# From Chapter 6 Bonds And Bond Value

*Selected practice questions from Chapters 6 – 8, FIN 335, with Dr. Graham*

*From Chapter 6 – Bonds and Bond Value*

1. 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.

Answer:

2. 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.

Answer:

3. 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.

Answer:

4. 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.

Answer:

5. A bond with a face value of $1,000 that sells for less than $1,000 in the market is called a:

A) Par bond.

B) Discount bond.

C) Premium bond.

D) Zero coupon bond.

E) Floating rate bond.

Answer:

6. A bond with a face value of $1,000 that sells for more than $1,000 in the market is called a:

A) Par bond.

B) Discount bond.

C) Premium bond.

D) Zero coupon bond.

E) Floating rate bond.

Answer:

7. The long-term bonds issued by the United States government are called:

A) Treasury bonds.

B) Municipal bonds.

C) Floating rate bonds.

D) Junk bonds.

E) Zero coupon bonds.

Answer:

8. A bond that makes no coupon payments (and thus is initially priced at a deep discount to par value) is called a _______ bond.

A) Treasury

B) municipal

C) floating rate

D) junk

E) zero coupon

Answer:

9. A bond which, at the election of the holder, can be swapped for a fixed number of shares of common stock at any time prior to the bond’s maturity is called a _____________ bond.

A) zero coupon

B) callable

C) putable

D) convertible

E) warrant

Answer:

10. The annual coupon payment of a bond divided by its market price is called the:

A) Coupon rate.

B) Current yield.

C) Yield to maturity.

D) Bid-ask spread.

E) Capital gains yield.

Answer:

11. The price a dealer is willing to accept for selling a security to an investor is called the:

A) Equilibrium price.

B) Auction price.

C) Bid price.

D) Ask price.

E) Bid-ask spread.

Answer:

12. A bond with a face value of $1,000 has annual coupon payments of $100 and was issued 10 years ago. The bond currently sells for $1,000 and has 8 years remaining to maturity. This bond’s ______________ must be 10%.

I. yield to maturity

II. market premium

III. coupon rate

A) I only

B) I and II only

C) III only

D) I and III only

E) I, II and III

Answer:

13. If you divide a bond’s annual coupon payment by its current yield you get the ___________.

A) yield to maturity

B) investors’ required rate of return

C) annual coupon rate

D) cost of capital

E) bond price

Answer:

14. Which of the following statements regarding bond pricing is true?

A) The lower the discount rate, the more valuable the coupon payments are today.

B) Bonds with high coupon payments are generally (all else the same) more sensitive to changes in interest rates than bonds with lower coupon payments.

C) When market interest rates rise, bond prices will also rise, all else the same.

D) Bonds with short maturities are generally (all else the same) more sensitive to changes in interest rates than bonds with longer maturities.

E) All else the same, bonds with larger coupon payments will have a lower price today.

Answer:

15. Your broker offers you the opportunity to purchase a bond with coupon payments of $90 per year and a face value of $1000. If the yield to maturity on similar bonds is 8%, this bond should:

A) Sell for the same price as the similar bond regardless of their respective maturities.

B) Sell at a premium.

C) Sell at a discount.

D) Sell for either a premium or a discount but it’s impossible to tell which.

E) Sell for par value.

Answer:

16. When pricing bonds, if a bond’s coupon rate is less than the required rate of return, then:

A) The holder of the bond is assured of a profit regardless of when the bond is eventually sold.

B) The holder of the bond will realize a capital gain if the bond is held to maturity.

C) The bond sells at par because the required rate of return is adjusted to reflect the discrepancy.

D) The bond sells at a premium if it has a long maturity and at a discount if it has a short maturity.

E) The bond sells at a discount if it has a long maturity and at a premium if it has a short maturity.

Answer:

17. All else the same, a(n) __________ will decrease the required return on a bond.

A) call provision

B) lower bond rating

C) sinking fund

D) increase in inflation

E) increase in the size of a bond issuance

Answer:

18. Which of the following items generally appears in a corporate bond quote from *The Wall Street Journal*?

A) Yield to maturity

B) Original issue price

C) Current yield

D) Name of the trustee

E) Bond rating

Answer:

19. For a discount bond, the current yield is _________ the yield to maturity, and the coupon rate is _____________ the yield to maturity.

