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1、Chapter EightValuation of Known Cash Flows: BondsThis chapter contains 50 multiple choice questions, 18 short problems and 9 longer problems.Multiple Choice1. A is a quantitative method used to infer an asset's value from market information about theprices of other assets and market interest rat

2、es.(a) fixed model(b) perpetual valuation model(c) valuation model(d) variable modelAnswer: (c)2. are examples of fixed-income securities.(a) Common stock and pension funds(b) Mortgages and pension annuities(c) Mutual funds and common stock(d) Preferred stock and common stockAnswer: (b)3. Consider a

3、 fixed-income security that promises to pay $150 each year for the next five years. How much is this five-year annuity worth if the appropriate discount rate is 7% per year?(a) $534.74(b) $615.03(c) $802.50(d) $867.96Answer: (b)4. Consider a fixed-income security that promises to pay $120 each year

4、for the next four years. Calculate the value of this four-year annuity if the appropriate discount rate is 6% per year.(a) $415.81(b) $508.80(c) $531.85(d) $629.06Answer: (a)5. The price of any existing fixed-income security when market interest rates rise becauseinvestors will only be willing to th

5、em if they offer a competitive yield.(a) rises; buy(b) rises; sell(c) falls; buy(d) falls; sellAnswer: (c)6. A fall in interest rates causes a in the market value of a fixed-income security.(a) a rise(b) a fall(c) no change(d) it cannot be determined from the information givenAnswer: (a)7. A change

6、in market interest rates causes in the market values of all existing contractspromising fixed payments in the future.(a) a change in the same direction(b) a change in the opposite direction(c) no change(d) an unpredictable variationAnswer: (b)8. What happens to the value of a four-year fixed-income

7、security promising $100 per year if the market interest rate rises from 5% to 6% per year?(a) A rise of 1% causes a drop of $4.87 in market value.(b) A rise of 1% causes a rise of $4.87 in market value.(c) A rise of 1% causes a drop of $8.09 in market value.(d) A rise of 1% causes a rise of $8.09 in

8、 market value.Answer: (c)9. What happens to the value of a four-year fixed-income security promising $100 per year if the market interest rate falls from 6% to 5% per year?(a) A fall of 1% causes a drop of $4.87 in market value.(b) A fall of 1% causes a rise of $4.87 in market value.(c) A fall of 1%

9、 causes a drop of $8.09 in market value.(d) A fall of 1% causes a rise of $8.09 in market value.Answer: (d)10. A zero-coupon bond is also known as (a) a perpetual bond(b) a pure discount bond(c) a market rebate(d) an infinite bondAnswer: (b)11. The promised cash payment on a pure discount bond is ca

10、lled its (a) face value(b) par value(c) fixed interest(d) both a and bAnswer: (d)12. What is the yield of a 1-year pure discount bond with a price of $850 and a face value of $1,000?(a) 8.50%(b) 9.09%(c) 15.00%(d) 17.65%Answer: (d)13. What is the yield of a 1-year pure discount bond with a price of

11、$900 and a face value of $1,000?(a) 5.26%(b) 10.00%(c) 11.11%(d) 15.79%Answer: (c)14. Consider a four-year pure discount bond with a face value of $1,000. If its current price is $850, compute its annualized yield.(a) 1.17%(b) 4.15%(c) 5.57%(d) 17.60%Answer: (b)15. Consider a three-year pure discoun

12、t bond with a face value of $1,000. If its current price is $900, compute its annualized yield.(a) 1.036%(b) 1.111%(c) 3.57%(d) 5.41%Answer: (c)16. Consider a five-year pure discount bond with a face value of $1,000. If its current price is $780, what is its annualized yield?(a) 5.09%(b) 2.82%(c) 1.

13、28%(d) 1.05%Answer: (a)17. A obligates the issuer to make periodic payments of interest to the bondholder for the lifeof the bond and then to pay the face value of the bond when the bond matures.(a) pure discount(b) zero-coupon(c) perpetual bond(d) coupon bondAnswer: (d)18. The of the bond is intere

14、st rate applied to the of the bond to compute theperiodic payment.(a) coupon rate; face value(b) maturity rate; face value(c) coupon rate; price(d) maturity rate; priceAnswer: (a)19. For a bond with a face value of $1,000 and coupon rate of 11%, what is the annual coupon payment?(a) $100(b) $110(c)

