BONDS VALUATION

TRUE. Write true if the statement is correct and leave it blank if the statement is not correct.

1. Public bonds differ from other debt because they are sold to the public rather than to a single investor.
2. In the case of a bond, the only contractual factor is the amount of interest payments, since beginning and ending bond
prices are determined by market forces.
3. A bond's price is determined by the issue's coupon rate, length to maturity, and the prevailing yield in the market.
4. A bond's maturity is affected by: call features, non-refunding provisions, and sinking fund provisions.
5. The coupon of a bond indicates the income that the bond investor will receive over the life of the bond.
6. 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.
7. Sinking funds are devices used to force companies to retire bonds on a scheduled basis prior to their maturity.
8. 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.
9. For bonds, price sensitivity to a given change in interest rates is generally greater the longer before the bond matures.
10. As a general rule, a company's debentures have higher required interest rates than its mortgage bonds because
mortgage bonds are backed by specific assets while debentures are unsecured.
11. Other things equal, a firm will have to pay a higher coupon rate on its subordinated debentures than on its second
mortgage bonds.
12. There is an inverse relationship between bonds' quality ratings and their required rates of return. Thus, the required
return is lowest for AAA-rated bonds, and required returns increase as the ratings get lower.
13. A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called,
and is not expected to default. The bond should sell at a premium if interest rates are below 10% and at a discount if
interest rates are greater than 10%.
14. You have funds that you want to invest in bonds, and you just noticed in the financial pages of the local newspaper
that you can buy a $1,000 par value bond for $800. The coupon rate is 10% (with annual payments), and there are 10
years before the bond will mature and pay off its $1,000 par value. You should buy the bond if your required return
on bonds with this risk is 12%.
15. If the required rate of return on a bond (r) is greater than its coupon interest rate and will remain above that rate,
then the market value of the bond will always be below its face value until the bond matures, at which time its market
value will equal its face value.
16. "Restrictive covenants" are designed primarily to protect bondholders by constraining the actions of managers. Such
covenants are spelled out in bond indentures.
17. The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds,
other things held constant.
18. Issuing zero coupon bonds might appeal to a company that is considering investing in a long-term project that will not
generate positive cash flows for several years.
19. The motivation for floating rate bonds arose out of the costly experience of the early 1980s when inflation pushed
interest rates to very high levels causing sharp declines in the prices of long-term bonds.
20. Although common stock represents a riskier investment to an individual than do bonds, in the sense of exposing the
firm to the risk of bankruptcy, bonds represent a riskier method of financing to a corporation than does common
stock.
21. Regardless of the size of the coupon payment, the price of a bond moves in the opposite direction from interest rate
movements. For example, if interest rates rise, bond prices fall.
22. If two bonds have the same maturity and the same expected rate of return, but one has a higher coupon, the price of
the low coupon bond will be more affected by a given change in interest rates.
23. If you buy a bond that is selling for less than its face, or maturity, value then the price (value) of the bond will increase
the maturity date nears if market interest rates do not change during the life of the bond.
24. The longer the maturity of a bond, the more its price will change in response to a given change in interest rates; this
is called interest rate price risk.
25. All else equal, a zero-coupon bond's price is more sensitive to changes interest rates than a bond with a 10% annual
coupon.
26. Here in the Philippines, the government sector is the largest bond market segment.
27. Bonds can have different types of collateral and can be either secured, unsecured or registered bonds.
28. The yield to maturity is normally equal to the coupon rate.
29. Samurai bonds are yen-denominated bonds sold in markets outside Japan by international syndicates.
30. 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.
31. A zero coupon bond is a bond that pays no interest and is offered (and subsequently sells initially) at face value. These
bonds provide compensation to investors in the form of capital appreciation.
32. Income bonds pay interest only if the issuing company actually earns the indicated interest. Thus, these securities
cannot bankrupt a company, and this makes them safer from an investor's perspective than regular bonds.
33. Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise. Since floating-
rate debt shifts interest rate risk to companies, it offers no advantages to issuers.
34. In general, long-term unsecured debt is less costly than long-term secured for a particular firm.
35. Foreign debt is debt sold in a country other than the one in whose currency the debt is denominated.
36. If a firm raises capital by selling new bonds, the buyer is called the "issuing firm," and the coupon rate is generally set
equal to the required rate.
37. Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, be
subject to much more interest rate price risk if you purchased a 30-day bond than if you bought a 30-year bond.
38. A bond's value will increase as interest rates rise over time.
39. If the yield to maturity (the market rate of return) of a bond is less than its coupon rate, the bond should be selling at
a discount; i.e., the bond's market price should be less than its face (maturity) value.
40. If we have two bonds with a simple interest rate yield of 9% where one bond is compounded quarterly and the other
bond is compounded monthly, the bond compounded quarterly will have a higher effective annual yield.