A) less than; less than

B) less than; greater than

C) greater than; less than

D) greater than; greater than

E) equal to; equal to

Answer:

20. For a premium bond, the required return is less than the:

I. Current yield.

II. Yield to maturity.

III. Coupon rate.

A) I only

B) I and II only

C) II and III only

D) I and III only

E) I, II, and III

21. If investors are uncertain that they will be able to sell a corporate bond quickly, the investors will demand a higher yield in the form of a(n) ____________.

A) inflation premium

B) liquidity risk premium

C) interest rate risk premium

D) default risk premium

E) increased real rate of interest

Answer:

22. Dizzy Corp. bonds bearing a coupon rate of 12%, pay coupons semiannually, have 3 years remaining to maturity, and are currently priced at $940 per bond. What is the yield to maturity?

A) 12.00%

B) 13.99%

C) 14.54%

D) 15.25%

E) 15.57%

Answer:

Response: $940 = 1000 FV, 60 PMT, 6 N, -940 PV, CPT I/Y = 7.27%;

YTM = 7.27% x 2 = 14.54%

23. Whitesell Athletic Corporation’s bonds have a face value of $1,000 and a 9% coupon paid semiannually; the bonds mature in 8 years. What current yield would be reported in *The Wall Street Journal* if the yield to maturity is 7%?

A) 4%

B) 5%

C) 6%

D) 7%

E) 8%

Answer:

Response:

1000 FV, 45 PMT, 16 N, 3.5 I/Y, CPT PV = $1,120.94; Annual coupon is 45 x 2 = 90.

Current Yield (CY) = $90 / 1,120.94 = 8.03%

24. D&G Enterprises issues bonds with a $1,000 face value that make coupon payments of $30 every 3 months. What is the coupon rate?

A) 0.30%

B) 3.00%

C) 9.00%

D) 12.00%

E) 30.00%

Answer:

Response: coupon rate = ($30 x 4) / 1,000 = 12%

25. Suppose you purchase a zero coupon bond with face value $1,000, maturing in 25 years, for $180. What is the implicit interest, in dollars, in the first year of the bond’s life?

A) $ 2.86

B) $ 9.84

C) $12.78

D) $19.27

E) $30.00

Answer:

1000 FV, 25 N, -180 PV, CPT I/Y = YTM = 7.1%; Year 1 interest = $180 x .071 = $12.78

26. Suppose you purchase a zero coupon bond with a face value of $1,000 and a maturity of 25 years, for $180. If the yield to maturity on the bond remains unchanged, what will the price of the bond be 5 years from now?

A) $253.64

B) $287.52

C) $310.91

D) $380.58

E) $500.00

Answer:

1000 FV, 25 N, -180 PV, CPT I/Y = 7.1%; -180 PV, 5 N, 7.1 I/Y, CPT FV = $253.64

27. What is the yield to maturity on an 18-year, zero coupon bond selling for 30% of par value?

A) 4.86%

B) 5.86%

C) 6.37%

D) 6.92%

E) 30.00%

Answer:

1000 FV, 18 N, -300 PV, CPT I/Y = YTM = 6.92%

28. J&J Enterprises wants to issue sixty 20-year, $1,000 zero-coupon bonds. If each bond is to yield 7%, how much will J&J receive (ignoring issuance costs) when the bonds are first sold?

A) $11,212

B) $12,393

C) $15,505

D) $18,880

E) $20,000

Answer:

Response: price = $1,000 / 1.0720 = $258.42; proceeds = $258.42 x 60 = $15,505

There is the algebra, but what are the entries using your TVOM keys on your TI BA II Plus?

And what of the algebra and keystrokes for numbers 29-40 below? Recognizing the algebra is important, and extending that recognition to the keystrokes is “key.”

29. J&J Enterprises wants to issue 20-year, $1,000 face value zero-coupon bonds. If each bond is to yield 7%, what is the minimum number of bonds J&J must sell if they wish to raise $5 million from the sale? (Ignore issuance costs.)