15、$1,000(d) $1,100Answer: (b)20. For a bond with a face value of $1,000 and a coupon rate of 9%, what is the annual coupon payment?(a) $90(b) $99(c) $1,000(d) $1,190Answer: (a)21. If the market price of a coupon bond equals its face value, it is also termed a (a) par bond(b) premium bond(c) discount b

16、ond(d) zero-discount bondAnswer: (a)22. If the bond s market price is higher than its face value, it is terme_d_a_(a) par bond(b) premium bond(c) discount bond(d) zero-discount bondAnswer: (b)23. If the bond s market price is lower than its face value, it is terme_d_a_ (a) par bond(b) premium bond(c

17、) discount bond(d) zero-par bondAnswer: (c)24. If a bond selling for $850 has an annual coupon payment of $80 and a face value of $1,000, what is its current yield?(a) 8.00%(b) 9.41%(c) 17.65%(d) 27.05%Answer: (b)25. If a bond selling for $1,120 has an annual coupon payment of $110 and a face value

18、of $1,000, what is its current yield?(a) 8.90%(b) 9.82%(c) 10.71%(d) 11.00%Answer: (b)26. If a bond selling for $900 has an annual coupon payment of $80 and a face value of $1,000, what is its current yield?(a) 8.00%(b) 8.89%(c) 11.00%(d) 20.00%Answer: (b)27. The is the discount rate that makes the

19、present value of the bond s stream of promised cpayments equal to its price.(a) compound rate(b) yield to maturity(c) coupon rate(d) current yieldAnswer: (b)28. Suppose you are considering buying a one-year 11% coupon bond with a face value of $1,000 and a current price of $1,020. What is its yield

20、to maturity?(a) 8.82%(b) 9.00%(c) 10.78%(d) 11.00%Answer: (a)29. Suppose you are considering buying a one-year 11% coupon bond with a face value of $1,000 and a current price of $1,050. What is its yield to maturity?(a) 4.76%(b) 5.71%(c) 6.00%(d) 10.48%Answer: (b)30. Suppose you are considering buyi

21、ng a five-year 11% coupon bond with a face value of $1,000 and a current price of $950. What is its yield to maturity?(a) 5.62%(b) 9.63%(c) 11.58%(d) 12.40%Answer: (d)31. Suppose you are considering buying a five-year 11% coupon bond with a face value of $1,000 and a current price of $1,100. What is

22、 its yield to maturity?(a) 3.87%(b) 8.47%(c) 10.00%(d) 13.62%Answer: (b)32. Suppose you are considering buying a six-year 10% coupon bond with a face value of $1,000 and a current price of $1,100. What are the current yield and yield to maturity of this bond?(a) CY = 11.00%; YTM = 12.23% (b) CY = 12

23、.23%; YTM = 11.00%(c) CY = 7.85%; YTM = 9.09%(d) CY = 9.09%; YTM = 7.85%Answer (d)33. Suppose you are considering buying a seven-year 11% coupon bond with a face value of $1,000 and a current price of $950. What are the current yield and yield to maturity of this coupon bond?(a) CY = 12.10%; YTM = 1

24、1.58%(b) CY = 11.58%; YTM = 12.10%(c) CY = 9.92%; YTM = 10.45%(d) CY = 10.45%; YTM = 9.92%Answer: (b)34. Over time bond prices their face value. Before maturity, bond prices can a greatdeal as a result of changes in market interest rates.(a) diverge from; fluctuate(b) converge toward; flatten out(c)

25、 converge toward; fluctuate(d) diverge from; flatten outAnswer: (c)35. When the yield curve is not flat, bonds of the same with different coupon rates haveyieldsto maturity.(a) maturity, different(b) maturity, identical(c) callability, different(d) callability, identicalAnswer: (a)36. Bonds offering

26、 the same future stream of promised payments can differ in a number of ways, but the two most important are and .(a) taxability, issue origin(b) type of issuer, default risk(c) type of issuer, taxability(d) taxability, default riskAnswer: (d)37. A is one that gives the holder of a bond issued by a c

27、orporation the right to convert thebond into a pre-specified number of shares of common stock.(a) callable bond(b) convertible bond(c) stock bond(d) preferred bondAnswer: (b)38. A is one that gives the issuer of the bond the right to redeem it before the final maturitydate.(a) callable bond(b) conve

28、rtible bond(c) stock bond(d) preferred bondAnswer: (a)39. Five years ago, English and Co. issued 25-year coupon bonds with par value $1,000. At the time of issuance, the yield to maturity was 6 percent and the bonds sold at par. The bonds are currently selling at 110 percent of their par value. Assu

