142331715 Questions and Answers
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Selected practice questions questions from Chapters Chapters 6 – 8, FIN 335, with with Dr Dr !raham From Chapter 6 – "onds and "ond #alue
1. The stated stated interest interest payment, payment, in dollars, dollars, made on a bond each each period is called called the bond's bond's:: A) Coupon. B) Face Face value alue.. C) Matu Maturi rity ty.. ) !ield ield to to maturi maturity ty.. ") Coup Coupo on rat rate. e. Ans#er: A $. The principal amount o% a bond that that is repaid at the the end o% the loan term is called the bond's: A) Coupon. B) Face Face value alue.. C) Matu Maturi rity ty.. ) !ield ield to to maturi maturity ty.. ") Coup Coupo on rat rate. e. Ans#er: B &. The rate o% o% return reuir reuired ed by investors investors in the the mar(et mar(et %or o#nin o#nin a bond is is called the: the: A) Coupon. B) Face Face value alue.. C) Matu Maturi rity ty.. ) !ield ield to to maturi maturity ty.. ") Coup Coupo on rat rate. e. Ans#er: *. The annual annual coupon coupon o% a bond divided divided by its its %ace value value is called called the bond's: bond's: A) Coupon. B) Face Face value alue.. C) Matu Maturi rity ty.. ) !ield ield to to maturi maturity ty.. ") Coup Coupo on rat rate. e. Ans#er: " +. A bond #ith #ith a %ace value o% 1,--1,--- that sells %or less than 1,--- in the mar(et is called a: A) ar bo bond. B) isc iscou ount nt bond bond.. C) rem remiu ium m bond bond.. ) /ero /ero coup coupon on bond bond.. ") Floa Floati tin n rate rate bond bond.. Ans#er: B 0. A bond #ith #ith a %ace value o% 1,--1,--- that sells %or more than 1,--- in the mar(et is called a: A) ar bo bond. B) isc iscou ount nt bond bond.. C) rem remiu ium m bond bond.. ) /ero /ero coup coupon on bond bond.. ") Floa Floati tin n rate rate bond bond.. Ans#er: C
. The lon2ter lon2term m bonds issued issued by by the 3nited 3nited 4tates 4tates overnmen overnmentt are called: called: A) Treas reasur ury y bon bonds ds.. B) Mu Muni nici cipa pall bond bonds. s. C) Floa Floati tin n rat ratee bond bonds. s. ) 5un( 5un( bond bonds. s. ") /ero /ero coup coupon on bond bonds. s. Ans#er: A 6. A bond that ma(es no coupon payments payments 7and thus thus is initially priced at a deep discount discount to par value) is called a 8888888 bond. A) Treas reasu ury B) mu mun nicip icipaal C) %loa %loati tin n rate rate ) 9un( ") ero ero coup coupon on Ans#er: " ;. A bond bond #hich, at the election election o% the the holder, holder, can be s#apped s#apped %or a %i. yield to maturity >>. mar(et premium >>>. coupon rate A) > only B) > and and >> on only C) >>> on only ) > and and >>> >>> onl only y ") >, >> and and >>> >>> Ans#er:
1&. >% you divide divide a bond's bond's annual coupon payment by its current yield you et the 88888888888. 88888888888. A) yiel yield d to to mat matur urit ity y B) invest investors ors'' reuire reuired d rate rate o% return return C) annu annual al coup coupon on rate rate ) cost cost o% o% capi capita tall ") bond pr price Ans#er: " 1*. ?hich o% o% the %ollo#in %ollo#in statements statements reardi reardin n bond pricin pricin is is true@ A) The lo#er the discount discount rate, the the more valuable valuable the coupon coupon payments are today. today. B) Bonds #ith #ith hih coupon coupon payments payments are enerall enerally y 7all else the the same) more sensitiv sensitivee to chanes in interest rates than bonds #ith lo#er coupon payments. C) ?hen mar(et mar(et interest interest rates rates rise, rise, bond