Q&A Hero

Q: A call provision allows the issuing firm the opportunity to avoid rising interest rates by calling investors and asking for more cash.

Q: Preferred stock is riskier than long-term debt because its claim on assets and income come after those of bonds.

Q: The amount of the preferred stock dividend is generally fixed either as a dollar amount or as a percentage of the par value.

Q: For a given constant required rate of return, the greatest portion of a preferred stockholder's return comes from increases in the price of preferred stock.

Q: A call provision entitles a company to repurchase its preferred stock from holders at stated prices over a given time period.

Q: In terms of risk, preferred stock is safer than common stock because it has a prior claim on assets and income.

Q: Because most preferred stocks are perpetuities, their value can be determined by dividing the annual dividend by an investor's required return.

Q: Preferred stock is referred to as a hybrid security because it has many characteristics of both common stock and bonds.

Q: 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? A) 2.16% B) 3.45% C) 4.32% D) 5.52%

Q: ND Electric Company issued $1,000 bonds that have an annual coupon rate of 6.5%. The present market value of the bonds is $1,225. If the bonds have 17 years remaining until maturity, what is the current yield on ND Electric Company bonds? A) 5.3% B) 6.5% C) 7.2% D) 13.2%

Q: 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? A) The longer maturity bond has a greater premium (is priced farther above par). B) The longer maturity bond has a smaller premium (is priced above par but closer to par). C) The longer maturity bond has a greater discount (is priced farther below par). D) The longer maturity bond has a smaller discount (is priced below par but closer to par).

Q: A corporate bond has a coupon rate of 9%, a face value of $1,000, a market price of $850, and the bond matures in 15 years. Therefore, the bond's yield to maturity is A) 9%. B) 24%. C) 11.1%. D) 13.45%.

Q: A bond's yield to maturity depends upon all of the following EXCEPT A) the individual investor's required return. B) the maturity of the bond. C) the coupon rate. D) the bond's risk as reflected by the bond rating.

Q: The yield to maturity on long-term bonds A) is equal to the current yield if the bond is selling for face value. B) is equal to the coupon rate on the bond. C) is equal to the net present value of the bond's future cash flows. D) is set by the indenture agreement and will not change over the life of the bond.

Q: Visionary TV Corporation bonds are currently priced at $1,088. They have a par value of $1,000 and 12 years to maturity. They pay an annual coupon rate of 6%. What is the yield to maturity on this bond? A) 6.7% B) 6.1% C) 5.4% D) 5.0%

Q: 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 $769? A) 2.4% B) 5.7% C) 7.6% D) 9.5%

Q: What is the expected rate of return on a bond that matures in 5 years, has a par value of $1,000, a coupon rate of 11.5%, and is currently selling for $982? Assume annual coupon payments. A) 12.5% B) 12.0% C) 12.7% D) 13.4%

Q: 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. A) 4.2% B) 4.7% C) 6.0% D) 5.3%

Q: Pentrax Corp. issued 25 year bonds in 2002 with a coupon rate of 6% and a face value of $1,000. The bonds sold for face value when issued. Since 2002, interest rates have increased, so the going rate on similar bonds is now 9%. Which of the following statements is MOST accurate? A) An investor who purchased an Pentrax bond in 2002 and plans to keep the bond until it matures expects to earn 6% per year over the life of the bond. B) Pentrax Corp. must now pay bondholders interest payments of $90 per year due to the increase in interest rates. C) An investor who purchased an Pentrax bond in 2002 and plans to keep the bond until it matures expects an increase in return from 6% per year to 9% per year. D) The price of an Pentrax Corp. bond should be higher than $1,000 due to the increase in rates.

Q: If the market price of a bond decreases, then A) the yield to maturity decreases. B) the coupon rate increases. C) the yield to maturity increases. D) the coupon rate decreases.

