Finance: Bonds

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Managerial Finance
Chapter 5, Quiz

Name: Emily Smith
Multiple Choice: Please circle the correct answer choice

.Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

a.The company’s bonds are downgraded.
b.Market interest rates rise sharply.
c.Market interest rates decline sharply.
d.The company's financial situation deteriorates significantly.
e.Inflation increases significantly.

.A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?

a.If the yield to maturity remains constant, the bond’s price one year from now will be higher than its current price.
b.The bond is selling below its par value.
c.The bond is selling at a discount.
d.If the yield to maturity remains constant, the bond’s price one year from now will be lower than its current price.
e.The bond’s current yield is greater than 9%.

.Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?

a.10-year, zero coupon bond.
b.20-year, 10% coupon bond.
c.20-year, 5% coupon bond.
d.1-year, 10% coupon bond.
e.20-year, zero coupon bond.

.Which of the following bonds has the greatest interest rate price risk?

a.A 10-year $100 annuity.
b.A 10-year, $1,000 face value, zero coupon bond.
c.A 10-year, $1,000 face value, 10% coupon bond with annual interest payments.
d.All 10-year bonds have the same price risk since they have the same maturity.
e.A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments.

.If its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in value?

a.A 1-year zero coupon bond.
b.A 1-year bond with an 8% coupon.
c.A 10-year bond with an 8% coupon.
d.A 10-year bond with a 12% coupon.
e.A 10-year zero coupon bond.

Please circle True or False

.If a firm raises capital by selling new bonds, it is called the "issuing firm," and the coupon rate is generally set equal to the required rate on bonds of equal risk.


.A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.


.A zero coupon bond is a bond that pays no interest and is offered (and subsequently sells initially) at par. These bonds provide compensation to investors in the form of capital appreciation.


.The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.


.For bonds, price sensitivity to a given change in interest rates is generally greater the longer before the bond matures.


Problems, Multiple Choice: Please circle the correct answer.

.The Morrissey Company's bonds mature in 7 years, have a par value of $1,000, and make an annual coupon payment of $70. The market interest rate for the bonds is 8.5%. What is the bond's price?


.Ezzell Enterprises’ noncallable bonds currently sell for $1,165. They have a 15-year maturity, an annual coupon of $95, and a par value of $1,000. What is their yield to maturity?

.Sadik Inc.'s bonds currently sell for $1,280 and have a par value of...
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