prices prices #ill #ill also rise, rise, all else else the same. ) Bonds #ith short maturities maturities are enerally enerally 7all else the same) same) more sensitive sensitive to chanes in interest rates than bonds #ith loner maturities. ") All else the same, bonds bonds #ith larer coupon coupon payments #ill have a lo#er price price today. today. Ans#er: A 1+. !our bro(er o%%ers o%%ers you the opportunity opportunity to purchase a bond #ith coupon payments o% ;;- per year and a %ace value o% 1---. >% the yield to maturity on similar bonds is 6=, this bond should: A) 4ell %or the same price as the similar similar bond reardless o% their respective maturities. maturities. B) 4ell 4ell at a prem premiu ium. m. C) 4ell 4ell at a dis disco coun unt. t. ) 4ell %or either either a premium premium or a discount discount but but it's impossi impossible ble to tell tell #hich. #hich. ") 4ell 4ell %or %or par par val value ue.. Ans#er: B 10. ?hen pricin bonds, i% a bond's coupon rate is less than the reuired rate o% return, then: A) The holder o% the bond bond is assured assured o% a pro%it reardless reardless o% #hen #hen the bond is eventually sold. B) The holder holder o% the bond bond #ill realie realie a capital capital ain ain i% the the bond is held held to maturity maturity.. C) The bond sells at par because the reuired rate o% return return is ad9usted ad9usted to re%lect the discrepancy. discrepancy. ) The bond sells sells at a premium i% it has a lon maturity and at a discount discount i% it has a short maturity. ") The bond bond sells at a discoun discountt i% it has a lon lon maturity maturity and at a premium premium i% it has has a short maturity. Ans#er: B 1. All else else the same, a7n) a7n) 8888888888 8888888888 #ill #ill decrease decrease the the reuired reuired return return on a bond. bond. A) call call prov provis isio ion n B) lo#e lo#err bond bond rati ratin n C) sin( sin(in in %und %und ) increa increase se in in%lat in%lation ion ") increa increase se in the the sie sie o% a bond bond issu issuanc ancee Ans#er: C 16. ?hich o% the the %ollo#in %ollo#in items items enerally enerally appears appears in a corporate corporate bond uote uote %rom Journal @ A) !ield ield to to matu maturi rity ty B) ri riin inal al iss issue ue pri price ce C) Curr Curren entt yiel yield d ) ame ame o% the the trus truste teee ") Bond Bond rat ratin in Ans#er: C
The Wall Street
1;. For a discount bond, the current current yield is 888888888 888888888 the yield to maturity maturity,, and the coupon coupon rate is 8888888888888 8888888888888 the yield to maturity. maturity. A) less less than than less less than than B) less less than than rea reate terr than than C) rea reate terr than than less less than than ) reate reaterr than than reate reaterr than than ") eua euall to to eua euall to Ans#er: A $-. For a premium premium bond, bond, the the reuired reuired return return is less less than than the: the: >. Current yield. >>. !ield to maturity. >>>. Coupon rate. A) B) C) ) ")
> only > and and >> on only >> and and >>> >>> onl only y > and and >>> >>> onl only y >, >>, and and >>> >>>