A) 17,290

B) 19,349

C) 20,164

D) 23,880

E) 26,159

Answer:

Response: price = $1,000 / 1.0720 = $258.42; # of bonds = $5,000,000 / 258.42 = 19,349

30. What is the market value of a bond that will pay a total of fifty semiannual coupons of $80 each over the remainder of its life? Assume the bond has a $1,000 face value and a 12% yield to maturity.

A) $ 734.86

B) $ 942.26

C) $1,135.90

D) $1,315.24

E) $1,545.62

Answer:

50 N, 80 PMT, 1000 FV, 12/2 = I/Y, CPT PV = -1,315

31. J&J Manufacturing just issued a bond with a $1,000 face and a coupon rate of 8%. The bond has a life of 20 years, annual coupons, and a yield to maturity is 7.5%, what will the bond sell for?

A) $ 975

B) $1,020

C) $1,051

D) $1,087

E) $1,162

Answer:

1000 FV, 80 PMT, 20 N, 7.5 I/Y, CPT PV = -1,051

32. J&J Manufacturing just issued a bond with a $1,000 face value and a coupon rate of 8%. If the bond has a life of 20 years, pays annual coupons, and the yield to maturity is 7.5%, what percent of the bond’s total price is represented by the present value of the coupons?

A) 45.7%

B) 56.1%

C) 77.6%

D) 93.2%

E) 100.0%

Answer:

Response:

Using the TVOM keystrokes above, you get the price of around $1,051.

Now, in this problem, you must calculate the value of the annuity stream (the interest payments or coupons) and divide that into the bond price. Recall that the total bond value is comprised of the PV of the coupons plus the PV of the maturity payoff of $1000.

Keystrokes for the PV of the coupons? 80 PMT, 7.5 I/Y, 20 N, CPT PV = -815.56. Divide that into 1051 and you get $815.56 / 1,050.97 = 77.6%.

33. J&J Manufacturing just issued a bond with a $1,000 face value and a coupon rate of 8%. If the bond has a life of 20 years, pays annual coupons, and the yield to maturity is 7.5%, what is the present value of the bond’s face value?

A) $ 235.41

B) $ 341.15

C) $ 815.56

D) $1,000.00

E) $1,050.97

Answer: , Response: PV of par = $1,000 / 1.07520 = $235.41

(1000 FV, 20 N, 7.5 I/Y, CPT PV = 235.41)

34. J&J Manufacturing just issued a bond with a $1,000 face value and a coupon rate of 8%. If the bond has a life of 20 years, pays annual coupons, and the yield to maturity is 7.5%, what is the total present value of the bond’s coupon payments?

A) $ 235.41

B) $ 341.15

C) $ 815.56

D) $1,000.00

E) $1,050.97

Answer:

Response: PV of coupons = $80 [(1 1/1.07520)/ .075] = $815.56

Using the TVOM keys instead of algebra?

Coupon payments are 8% of $1000 or $80. So, 80 PMT, 20 N, 7.5I/Y, CPT PV = 815.56

35. The market price of a bond is $1,236.94, it has 14 years to maturity, a $1,000 face value, and pays an annual coupon of $100 in semiannual installments. What is the yield to maturity?

A) 3.18%

B) 4.26%

C) 5.37%

D) 6.11%

E) 7.27%

Answer:

Response:

$1,236.94 = $50 {[1 – 1/(1 + R)28] / R} + 1,000 / (1 + R)28; R = 3.637%; YTM = 3.64% x 2 = 7.27%

The algebra is a bit annoying, so do the TVOM stuff, thusly: -1,236.94PV, 1000 FV, 28 N, 50 PMT, CPT I/Y = 3.637. I/Y x 2 = 3.637 x 2 = 7.274 or 7.27%

36. What would you pay for a bond that pays an annual coupon of $45, has a face value of $1,000, matures in 11 years, and has a yield to maturity of 10%?