MULTIPLE CHOICE. Identify the letter of the choice that best completes the statement or answers the questions.

41. If a bond sells for par [A] current yield equals yield to maturity. [B] current yield exceeds the yield to maturity. [C]
current yield is less than the yield to maturity. [D] none of the above.
42. If a bond sells at a premium [A] current yield exceeds the yield to maturity. [B] current yield is less than the yield to
maturity. [C] current yield equals yield to maturity. [D] none of the above.
43. If a bond sells at a discount [A] current yield is less than the yield to maturity. [B] current yield exceeds the yield to
maturity. [C] current yield equals yield to maturity. [D] none of the above.
44. If a bond sells at a premium, its price [A] must decline over time. [B] must rise over time. [C] will remain relatively
constant over time. [D] will be very volatile over time.
45. Someone who relies on investment income for living expenses is most concerned with [A] current yield. [B] internal
rate of return. [C] yield to maturity. [D] realized compound yield.
46. An income bond is most likely to be associated with financing which of the following? [A] An apartment complex. [B]
A public highway. [C] Capital improvements to a park. [D] A toll bridge.
47. Bonds are identified by all of the following EXCEPT [A] issuer. [B] maturity. [C] coupon. [D] rating.
48. The details of a bond issue are contained in the [A] confirmation statement. [B] call agreement. [C] debenture. [D]
indenture.
49. Which of the following are most similar? [A] Bills and notes. [B] Bills and bonds. [C] Loans and bonds. [D] Notes and
bonds.
50. A debenture is like a _____ loan. [A] automobile. [B] mortgage. [C] secured. [D] signature.
51. Which of the following is most likely to be financed by a revenue bond? [A] Low-income housing complex. [B] Fleet of
corporate automobiles. [C] Airplane. [D] Bridge.
52. A cash reserve for the ultimate repayment of bond principal is a [A] interest-only fund. [B] reserve fund. [C]
depreciation fund. [D] sinking fund.
53. A bond on which the interest is payable only if it is earned is a(n) ____ bond. [A] subordinated. [B] full faith and credit.
[C] sinking fund. [D] income.
54. The yield to maturity calculation assumes that _____ are reinvested at the yield to maturity. [A] sinking fund payments.
[B] the principal payments. [C] dollars equal to the purchase price. [D] coupon proceeds.
55. If a $1,000 par value bond has a coupon rate of 6% with interest paid semi-annually, a maturity of 12 years, and a
yield-to-maturity of 7%, what is the current price of this bond? [A] $989.71. [B] $1014.71. [C] $1062.71. [D] $919.71.
56. If a $1,000 face value bond has a coupon rate of 5.5% with interest paid semi-annually, a maturity of 15 years, and a
yield to maturity of 4.5%, what is the current price of this bond? [A] $854.66. [B] $1162.89. [C] $1242.72. [D] $1108.23.
57. If a $1,000 face value bond has a coupon rate of 6.5% with interest paid semi-annually, a maturity of 11 years, and a
current price of 1090.34, what is the annual yield-to-maturity of this bond? [A] 2.7%. [B] 5.8%. [C] 6.8%. [D] 5.4%.
58. If a $1,000 par value bond has a coupon rate of 7% with interest paid semi-annually, a maturity of 18 years, and a
current price of $1,235, what is the annual yield-to-maturity of this bond? [A] 2.5%. [B] 4.3%. [C] 6.4%. [D] 5.0%.
59. If a $1,000 face value zero coupon bond has a maturity of 15 years and a yield-to-maturity of 6%, what is the current
price of this bond? [A] $518.27. [B] $635.51. [C] $782.48. [D] $417.27.
60. If a $1,000 face value zero coupon bond has a maturity of 22 years and is currently priced at $521.89, what is the
annual yield-to-maturity? [A] 2%. [B] 4%. [C] 5%. [D] 3%.