Q: Which of the following is NOT a definition of yield to maturity? A) discount rate that equates present value of future cash flows with a bond's price. B) investors' required rate of return on a bond investment. C) return that an investor will earn if they buy the bond for its market price and hold it until maturity. D) discount rate that equates present value of future cash flows with a bond's face value.

Q: A $1,000 par value 14-year bond with a 10 percent coupon rate recently sold for $965. The yield to maturity is A) 10.49%. B) 10.00%. C) 8.87%. D) 6.50%.

Q: 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 A) the bond with the lower coupon rate will have the lower current yield. B) both bonds have the same yield to maturity. C) both bonds will have the same bond rating. D) the bond with the longest time to maturity will have the highest yield to maturity.

Q: 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? A) William Corp. bonds will have a higher yield to maturity than Smith Corp. bonds. B) Smith Corp. bonds will sell for a lower price than William Corp. bonds. C) Smith Corp. bonds are riskier than William Corp. bonds. D) 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.

Q: 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? A) 5.50% B) 6.23% C) 8.43% D) 10.50%

Q: 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? A) An investor with a required return of 10% will value the bond at more than $1,000. B) An investor who buys the bond for $900 and holds the bond until maturity will have a capital loss. C) An investor who buys the bond for $900 will have a yield to maturity on the bond greater than 9%. D) If the bond's market price is $900, then the annual interest payments on the bond will be $81.

Q: 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? A) An investor who purchases the bond today will earn a return of 10% if he sells the bond after one year. B) An investor who purchases the bond today will earn a return of 7% if he sells the bond after one year. C) An investor who purchases the bond today will earn a return of 17% per year if he holds the bond until it matures. D) An investor who purchases the bond today will earn a return of 10% per year if he holds the bond until it matures.

Q: Which of the following statements is MOST correct? A) If a bond's yield to maturity exceeds its coupon rate, the bond's current yield (interest yield) must also exceed its coupon rate. B) If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value. C) If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price regardless of the bond's coupon rate. D) Answers B and C are correct.

Q: 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. A) 7% B) The yield to maturity is $900 ($1,000 interest less $100 capital loss). C) The yield to maturity must be greater than 8% because the price paid for the bond exceeds the face value. D) 5.4%

Q: The yield to maturity on a bond is the rate of return that equates the present value of the bond's future cash flows with the bond's A) face value. B) market value. C) liquidation value. D) book value.

Q: The yield to maturity on a bond A) is fixed in the indenture. B) is lower for higher risk bonds. C) is the required rate of return on the bond. D) is generally below the coupon interest rate.

Q: A bond's yield to maturity varies from investor to investor because each investor has his or her own required return.

Q: The current yield for a bond is constant over time because the coupon rate is fixed.

Q: Bond A has a current yield of 6% and Bond B has a current yield of 8%. If the market price of both bonds is the same, then the yield to maturity on Bond B must be higher than the yield to maturity on Bond A.

Q: The less risky the bond (or the higher the bond rating) the lower will be the yield to maturity on the bond.

Q: The current yield is greater than the coupon rate for a bond selling above par value.

Q: The yield-to-maturity is the discount rate that equates the present value of the interest and principal payments with the face value of the bond.

Q: The yield to maturity is the discount rate that equates the present value of the interest and principal payments with the current market price of the bond.

Q: If two bonds have the same yield to maturity, they also have the same current yield.

Q: FYI bonds have a par value of $1,000. The bonds pay $40 in interest every six months and will mature in 10 years.a. Calculate the price if the yield to maturity on the bonds is 7, 8, and 9 percent, respectively.b. Explain the impact on price if the required rate of return decreases.c. Compute the coupon rate on the bonds. How does the relationship between the coupon rate and the yield to maturity determine how a bond's price will compare to it par value?

Q: Calculate the value of a bond that is expected to mature in 18 years with a $1,000 face value. The coupon rate is 4%, and the required rate of return is 8%. Interest is paid annually.

