The bonds have a face value of $1,000,a current price of $904,and will mature in 14 years.What is the annual yield to maturity on the bond?

A)15.80%
B)10.47%
C)9.24%
D)7.90%
E)4.62%

Question 57

Generic,Inc.has bonds outstanding that mature in 20 years.The bonds have $1,000 face value,pay interest annually at a rate of 10%,and have a current selling price of $875.25.The current yield on the bonds is 11.63%.

Question 58

Lambda Co.has bonds outstanding that mature in 10 years.The bonds have $1,000 face value,pay interest annually at a rate of 9%,and have a current selling price of $1,125.The yield to maturity on the bonds is less than 9%.

Question 59

A AAA rated bond's yield to maturity will be very close to its expected yield.

Question 60

A $1,000 face value bond is currently listed as selling at 92 1/8.This means

A)that you can buy the bond for $92.125.
B)that you can buy the bond for $921.25.
C)that if you purchase the bond today,you will receive $921.25 when the bond matures.
D)none of the above.

Question 61

Which of the following statements is true?

A)A bond that has a rating of AA is considered to be a junk bond.
B)A bond will sell at a premium if the prevailing required rate of return is less than the bond's coupon rate.
C)A zero coupon is a bond that is secured by a lien on real property.
D)The legal document that describes all of the terms and conditions of a bond issue is called a debenture agreement.

Question 62

If current market interest rates rise,what will happen to the value of outstanding bonds?

A)It will rise.
B)It will fall.
C)It will remain unchanged.
D)There is no connection between current market interest rates and the value of outstanding bonds.

Question 63

Cassel Corp.bonds pay an annual coupon rate of 10%.If investors' required rate of return is now 8% on these bonds,they will be priced at

A)face value.
B)a premium to face value.
C)a discount to face value.
D)cannot be determined from information given.

Question 64

When referring to bonds,expected rate of return and yield to maturity are often used interchangeably.

Question 65

The market price of a 20-year,$1,000 bond that pays 9% interest semiannually is $774.31.What is the bond's yield to maturity?

Question 66

The better the bond rating,the lower the rate of return demanded in the capital markets.

Question 67

Given the following information,determine the market value of EAO Company bonds.
Face value $1,000
Coupon rate 10%
Years to maturity 6
Market rate 8%
Interest paid semiannually

Question 68

Compare and contrast current yield and yield to maturity.

Question 69

DAH,Inc.has issued a 12% bond that is to mature in nine years.The bond had a $1,000 face value,and interest is due to be paid semiannually.If your required rate of return is 10%,what price would you be willing to pay for the bond?

Question 70

Garvin,Inc.'s bonds have a face value of $1,000.The bonds pay semiannual interest of $40 and mature in five years.
a.How much would you pay for Garvin bonds if your required rate of return is 10%?
b.How much would you pay if your required rate of return is 8%?

Question 71

The sensitivity of a bond's value to changing interest rates depends on both the bond's time to maturity and its pattern of cash flows.

Question 72

If the market price of a bond increases,then

A)the yield to maturity decreases.
B)the coupon rate increases.
C)the yield to maturity increases.
D)none of the above.

Question 73

BCD's $1,000 face value bonds currently sell for $798.50.The coupon rate is 10%,paid semiannually.If the bonds have five years before maturity,what is the yield to maturity or expected rate of return?

Question 74

Bond ratings measure the interest rate risk of a given bond issue.

Question 75

If you are willing to pay $1,392.05 for a 15-year,$1,000 face value bond that pays 10% interest semiannually,what is your expected rate of return?

Question 76

Quirk Drugs sold an issue of 30-year,$1,000 face value bonds to the public that carry a 10.85% coupon rate,payable semiannually.It is now 10 years later,and the current market rate of interest is 9.00%.If interest rates remain at 9.00% until Quirk's bonds mature,what will happen to the value of the bonds over time?

A)The bonds will sell at a premium and decline in value until maturity.
B)The bonds will sell at a discount and rise in value until maturity.
C)The bonds will sell at a premium and rise in value until maturity.
D)The bonds will sell at a discount and fall in value until maturity.

Question 77

If current market interest rates fall,what will happen to the value of outstanding bonds?

A)It will rise.
B)It will fall.
C)It will remain unchanged.
D)There is no connection between current market interest rates and the value of outstanding bonds.

Question 78

The current yield of a bond will equal its coupon rate when the bond is selling at face value.

Question 79

Investment grade bonds are rated BB or lower.

Question 80

Calculate the value of a bond that is expected to mature in 13 years with a $1,000 face value.The interest coupon rate is 8%,and the required rate of return is 10%.Interest is paid annually.