公司理财8

Chapter 08 - Interest Rates and Bond Valuation

1. A bond that makes no coupon payments and is initially

priced at a deep discount is called a _____ bond.

A.

Treasury

B.

municipal

C.

floating-rate

D.

junk

E.

zero coupon

2. An asset characterized by cash flows that increase at a

constant rate forever is called a:

A.

growing perpetuity.

B.

growing annuity.

C.

common annuity.

D.

perpetuity due.

E. preferred stock.

3. The stated interest payment, in dollars, made on a bond

each period is called the bond's:

A.

coupon.

B.

face value.

C.

maturity.

D.

yield to maturity.

E.

coupon rate.

4. The principal amount of a bond that is repaid at the end of

the loan term is called the bond's:

A.

coupon.

B.

face value.

C.

maturity.

D.

yield to maturity.

E.

coupon rate.

5. The specified date on which the principal amount of a bond

is repaid is called the bond's:

A.

coupon.

B.

face value.

C.

maturity.

D.

yield to maturity.

E.

coupon rate.

6. The rate of return required by investors in the market for

owning a bond is called the:

A.

coupon.

B.

face value.

C.

maturity.

D.

yield to maturity.

E.

coupon rate.

7. The annual coupon of a bond divided by its face value is

called the bond's:

A.

coupon.

B.

face value.

C.

maturity.

D.

yield to maturity.

E.

coupon rate.

8. A bond with a face value of $$1,000 that sells for $$1,000 in

the market is called a _____ bond.

A.

par value

B.

discount

C.

premium

D.

zero coupon

E.

floating rate

9. A bond with a face value of $$1,000 that sells for less than

$$1,000 in the market is called a _____ bond.

A.

par

B.

discount

C.

premium

D.

zero coupon

E.

floating rate

10. The relationship between nominal rates, real rates, and

inflation is known as the:

A.

Miller and Modigliani theorem.

B.

Fisher effect.

C.

Gordon growth model.

D.

term structure of interest rates.

E.

interest rate risk premium.

11. The relationship between nominal interest rates on

default-free, pure discount securities and the time to maturity

is called the:

A.

liquidity effect.

B.

Fisher effect.

C.

term structure of interest rates.

D.

inflation premium.

E.

interest rate risk premium.

12. The _____ premium is that portion of a nominal interest

rate or bond yield that represents compensation for expected

future overall price appreciation.

A.

default risk

B.

taxability

C.

liquidity

D.

inflation

E.

interest rate risk

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Chapter 08 - Interest Rates and Bond Valuation

13. A bond with a 7% coupon that pays interest semi-annually

and is priced at par will have a market price of _____ and

interest payments in the amount of _____ each.

A.

$$1,007; $$70

B.

$$1,070; $$35

C.

$$1,070; $$70

D.

$$1,000; $$35

E.

$$1,000; $$70

14. All else constant, a bond will sell at _____ when the yield

to maturity is _____ the coupon rate.

A.

a premium; higher than

B.

a premium; equal to

C.

at par; higher than

D.

at par; less than

E.

a discount; higher than

15. All else constant, a coupon bond that is selling at a

premium, must have:

A.

a coupon rate that is equal to the yield to maturity.

B.

a market price that is less than par value.

C.

semi-annual interest payments.

D.

a yield to maturity that is less than the coupon rate.

E.

a coupon rate that is less than the yield to maturity.

16. The market price of a bond is equal to the present value of

the:

A.

face value minus the present value of the annuity payments.

B.

annuity payments plus the future value of the face amount.

C.

face value plus the present value of the annuity payments.

D.

face value plus the future value of the annuity payments.

E.

annuity payments minus the face value of the bond.

17. American Fortunes is preparing a bond offering with an

8% coupon rate. The bonds will be repaid in 10 years. The

company plans to issue the bonds at par value and pay interest

semiannually. Given this, which of the following statements

are correct?

I. The initial selling price of each bond will be $$1,000.

II. After the bonds have been outstanding for 1 year, you

should use 9 as the number of compounding periods when

calculating the market value of the bond.

III. Each interest payment per bond will be $$40.

IV. The yield to maturity when the bonds are first issued is

8%.

A.

I and II only

B.

II and III only

C.

II, III, and IV only

D.

I, II, and III only

E.

I, III, and IV only

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18. The newly issued bonds of the Wynslow Corp. offer a 6%

coupon with semiannual interest payments. The bonds are

currently priced at par value. The effective annual rate

provided by these bonds must be:

A.

equal to 3%.

B.

greater than 3% but less than 4%.

C.

equal to 6%.

D.

greater than 6% but less than 7%.

E.

equal to 12%.

19. You own a bond that has a 7% coupon and matures in 12

years. You purchased this bond at par value when it was

originally issued. If the current market rate for this type and

quality of bond is 7.5%, then you would expect:

A.

the bond issuer to increase the amount of each interest

payment on these bonds.

B.

the yield to maturity to remain constant due to the fixed

coupon rate.

C.

to realize a capital loss if you sold the bond at the market

price today.

D.

today's market price to exceed the face value of the bond.

E.

the current yield today to be less than 7%.

20. A bond with semi-annual interest payments, all else equal,

would be priced _________ than one with annual interest

payments.