Q: GAT, Inc. has issued a $1,000 par 4% annual coupon bond that is to mature in 18 years. If your required rate of return is 6.5%, what price would you be willing to pay for the bond?

Q: A bond with a $1,000 face value and a 10 percent annual coupon rate matures in 15 years. a. Determine the value of the bond to a friend of yours with a required rate of return of 13%. b. A zero coupon bond with similar risk is selling for $180. The bond has a face value of $1,000 and matures in 15 years. Your friend asks you which bond she should invest in, the zero coupon bond or the bond in part (a). Which bond do you recommend, and why? Assume the market price of the bond in part (a) is $820.

Q: Due to a number of lawsuits related to toxic wastes, a major chemical company has recently experienced a market revaluation. The firm has bonds outstanding that were issued 8 years ago at their par value of $1,000. These bonds have 12 years to maturity and a coupon rate of 6 percent, with interest paid semiannually. The required return on these bonds has increased to 14 percent. What is the current value of one of these bonds?

Q: Master Craft Control Inc. has bonds that mature in 6 1/2 years with a par value of $1,000. They pay a coupon rate of 9% with semiannual payments. If the required rate of return on these bonds is 11% what is the bond's value? A) $1,026.73 B) $973.76 C) $1,022.74 D) $908.83

Q: 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%. A) $1,197.27 B) $1,133.05 C) $1,098.99 D) $1,082.75

Q: Alice Kitchen's, Inc. bonds have a 10% coupon rate with semiannual coupon payments. They have 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%. A) $1,156.22 B) $1,239.33 C) $1,137.10 D) $1,084.44

Q: What is the value of a bond that matures in 5 years, has an annual coupon payment of $110, and a par value of $2,000? Assume a required rate of return of 8.69%. A) $938.50 B) $1,876.99 C) $1,891.36 D) $1,749.83

Q: What is the value of a bond that matures in 17 years, makes an annual coupon payment of $50, and has a par value of $1,000? Assume a required rate of return of 5.90%. A) $823.48 B) $856.98 C) $895.23 D) $905.02

Q: What is the value of a bond that has a par value of $1,000, a coupon of $120 (annually), and matures in 10 years? Assume a required rate of return of 7.02%. A) $1,198.45 B) $1,200.78 C) $1,284.38 D) $1,349.45

Q: Assume that Bunch Inc. has an issue of 18-year $1,000 par value bonds that pay 7% interest, annually. Further assume that today's required rate of return on these bonds is 5%. How much would these bonds sell for today? Round off to the nearest $1. A) $1,233.79 B) $1,201.32 C) $1,134.88 D) $1,032.56

Q: 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 A) the value of Andre's bond will decrease and the value of Ruth's bond will increase. B) the value of both bonds will increase. C) the value of Ruth's bond will decrease more than the value of Andre's bond due to the longer time to maturity. D) the value of both bonds will remain the same because they were both purchased in an earlier time period before the interest rate changed.

Q: 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%? A) $901.08 B) $902.27 C) $1,000.00 D) $1,104.28

Q: 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 A) 10%. B) 11%. C) 12%. D) 13%.

Q: 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? A) $64.50 B) $55.00 C) $32.00 D) $21.75

Q: Valley Manufacturing Inc. just issued $1,000 par 20-year bonds. The bonds sold for $758.18 and pay interest semiannually. Investors require a rate of 9% on the bonds. What is the bonds' coupon rate? A) 6% B) 7% C) 8% D) 9%

Q: Bryant Inc. just issued $1,000 par 30-year bonds. The bonds sold for $1,107.20 and pay interest semiannually. Investors require a rate of 7.75% on the bonds. What is the bonds' coupon rate? A) 9.333% B) 7.750% C) 4.125% D) 8.675%

Q: Nunavet Ocean Cruises sold an issue of 12-year $1,000 par bonds to build new ships. The bonds pay 4.85% interest, semiannually. Today's required rate of return is 9.7%. How much should these bonds sell for today? Round off to the nearest $1. A) $771.86 B) $732.93 C) $660.45 D) $598.33

Q: The interest on corporate bonds is typically paid A) semiannually. B) annually. C) quarterly. D) monthly.