$1. >% investors are are uncertain that they #ill be able to sell a corporate bond uic(ly, uic(ly, the investors #ill demand a hiher yield in the %orm % orm o% a7n) 888888888888. A) in%l in%lat atio ion n prem premiu ium m B) liu liuid idit ity y ris( ris( premi premium um C) interes interestt rate rate ris( ris( prem premium ium ) de%a de%aul ultt ris( ris( prem premiu ium m ") increa increased sed real real rate rate o% o% inter interest est Ans#er: B $$. iy Corp. bonds bearin a coupon rate o% 1$=, 1$=, pay coupons coupons semiannually semiannually,, have & years remainin to maturity, maturity, and are currently priced at ;*- per bond. ?hat is the yield to maturity@ A) 1$.--= B) 1&.;;= C) 1*.+*= ) 1+.$+= ") 1+.+= Ans#er: C Desponse: ;*- E 1--- F, 0- MT, 0 , 2;*- , CT >G! E .$= !TM E .$= < $ E 1*.+*= $&. ?hitesell ?hitesell Athletic Athletic Corporati Corporation's on's bonds bonds have a %ace value value o% 1,--1,--- and a ;= coupon paid paid semiannually the bonds mature in 6 years. ?hat current yield #ould be reported in The Wall i% the yield to maturity is =@ Street Journal i% A) *= B) += C) 0= ) = ") 6= Ans#er: " Desponse: 1--- F, *+ MT, 10 , &.+ >G!, CT E 1,1$-.;* Annual coupon is *+ < $ E ;-. Current !ield !ield 7C!) E ;- G 1,1$-.;* E 6.-&=
$*. HI "nterprises "nterprises issues bonds #ith a 1,--- %ace value that ma(e coupon coupon payments payments o% &&- every & months. ?hat is the coupon rate@ A) -.&-= B) &.--= C) ;.--= ) 1$.--= ") &-.--= Ans#er: Desponse: coupon rate E 7&- < *) G 1,--- E 1$= $+. 4uppose you purchase a ero coupon bond #ith %ace value 1,---, maturin maturin in $+ years, %or 16-. ?hat is the implicit interest, in dollars, in the %irst year o% the bond's li%e@ A) $.60 B) ;.6* C) 1$.6 ) 1;.$ ") &-.-Ans#er: C 1--- F, $+ , 216- , CT >G! E !TM E .1= !ear 1 interest E 16- < .-1 E 1$.6 $0. 4uppose 4uppose you purchas purchasee a ero coupon coupon bond #ith #ith a %ace value value o% 1,--1,--- and a maturity maturity o% $+ years, years, %or 16-. >% the yield to maturity on the bond remains unchaned, #hat #ill the price o% the bond be + years %rom no#@ A) $+&.0* .0* B) $6.+$ C) &1-.;1 ) &6-.+6 .+6 ") +--.-Ans#er: A 1--- F, $+ , 216- , CT >G! E .1= 216- , + , .1 >G!, CT F E $+&.0* $. ?hat is the yield to maturity on an 162year, 162year, ero ero coupon bond sellin sellin %or &-= &-= o% par par value@ A) *.60= B) +.60= C) 0.&= ) 0.;$= ") &-.--= Ans#er: 1--- F, 16 , 2&-- , CT >G! E !TM E 0.;$= $6. 5H5 "nterprises "nterprises #ants to issue si% each bond is to yield =, ho# much #ill 5H5 receive 7inorin issuance costs) #hen the bonds are %irst sold@ A) 11,$1$ B) 1$,&;& C) 1+,+-+ ) 16,66") $-,--Ans#er: C $Desponse: price E 1,--- G 1.- E $+6.*$ proceeds E $+6.*$ < 0- E 1+,+-+
There is the alebra, but #hat are the entries usin your TM (eys on your T> BA >> lus@ And #hat o% the alebra and (eystro(es %or numbers $;2*- belo#@ Deconiin the alebra is important, and e% each bond bond is to to yield =, #hat is the minimum number o% bonds 5H5 must sell i% they #ish to raise + million %rom the sale@ 7>nore issuance costs.) A) 1,$;B) 1;,&*; C) $-,10* ) $&,66") $0,1+; Ans#er: B Desponse: price E 1,--- G 1.-$- E $+6.*$ L o% bonds E +,---,--- G $+6.*$ E 1;,&*; &-. ?hat is the mar(et value o% a bond that #ill pay a total o% o% %i%ty semiannual semiannual coupons coupons o% 6- each over the remainder o% its li%e@ Assume the bond has a 1,--- %ace value and a 1$= yield to maturity. A) &*.60 B) ;* ;*$.$0 C) 1,1 1,1&+ &+.; .;) 1,& 1,&1+ 1+.$ .$* * ") 1,+* ,+*+.0$ Ans#er: +- , 6- MT, 1--- F, 1$G$ E >G!, CT E 21,&1+ &1. 5H5 Manu%acturin Manu%acturin 9ust issued a bond #ith a 1,--- %ace %ace and a coupon rate o% 6=. The bond has a li%e o% $- years, annual coupons, and a yield to maturity is .+=, #hat #ill the bond sell %or@ A) ;+ B) 1,-$C) 1,-+1 ) 1,-6 ") 1,10$ Ans#er: C 1--- F, 6- MT, $- , .+ >G!, CT E 21,-+1 &$. 5H5 Manu%actu Manu%acturin rin 9ust 9ust issued issued a bond #ith #ith a 1,--1,--- %ace value value and a coupon coupon rate o% 6=. 