29、ming that the coupon is paid annually, what is the current yield to maturity?(a) 3.77%(b) 5.18%(c) 5.27%(d) 5.46%Answer: (b)40. Potemkin Corporation plans to raise $10,000,000 in funds by issuing zero coupon $1,000 par value bonds with a 25 year maturity. Potemkin Corporation is able to issue these

30、bonds at an after tax cost of debt of 12%. To the nearest whole number, how many bonds must Potemkin Corporation issue?(a) 10,000 bonds(b) 42,919 bonds(c) 125,837 bonds(d) 170,000 bondsAnswer: (d)41. Calculate the years to maturity for a bond based on the following information. The bond trades at $9

31、50, it has a par value of $1,000, a coupon rate of 11%, and a required rate of return of 12%.(a) 8 years(b) 12 years(c) 15 years(d) 16 yearsAnswer: (a)42. Compute the current price of Walsingham bonds based on the following information. Walsingham bonds have a $1,000 par value, have 20 years remaini

32、ng until maturity, a 12 percent coupon rate, and a yield to maturity of 10.5 percent.(a) $858.42(b) $982.47(c) $1,119.52(d) $1,124.41Answer: (d)43. Compute the yield to maturity of Arundel bonds based on the following information. Arundel bonds have a $1,000 par value, 25 years remaining until matur

33、ity, an 11% coupon rate, and a current market price of $1,187.(a) 4.55%(b) 9.08%(c) 9.27%(d) 13.17%Answer: (b)44. When prices of U.S Treasury strips are listed, principal from a Treasury bond is denoted by the letters(a) ci(b) tb(c) bp(d) npAnswer: (c)45. The is the price at which dealers in Treasur

34、y bonds are willing to sell.(a) bid price(b) asked yield(c) ask price(d) maturity priceAnswer: (c)46. The is the price at which dealers are willing to buy.(a) bid price(b) ask price(c) asked yield(d) maturity priceAnswer: (a)47. The bid price of a bond is always the ask price.(a) greater than(b) les

35、s than(c) identical to(d) it varies from case to caseAnswer: (b)48. The of a bond price measures the sensitivity of the bond price to a change in the yield tomaturity.(a) callability(b) convertibility(c) immutability(d) elasticityAnswer: (d)49. Suppose you buy a 25-year pure discount bond with a fac

36、e value of $1,000 and a yield of 6% per year. A day later market interest rates drop to 5% and so does the yield on your bond. What is the proportional change in the price of your bond?(a) a decrease of 26.74%(b) a decrease of 21.10%(c) an increase of 26.74(d) an increase of 21.20Answer: (c)50. Supp

37、ose you buy a 25-year pure discount bond with a face value of $1,000 and a yield of 6% per year. A day later market interest rates rise to 5% and so does the yield on your bond. What is the elasticity of the bond price to the change in the yield?(a) -0.62%(b) -1.27%(c) -1.60%(d) 267%Answer: (c)8-22S

38、hort Problems1. Consider a five-year fixed-income security which promises $120 per year. Calculate the value ofthe security ifthe market interest rate rises from 5% to 6% per year.Answer:n i PVPMTResult55?$120PV=$519.54ResultPV = $505.48n i PVPMT56?$120The price drops by $14.06.2. Consider a four-ye

39、ar fixed-income security which promises $120 per year. Calculate the value of the security ifthe market interest rate falls from 7% to 6% per year.Answer:niPVPMTResult47?$120PV = $406.47ResultPV = $415.81n i PVPMT46?$120The price increases by $9.34.3. Discuss the general principles about the relatio

40、n between prices and yields of coupon bonds.Answer:Principle#1: ParBonds.If a bond's price equals its face value, then its yield equals its coupon rate.Principle #2: Premium Bonds.If a coupon bond has a price higher than its face value, its yield to maturity is less than its current yield, which

41、 is in turn less than its coupon rate.Principle #3: Discount Bonds.If a coupon bond has a price lower than its face value, its yield to maturity is greater than its current yield, which is in turn greater than its coupon rate.4. List some reasons why differences in the prices of fixed-income securit

42、ies of a given maturity may arise.Answer:Differences in the prices of fixed-income securities of a given maturity may arise due to differences in coupon rates, default risk, tax treatment, callability and convertibility.5. Explain why it is important to have a method for valuation of fixed-income co

