FIN 313 - Ch. 7 Quiz

In the present value bond valuation model, risk is generally incorporated into the

discount rate or required return.

If markets were entirely efficient (perfect), which of the following would we conclude?

Market value and intrinsic value would be the same.

Fred and Ethel are both considering buying a corporate bond with a coupon rate of 8%, a face value of $1,000, and a maturity date of January 1, 2025. Which of the following statements is MOST correct?

Fred may determine a different value for a bond than Ethel because each investor may have a different level of risk aversion, and hence a different required return.

Finance theory suggests that the current market value of a bond is based upon which of the following?

the sum of the present value of the bond's interest payments and the present value of the principal

The detailed legal agreement between a bond's issuer and its trustees that describes the bonds, the rights of the bondholders and the issuing firm is called the _____.

indenture

PR Corporation just issued $1,000 par 20-year bonds. The bonds sold for $936 and pay interest semiannually. Investors require a rate of 7.00% on the bonds. What is the amount of the semiannual interest payment on the bonds?

$32.00

A corporate bond has a coupon rate of 9%, a face value of $1,000, and matures in 15 years. Which of the following statements is MOST correct?

An investor who buys the bond for $900 will have a yield to maturity on the bond greater than 9%.

What is the yield to maturity of a bond that pays an 5% coupon rate with annual coupon payments, has a par value of $1,000, matures in 15 years, and is currently selling for $743?

7.6%

Andre owns a corporate bond with a coupon rate of 8% that matures in 10 years. Ruth owns a corporate bond with a coupon rate of 12% that matures in 25 years. If interest rates go down, then

the value of both bonds will increase.

The yield to maturity on a bond

is the required rate of return on the bond.

Both Investor A and Investor B are considering the purchase of Corporation FJR bonds. The bonds are selling at a price of $1,100 each. Investor A decides to buy the bonds and Investor B does not buy the bonds.

Investor A must have a required return lower than the required return for Investor B.

The present value of the expected future cash flows of an asset represents the asset's

intrinsic value.

Which of the following gives the bond issuer the right to redeem or repurchase a bond issue before its maturity date?

The call provision.

Bart's Moving Company bonds have a 11% coupon rate. Interest is paid semiannually. The bonds have a par value of $1,000 and will mature 8 years from now. Compute the value of Bart's Moving Company bonds if investors' required rate of return is 9.5%.

$1,082.75

If a corporation were to choose between issuing a debenture, a mortgage bond, or a subordinated debenture, which would have the highest yield to maturity, everything else equal?

the subordinated debenture

A bond issued by Liberty, Inc. 10 years ago has a coupon rate of 8%, paid annually, and a face value of $1,000. The bond will mature in 15 years. What is the value to an investor with a required return of 12.5%?

$701.52

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

price

Other things being equal, investors will value which of the following bonds the highest?

convertible bonds

Which of the following statements is true?

Long-term bonds have greater interest rate risk than do short-term bonds

Which of the following statements is MOST correct?

If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value.

What is the yield to maturity of a corporate bond with 13 years to maturity, a coupon rate of 8% per year, a $1,000 par value, and a current market price of $1,250? Assume semiannual coupon payments.

5.3%

Two bonds are identical except for their maturity. The bonds have a coupon rate that is greater than their yield to maturity. Which of the following is true when comparing the two bonds?

The longer maturity bond has a greater premium (is priced farther above par).

Put the following in order of their claim on assets of a firm, starting with the LAST to have a claim:

A. Subordinated debentures

B. Debentures (unsubordinated)

C. Common Stock

D. Preferred stock

C, D, A, B

LRQ Inc. issued bonds on July 1, 2006. The bonds had a coupon rate of 5.5%, with interest paid semiannually. The face value of the bonds is $1,000 and the bonds mature on July 1, 2021. What is the intrinsic value of an LRQ Corporation bond on July 1, 2012 to an investor with a required return of 7%?

$901.08

If market interest rates rise

long-term bonds will decline in value more than short-term bonds

When the intrinsic value of an asset exceeds the market value,

the asset is undervalued to the investor.

While checking the Wall Street Journal bond listings you notice that the price of an AT&T bond is the same as the price of a K-Mart bond. Based on this information you know that

the bond with the lower coupon rate will have the lower current yield.

Progressive Corporation issued callable bonds. The bonds are most likely to be called if

interest rates decrease.

A bond will sell at a discount (below par value) if

investor's current required rate of return is above the coupon rate of the bond.