6=. >% the bond has a li%e o% $- years, pays pays annual coupons, coupons, and the yield to maturity is is .+=, #hat percent o% the bond's total price is represented by the present value o% the coupons@ A) *+.= B) +0.1= C) .0= ) ;&.$= ") 1--.-= Ans#er: C Desponse: 3sin the TM (eystro(es above, you et the price o% around 1,-+1. The alebra@ $$ price E 6- 71 2 1G1.-+ ) G .-+N O 1,--- G 1.-+ E 1,-+-.; $ o% coupons E 6- 71 2 1G1.-+ )G .-+N E 61+.+0 percentae E 61+.+0 G 1,-+-.; E .0= &&. 5H5 Manu%actu Manu%acturin rin 9ust 9ust issued issued a bond #ith #ith a 1,--1,--- %ace value value and a coupon coupon rate o% 6=. 6=. >% the
bond has a li%e o% $- years, pays pays annual coupons, coupons, and the yield to maturity is is .+=, #hat is the present value o% the bond's bond's %ace value@ A) $&+.*1 B) &* &*1.1+ C) 61 61+.+0 ) 1,1,----..-") 1,-+ ,-+-.; $Ans#er: A, A, Desponse: o% par E 1,--- G 1.-+ E $&+.*1 71--- F, $- , .+ >G!, CT E $&+.*1) &*. 5H5 Manu%actu Manu%acturin rin 9ust 9ust issued issued a bond #ith #ith a 1,--1,--- %ace value value and a coupon coupon rate o% 6=. 6=. >% the bond has a li%e o% $- years, pays pays annual coupons, coupons, and the yield to maturity is is .+=, #hat is the total present value o% the bond's coupon payments@ A) $&+.*1 B) &* &*1.1+ C) 61 61+.+0 ) 1,1,----..-") 1,-+ ,-+-.; Ans#er: C $Desponse: o% coupons E 6- 71 1G1.-+ )G .-+N E 61+.+0 &+. The mar(et price price o% a bond is 1,$&0.;*, it has 1* years to maturity, maturity, a 1,--- %ace value, and pays an annual coupon o% 1-- in semiannual installments. ?hat is the yield to maturity@ A) &.16= B) *.$0= C) +.&= ) 0.11= ") .$= Ans#er: " Desponse: $6 $6 1,$&0.;* E +- P1 2 1G71 O D) N G DQ O 1,--- G 71 O D) D E &.0&= !TM E &.0*= < $ E .$= &0. ?hat #ould #ould you pay pay %or a bond that that pays pays an annual annual coupon o% o% *+, has a %ace %ace value o% 1,---, 1,---, matures in 11 years, and has a yield to maturity o% 1-=@ A) 0*$. . B) +.&* C) 6--.16 ) ;1-.1* .1* ") ;0.&6 Ans#er: A 11) 11 Desponse: price E *+ 71 2 1G1.1 G .1N O 1,--- G 1.1 E 0*$. &. Rin oodles' oodles' bonds have a ;= ;= coupon rate. >nterest is paid uarterly and the bonds have a maturity o% 1- years. >% the appropriate discount rate is 1-= on similar bonds, #hat is the price o% Rin oodles' bonds@ A) ;&.$* .$* B) ;&6.++ C) ;1.$ ) ;6;.0& .0& ") ;;1.$ Ans#er: A **Desponse: price E $$.+- 71 2 1G1.-$+ ) G .-$+N O 1,--- G 1.-$+ E ;&.$*
&6. Cornerstone >ndustries >ndustries has a bond outstandin outstandin #ith an 6= coupon rate and a mar(et price o% 6*.06. >% the bond matures in 0 years and interest is paid semiannually, #hat is the !TM@ A) *.;= B) 0.;= C) 6.;= ) 1-.;= ") 1$.;= Ans#er: 1$ 1$ Desponse: 6*.06 E *- P1 2 1G71 O D) N G DQ O 1,--- G 71 O D) D E +.*+= !TM E +.*+= < $ E 1-.;= &;. The ma(e2beli ma(e2believe eve bonds bonds o% Faceboo( Faceboo( carry a 1$= annual annual coupon, coupon, have a 1,--- %ace %ace value, and mature in + years. Bonds o% euivalent ris( yield ;=. ?hat is the mar(et value o% Faceboo( bonds@ A) 1,1,-1 11.$.$B) 1,1,-6 6.$ .$+ + C) 1,1,-;+ ;+.0 .00 0 ) 1,1 1,110 10.0 .0; ; ") 1,10 ,10-.$+ Ans#er: + + Desponse: price E 1$- 71 2 1G1.-; ) G .-;N O 1,--- G 1.-; E 1,110.0; *-. >% the %ollo#i %ollo#in n bonds bonds are identica identicall e, >>, and and >>> >>> Ans#er: B