A) $642.77

B) $775.34

C) $800.18

D) $910.14

E) $976.38

Answer:

Response: price = $45 [(1 – 1/1.111) / .1] + 1,000 / 1.111 = $642.77

TVOM stuff? 1000 FV, 45 PMT, 11 N, 10 I/Y, CPT PV = -642.77

37. King Noodles’ bonds have a 9% coupon rate. Interest is paid quarterly and the bonds have a maturity of 10 years. If the appropriate discount rate is 10% on similar bonds, what is the price of King Noodles’ bonds?

A) $937.24

B) $938.55

C) $971.27

D) $989.63

E) $991.27

Answer:

1000 FV, 90/4 = 22.5 PMT, 10 x 4 = 40 N, 10/4=2.5 I/Y, CPT PV = -937.24

38. Cornerstone Industries has a bond outstanding with an 8% coupon rate and a market price of $874.68. If the bond matures in 6 years and interest is paid semiannually, what is the YTM?

A) 4.9%

B) 6.9%

C) 8.9%

D) 10.9%

E) 12.9%

Answer:

Response: $874.68 = $40 {[1 – 1/(1 + R)12] / R} + 1,000 / (1 + R)12; R = 5.45%; YTM = 5.45% x 2 = 10.9%

TVOM keystrokes? 40 PMT, 12 N, 1000 FV, -874.68 PV, CPT I/Y = 5.45 x 2 = YTM = 10.9%

39. The make-believe bonds of Facebook carry a 12% annual coupon, have a $1,000 face value, and mature in 5 years. Bonds of equivalent risk yield 9%. What is the market value of Facebook bonds?

A) $1,011.20

B) $1,087.25

C) $1,095.66

D) $1,116.69

E) $1,160.25

Answer:

Response: price = $120 [(1 – 1/1.095) / .09] + 1,000 / 1.095 = $1,116.69

1000 FV, 120 PMT, 5 N, 9 I/Y, CPT PV = -1,116.69

40. If the following bonds are identical except for coupon, what is the price of bond B?

A) $ 944.58

B) $ 975.31

C) $1,037.86

D) $1,150.00

E) $1,279.47

Answer:

Response:

Bond A: $1,150 = $50 {[1 – 1/(1 + R)50 ]/ R} + 1,000 / (1 + R)50; R = 4.27%;

Bond B: price = $40 [(1 – 1/1.042750) / .0427] + 1,000 / 1.042750 = $944.58

First, compute the YTM for bond A, thusly:

1000 FV, 25×2=N, 50 PMT, -1,150 PV, CPT I/Y = YTM = 4.27. Then compute PV of bond B:

1000 FV, 40 PMT, 25×2= N, 4.27 I/Y, CPT PV = -944.58

41. If corporate bond yields are at 8.4% and you are in the 34% federal marginal income tax bracket, at what level of municipal bond yields would you be indifferent between owning corporate bonds or muni bonds? Ignore the impact of state and local taxes.

A) 5.95%

B) 5.54%

C) 5.03%

D) 4.67%

E) 4.11%

Answer:

Response: 8.4(1 – .34) = 5.54%

**CHAPTER 6 QUESTIONS END HERE.**

**CHAPTER 7 QUESTIONS BEGIN HERE**

1. The stock valuation model that determines the current stock price as the next dividend divided by the (discount rate less the dividend growth rate) is called the:

A) Zero growth model.

B) Dividend growth model.

C) Capital Asset Pricing Model.

D) Earnings capitalization model.

Answer:

2. A stock’s next expected dividend divided by the current stock price is the:

A) Current yield.

B) Total yield.

C) Dividend yield.

D) Capital gains yield.

E) Earnings yield.

Answer:

3. The rate at which the stock price is expected to appreciate (or depreciate) is the:

A) Current yield.

B) Total yield.

C) Dividend yield.

D) Capital gains yield.

E) Earnings yield.

Answer:

4. Payments made by a corporation to its shareholders, in the form of either cash, stock, or payments in kind, are called:

A) Retained earnings.

B) Net income.

C) Dividends.

D) Redistributions.

E) Infused equity.

Answer:

5. The market in which new securities are originally sold to investors is the ________ market.

A) dealer

B) auction

C) over-the-counter (OTC)

D) secondary

E) primary

Answer:

6. The market in which previously issued securities are traded among investors is the:

A) Dealer market.