A Johnson corporation bond is currently selling for $850. The bond matures in 20 years, has a face value of $1,000, and a yield to maturity of 14.30%. The bond's coupon rate is

12%.

Tranis Corporation sold an issue of 20-year, $1,000 par value bonds to the public that carry a 10.00% coupon rate, payable semiannually. It is now 10 years later, and the current market rate of interest is 8.00%. If interest rates remain at 8.00% until Tranis' bonds mature, what will happen to the value of the bonds over time?

The bonds will sell at a premium and decline in value until maturity.

Which of the following is FALSE concerning bonds?

Debentures are secured by assets other than real estate.

PBJ Corporation issued bonds on January 1, 2006. The bonds had a coupon rate of 5.5%, with interest paid semiannually. The face value of the bonds is $1,000 and the bonds mature on January 1, 2021. What is the yield to maturity for a PBJ Corporation bond on January 1, 2012 if the market price of the bond on that date is $950?

6.23%

If a firm were to experience financial insolvency, the legal system provides an order of hierarchy for the payment of claims. Assume that a firm has the following outstanding securities: mortgage bonds, common stock, debentures, and preferred stock. Rank the order in which investors that own mortgage bonds would have their claim paid?

first

Which of the following statements is true regarding convertible bonds?

These bonds are convertible into common stock of the issuing firm at a prespecified price.

Which of the following statements concerning bonds and risk is true?

Bonds are generally less risky than common stock because of the preference for debt over equity in the event of bankruptcy and liquidation.

Charlie Corporation has two bonds outstanding. Both bonds mature in 10 years, have a face value of $1,000, and have a yield to maturity of 8%. One bond is a zero coupon bond and the other bond has a coupon rate of 8%. Which of the following statements is true?

The zero coupon bond must sell for a lower price than the bond with an 8% coupon rate.

A Heights Inc. bonds have a coupon rate of 7%, a yield to maturity of 10%, a face value of $1,000, and mature in 10 years. Which of the following statements is MOST correct?

An investor who purchases the bond today will earn a return of 10% per year if he holds the bond until it matures.

William Corp. bonds have a current yield of 7% and mature in 10 years. Smith Corp. bonds have a current yield of 5% and mature in 10 years. Given this information, which of the following statements is MOST correct?

If both bonds have the same yield to maturity, then the price of Smith Corp. bonds must be less than the price of William Corp. bonds.

Two investors are considering the purchase of Corporation LMQ bonds. The bonds are selling at their par value of $1,000 with a coupon rate of 9%. Investor A decides to buy the bonds and Investor B does not buy the bonds.

Investor A must have a required return less than or equal to 9%.

Speculative, or non-investment-grade, bonds have an S&P bond rating of

BB or less.

Alice Kitchen's, Inc. bonds have a 10% coupon rate with semiannual coupon payments. They have 12-1/2 years to maturity and a par value of $1,000. Compute the value of Alice's bonds if investors' required rate of return is 8%.

$1,156.22

Facade Securities has an issue of $1,000 par value bonds with 18 years remaining to maturity. The bonds pay 7.7% interest on a semiannual basis. The current market price of the bonds is $1,173. What is the yield-to-maturity of the bonds?

6.09%

Messenger, Inc. bonds have a 4% coupon rate with semiannual coupon payments and a $1,000 par value. The bonds have 11 years until maturity, and sell for $925. What is the current yield for Messenger's bonds?

4.32%

Valley Manufacturing Inc. just issued $1,000 par 20-year bonds. The bonds sold for $723.98 and pay interest semiannually. Investors require a rate of 9% on the bonds. What is the bonds' coupon rate?

6%

Suppose interest rates have been at historically low levels the past two years. A reasonable strategy for bond investors during this time period would be to

invest in short-term bonds to reduce interest rate risk.

In 2000 Jenson Inc. issued bonds with an 8 percent coupon rate and a $1,000 face value. The bonds mature on March 1, 2025. If an investor purchased one of these bonds on March 1, 2012, determine the yield to maturity if the investor paid $1,100 for the bond.

7%

Which of the following statements concerning junk bonds is MOST correct?

Junk bonds have higher interest rates than AAA-rated bonds because of the higher risk.

If a corporation were to choose between issuing a debenture, a mortgage bond, or a subordinated debenture, everything else equal (such as coupon rate, maturity, etc.) which would sell for the greatest price?

the mortgage bond

The correct relationship for a premium bond is

coupon rate > current yield > yield to maturity.