6. As illustrated illustrated usin the dividend dividend ro#th model, the total return on a share share o% common stoc( is comprised o% a 88888888888. 88888888888. A) capital capital ains ains yield yield and and a divide dividend nd ro#th ro#th rate rate B) capital capital ains ains ro#th ro#th rate and and a divide dividend nd ro#th ro#th rate rate C) dividend dividend payou payoutt ratio ratio and a reuir reuired ed rate rate o% return return ) dividend dividend yield yield and the presen presentt dividen dividend d ") dividend dividend yield yield and and a capital capital ains ains yield Ans#er: " ;. ?hich o% o% the %ollo#in %ollo#in items #ould #ould usuall usually y appear appear %or a stoc( uote uote in A) Capi Capita tall ain ainss rat ratee B) ivi ivide dend nd yiel yield d C) umber umber o% shar shares es out outsta stand ndin in ) ar ar valu valuee o% the the stoc stoc( ( ") ivi ivide dend nd ro# ro#th th rate rate Ans#er: B
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1-. >% dividends on a common stoc( are e. the price o% the stoc( stoc( today >>. the dividend that is e>>. the appropriate discount rate ten years %rom no# no# A) > only B) > and and >> on only C) > and and >>> only only ) >> and and >>> >>> only only ") >, >>, and and >>> >>> Ans#er: B 11. 11. ?hich o% the the %ollo#in %ollo#in statement statementss reardin reardin dividend dividend yields yields is true@ A) >t measures measures ho# much much the stoc('s stoc('s price price #ill #ill increase increase in a year. year. B) >t incorpor incorporates ates the the par value value o% the the stoc( stoc( into the the calculat calculation. ion. C) >t is analoous analoous to the the current current yield yield %or a bond. bond. ) >t is al#ays al#ays reater reater than than the stoc(' stoc('ss capital capital ains ains yield. yield. ") >t measures measures the total total annual annual return return an investor investor can e>. ?hen the constant dividend ro#th ro#th model holds, E capital ains yield. >>>. The total return on a share o% stoc( E dividend dividend yield O capital ains ains yield. A) > only B) >> on only C) > and and >> on only ) >> and and >>> >>> only only ") >, >>, and and >>> >>> Ans#er: 1&. >% some sharehol shareholders ders have have reater reater votin votin po#er than than others, others, it must be that: that: A) The company company has both both pre%erred pre%erred stoc( and and common stoc( stoc( outstand outstandin. in. B) The company company has outstand outstandin in debenture debentures. s. C) The company company is located located outsid outsidee the 3nited 3nited 4tates 4tates in a tante >ntern rnal al rat ratee o% ret retur urn n
Ans#er: A 1*. An investment investment enerates 1.1- in present value value bene%its %or each dollar dollar o% invested invested costs. costs. This conclusion #as most li(ely reached by calculatin the pro9ect's: A) et et pres presen entt val value ue B) ro% ro%it itab abil ilit ity y inde inde< < C) >nte >ntern rnal al rat ratee o% ret retur urn n ) ayb aybac ac( ( peri period od ") Averae verae accoun accountin tin retur return n Ans#er: B 1+. The use o% o% #hich o% the %ollo#in %ollo#in #ould #ould lead to correct decisions #hen #hen comparin mutually e. ro%itability inde< >>. et present value >>>. Averae accountin accountin return A) > only B) >> on only C) >>> on only ) > and and >> only only ") > and and >>> only only Ans#er: B
10. !ou o#n some manu%acturin manu%acturin euipment euipment that must be replaced. T#o T#o di%%erent suppliers present present a purchase and installation installation plan %or your consideration. consideration. This This is an e E +,++ G +-,--- E 1.1+ accept END OF CHAPTER 8 QUESTIONS
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