B) Auction market.

C) Over-the-counter (OTC) market.

D) Secondary market.

E) Primary market.

Answer:

7. Common stock valuation requires, among other things, information regarding the:

I. Expected dividend growth rate.

II. Current dividend payment.

III. Par value of the common stock.

A) I only

B) I and II only

C) I and III only

D) II and III only

E) I, II, and III

Answer:

8. As illustrated using the dividend growth model, the total return on a share of common stock is comprised of a ___________.

A) capital gains yield and a dividend growth rate

B) capital gains growth rate and a dividend growth rate

C) dividend payout ratio and a required rate of return

D) dividend yield and the present dividend

E) dividend yield and a capital gains yield

Answer:

9. Which of the following items would usually appear for a stock quote in *The Wall Street Journal*?

A) Capital gains rate

B) Dividend yield

C) Number of shares outstanding

D) Par value of the stock

E) Dividend growth rate

Answer:

10. If dividends on a common stock are expected to grow at a constant rate forever, and if you are told the most recent dividend paid, the dividend growth rate, and the appropriate discount rate today, you can calculate ___________.

I. the price of the stock today

II. the dividend that is expected to be paid ten years from now

III. the appropriate discount rate ten years from now

A) I only

B) I and II only

C) I and III only

D) II and III only

E) I, II, and III

Answer:

11. Which of the following statements regarding dividend yields is true?

A) It measures how much the stock’s price will increase in a year.

B) It incorporates the par value of the stock into the calculation.

C) It is analogous to the current yield for a bond.

D) It is always greater than the stock’s capital gains yield.

E) It measures the total annual return an investor can expect to earn by owning the stock.

Answer:

12. Which of the following is (are) true?

I. The dividend yield on a stock is the annual dividend divided by the par value.

II. When the constant dividend growth model holds, g = capital gains yield.

III. The total return on a share of stock = dividend yield + capital gains yield.

A) I only

B) II only

C) I and II only

D) II and III only

E) I, II, and III

Answer:

13. If some shareholders have greater voting power than others, it must be that:

A) The company has both preferred stock and common stock outstanding.

B) The company has outstanding debentures.

C) The company is located outside the United States in a tax-haven locale.

D) The company has multiple classes of common stock.

E) The company is in bankruptcy proceedings.

Answer:

14. What would you pay for a share of ABC Corporation stock today if the next dividend will be $3 per share, your required return on equity investments is 15%, and the stock is expected to be worth $90 one year from now?

A) $78.26

B) $80.87

C) $82.56

D) $90.00

E) $98.12

Answer:

Response:

15. The dividend on Simple Motors common stock will be $3 in 1 year, $4.25 in 2 years, and $6.00 in 3 years. You can sell the stock for $100 in 3 years. If you require a 12% return on your investment, how much would you be willing to pay for a share of this stock today?

A) $75.45

B) $77.24

C) $81.52

D) $85.66

E) $91.30

Answer:

Response:

16. A stock that pays a constant dividend of $1.50 forever currently sells for $10.71. What is the required rate of return?

A) 10%

B) 12%

C) 13%

D) 14%

E) 15%

Answer:

Response:

17. ABC Company’s preferred stock is selling for $30 a share. If the required return is 8%, what will the dividend be two years from now?

A) $2.00

B) $2.20

C) $2.40

D) $2.80

E) $3.25

Answer:

Response:

18. What would you pay today for a stock that is expected to make a $2 dividend in one year if the expected dividend growth rate is 5% and you require a 12% return on your investment?

A) $28.57

B) $29.33

C) $31.43

D) $43.14

E) $54.30

Answer:

Response:

19. The stock of MTY Golf World currently sells for $90 per share. The firm has a constant dividend growth rate of 6% and just paid a dividend of $5.09. If the required rate of return is 12%, what will the stock sell for one year from now?

A) $ 90.00

B) $ 93.52

C) $ 95.40

D) $ 99.80

E) $112.78

Answer:

Response:

20. Llano’s stock is currently selling for $40.00. The expected dividend one year from now is $2 and the required return is 13%. What is this firm’s dividend growth rate assuming the constant dividend g