Q: Which of the following will cause the value of a bond to increase, other things held the same? A) Investors' required rate of return increases. B) The company's debt rating drops from AAA to BBB. C) Interest rates decrease. D) The bond is callable.

Q: A bond issued by Liberty, Inc. 10 years ago has a coupon rate of 8% 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%? A) $800 B) $750.86 C) $658.94 D) $701.52

Q: 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. A) Investor A must have a required return lower than the required return for Investor B. B) The yield to maturity for Investor A must be higher than the yield to maturity for Investor B. C) The yield to maturity for Investor A must be less than the yield to maturity for Investor B. D) The yield to maturity for this bond must be higher than the coupon rate.

Q: 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? A) Both bonds must sell for the same price if markets are in equilibrium. B) The zero coupon bond must have a higher price because of its greater capital gain potential. C) The zero coupon bond must sell for a lower price than the bond with an 8% coupon rate. D) All rational investors will prefer the 8% bond because it pays more interest.

Q: When using the pv (present value) function in Excel to calculate bond values, the bond's coupon rate is entered as the Rate variable.

Q: In Excel, the variable pv stands for a bond's par value.

Q: The value of a bond is inversely related to changes in the investor's present required rate of return.

Q: The Wall Street Journal bond quotes indicate that the net close for a bond with a $1,000 par value is . The closing price for that bond was $100.75.

Q: A bond with a par value of $1,000 is listed in the Wall Street Journal at a price of 100.50. This bond is selling for $1,005.

Q: The value of a bond is the present value of both the future interest to be received and the price of the bond.

Q: 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?A) Because both Fred and Ethel will receive the same cash flows if they each buy a bond, they both must assign the same value to the bond.B) If Fred decides to buy the bond, then Ethel will also decide to buy the bond, if markets are efficient.C) Fred and Ethel will only buy the bonds if the bonds are rated BBB or above.D) 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.

Q: In the present value bond valuation model, risk is generally incorporated into the A) maturity amount. B) timing of cash flows (assuming more risky cash flows are received early). C) discount rate or required return. D) cash flows (making some smaller if they are more risky).

Q: As interest rates, and consequently investors' required rates of return, change over time the ________ of outstanding bonds will change as a result. A) maturity date B) coupon interest payment C) par value D) price

Q: What are the three important elements of asset valuation?

Q: Finance theory suggests that the current market value of a bond is based upon which of the following? A) the future value of interest paid on a bond B) the sum total of principal and interest paid on a bond C) the sum of the present value of the bond's interest payments and the present value of the principal D) the present value of a bond's par value plus the future value of the bond's present value

Q: Which of the following affect an asset's value to an investor? I. Amount of an asset's expected cash flow II. The riskiness of the cash flows III. Timing of an asset's cash flows IV. Investor's required rate of return A) I, II, III B) I, III, IV C) I, II, IV D) I, II, III, IV

Q: In an efficient market, two investors may agree on the amount and timing of a bond's expected cash flows and also on the bond's risk level, as measured by its debt rating, and still determine two different values for the bond.

Q: Explain the different types of value.

Q: Which type of value is shown on the firm's balance sheet? A) book value B) liquidation value C) market value D) intrinsic value

Q: The present value of the expected future cash flows of an asset represents the asset's A) liquidation value. B) book value. C) intrinsic value. D) par value.

Q: When the intrinsic value of an asset exceeds the market value, A) the asset is undervalued to the investor. B) the asset is overvalued to the investor. C) liquidation value must be higher than book value. D) Market value and intrinsic value are always the same; therefore, this could not happen.