43、ntracts.Answer:(1) The parties to the contracts need to have an agreed-upon valuation procedure in setting the terms ofthe contracts at the outset.(2) Since market factors determining the value of fixed-income contracts change over time, both buyers and sellers have to reevaluate them each time they

44、 are traded.6. Consider a five-year pure discount bond with a face value of $1,000. If its current price is $775, compute its annualized yield.Answer:niPVFVResult5?-$775$1,000i = 5.23%7. A four-year bond has a coupon rate of 6% per year, a price of $950, and a face value of $1,000. Calculate its cur

45、rent yield and yield to maturity.Answer:Current yield = coupon/price=60/950=6.32%To calculate yield to maturity: n i = YTMPVFVPMTResult4?-$950$1,000$60YTM = 7.49%8. What is the current price of a bond that has a coupon rate of 7%, a return rate of 8%, and a face value of $1,000? Assume that this bon

46、d will mature in five years. Compare the current price of the bond against its face value.Answer:n i = YTMPVFVPMTResult58?$1,000$70PV = $960.07Because the price of the bond is below its face value, it is a discount bond.9. A five-year coupon bond has a coupon rate of 5%, a return rate of 6%, and a f

47、ace value of $1,000. What is its current price and how does it compare to its face value?Answer:n i = YTMPVFVPMTResult56?$1,000$50PV = $957.88Because the price of the bond is below its face value, it is a discount bond.10. What is the yield to maturity of a five-year coupon bond with a current price

48、 of $850, a face value of $1,000, and coupon rate of 7%?Answer:n i = YTMPVFVPMTResult5?-$850$1,000$70YTM = 11.07%11. Five years ago, English and Co. issued 30 year coupon bonds with a par value of $1,000. At the time of issuance, the yield to maturity was 6 percent per year and the bonds sold at par

49、. The bonds are currently selling at 85 percent of their par value. Assuming that the coupon is paid annually, what is the current yield to maturity?Answer:Five years ago, the bonds were issued at par, which means at the time yield to maturity equaled coupon rate. So the annual coupon is 0.06 x $1,0

50、00 = $60.For the current yield to maturity:n_25i = YTMPVFVPMTResult-8501,00060YTM = 7.33%12. Eisenstein Corporation plans to raise $100,000,000 in funds by issuing zero-coupon $1,000 par value bonds with a 30-year maturity. Assuming that Eisenstein Corporation is able to issue these bonds at an afte

51、r-tax cost of debt of 11%, how many bonds must Eisenstein Corporation issue?Answer:First, calculate the price of an Eisenstein bond:n i = YTMPVFVPMTResult3011?1,0000PV = $43.68The corporation wants to raise $100,000,000, so it must issue the following number of bonds:$100,000,000/$43.68 = 2,289,377

52、bonds13. Currently, an Eisenstein bond trades at $1,050 per bond and has a coupon rate of 10%. Assuming the bond matures at a $1,000 value, and the required rate of return is 9.5%, in how many years does an Eisenstein bond mature?Answer:i = YTM9.5PVFVPMTResult-1,0501,0000n = 3314. Compute the curren

53、t price of Walsingham bonds based on the following information. Walsingham bonds have a $1,000 par value, 26 years remaining until maturity, a 13 percent coupon rate, and a current yield to maturity of 11 percent per year.Answer:ni = YTM2611PVFVPMTResult1,0000PV = $1,169.6915. Health & US Corpor

54、ation is a major pharmaceutical firm that has recently experienced a market reevaluation. Currently, the firm has a bond issue outstanding with 18 years to maturity and a coupon rate of 9 percent, with interest paid annually. The required rate of return of this debt issue has risen to 15 percent. Ca

55、lculate the current price of this bond.Answer:ni = YTM1815PVFVPMTResult1,00090PV = $632.3216. Calculate the coupon rate, current yield, and the yield to maturity for a bond that has $1,000 par value, pays a coupon of $85 annually, matures in 20 years, and has a current price of $985.25.Answer:Coupon

56、 rate = 85/1,000=8.5% per year Current yield = coupon/price =85/985.25 =8.63%For yield to maturity: n i = YTMPVFVPMTResult20?-985.251,00085YTM = 8.66%17. Suppose you buy a 20-year pure discount bond with a face value of $1,000 and a yield of 7% per year. A day later, market interest rates rise to 8% and so does the yield of your bond. What is the proportional change in the price of your bond? What i

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