A.

higher

B.

lower

C.

the same

D.

it is impossible to tell

E.

either higher or the same

21. A zero coupon bond:

A.

is sold at a large premium.

B.

has a price equal to the future value of the face amount

given a specified rate of return.

C.

can only be issued by the U.S. Treasury.

D.

has less interest rate risk than a comparable coupon bond.

E.

has implicit interest which is calculated by amortizing the

loan.

22. The total interest paid on a zero-coupon bond is equal to:

A.

zero.

B.

the face value minus the issue price.

C.

the face value minus the market price on the maturity date.

D.

$$1,000 minus the face value.

E.

$$1,000 minus the par value.

Chapter 08 - Interest Rates and Bond Valuation

23. The yield to maturity is:

A.

the rate that equates the price of the bond with the

discounted cash flows.

B.

the expected rate to be earned if held to maturity.

C.

the rate that is used to determine the market price of the

bond.

D.

equal to the current yield for bonds priced at par.

E.

All of the above.

24. Face value is:

A.

always higher than current price.

B.

always lower than current price.

C.

the same as the current price.

D.

the coupon amount.

E.

None of the above.

25. One basis point is equal to:

A.

.01%.

B.

.10%.

C.

1.0%.

D.

10%.

E.

100%.

26. The

The Wall Street Journal

listing of corporate bonds represents the estimated:

A.

yield to maturity.

B.

difference between the current yield and the yield to

maturity.

C.

difference between the bond's yield and the yield of a

particular Treasury issue.

D.

range of yields to maturity provided by the bond over its

life to date.

E.

difference between the yield to call and the yield to

maturity.

27. A bond is listed in The Wall Street Journal as a 12 3/4s of

July 2009. This bond pays:

A.

$$127.50 in July and January.

B.

$$63.75 in July and January.

C.

$$127.50 in July.

D.

$$63.75 in July.

E.

None of the above.

28. If its yield to maturity is less than its coupon rate, a bond

will sell at a _____, and increases in market interest rates will

_____.

A.

discount; decrease this discount.

B.

discount; increase this discount.

C.

premium; decrease this premium.

D.

premium; increase this premium.

E.

None of the above.

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29. The Fisher formula is expressed as _____ where R is the

nominal rate, r is the real rate, and h is the inflation rate.

A.

1 + r = (1 + R)

?

(1 + h)

B.

1 + r = (1 + R)

?

(1 + h)

C.

1 + h = (1 + r)

?

(1 + R)

D.

1 + R = (1 + r)

?

(1 + h)

E.

1 + R = (1 + r)

?

(1 + h)

30. The Fisher Effect primarily emphasizes the effects of

_____ risk on an investor's rate of return.

A.

default

B.

market

C.

interest rate

D.

inflation

E.

maturity

31. Consider a bond which pays 7% semiannually and has 8

years to maturity. The market requires an interest rate of 8%

on bonds of this risk. What is this bond's price?

A.

$$942.50

B.

$$911.52

C.

$$941.74

D.

$$1,064.81

E.

None of the above

N = 16 I/Y = 4 PMT = 35 FV = $$1000 PV = ? = $$941.74

32. The value of a 20 year zero-coupon bond when the market

required rate of return is 9% (semiannual) is ____.

A.

$$171.93

B.

$$178.43

C.

$$318.38

D.

$$414.64

E.

None of the above

$$1,000/(1.045)

40

= $$171.93

33. The bonds issued by Jensen & Son bear a 6% coupon,

payable semiannually. The bond matures in 8 years and has a

$$1,000 face value. Currently, the bond sells at par. What is the

yield to maturity?

A.

5.87%

B.

5.97%

C.

6.00%

D.

6.09%

E.

6.17%

Chapter 08 - Interest Rates and Bond Valuation

This can not be solved directly, so it's easiest to just use the

calculator method to get an answer. You can then use the

calculator answer as the rate in the formula just to verify that

your answer is correct.

This can not be solved directly, so it's easiest to just use the

calculator method to get an answer. You can then use the

calculator answer as the rate in the formula just to verify that

your answer is correct.

Answer is 6.00%

Answer is 10.40% (rounded)

34. A General Co. bond has an 8% coupon and pays interest

annually. The face value is $$1,000 and the current market

price is $$1,020.50. The bond matures in 20 years. What is the

yield to maturity?

A.

7.79%

B.

7.82%

C.

8.00%

D.

8.04%

E.

8.12%

36. Wine and Roses, Inc. offers a 7% coupon bond with

semiannual payments and a yield to maturity of 7.73%. The

bonds mature in 9 years. What is the market price of a $$1,000

face value bond?

A.

$$953.28

B.

$$963.88

C.

$$1,108.16

D.

$$1,401.26

E.

$$1,401.86

This can not be solved directly, so it's easiest to just use the

calculator method to get an answer. You can then use the

calculator answer as the rate in the formula just to verify that

your answer is correct.

Answer is 7.79%

35. Winston Enterprises has a 15-year bond issue outstanding

that pays a 9% coupon. The bond is currently priced at

$$894.60 and has a par value of $$1,000. Interest is paid

semiannually. What is the yield to maturity?

A.

8.67%

B.

10.13%

C.

10.16%

D.

10.40%

E.

10.45%

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