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Fundamentals of Corporate Finance, 4/c/e

Fundamentals of Corporate Finance, 4/e

Stephen A. Ross, Massachusetts Institute of Technology
Randolph W. Westerfield, University of Southern California
Bradford D. Jordan, University of Kentucky
Gordon S. Roberts, York University

Interest Rates and Bond Valuation

Quick Quiz 1

After taking this quiz, click 'Submit Answers' for graded results. You'll also have the option of emailing the results to your instructor and/or yourself.


1	The market interest rate that equates the present value of a bond's interest payments and principal payment with its current price is called the:
		A)	Coupon rate.
		B)	Bid-ask spread.
		C)	Yield to maturity.
		D)	Current yield.
		E)	Capital gains yield.


2	The following are all negative bond covenants EXCEPT:
		A)	The firm must limit the amount of dividends it pays according to some formula.
		B)	The firm cannot pledge any assets to other lenders.
		C)	The firm cannot merge with another firm.
		D)	The company must periodically furnish audited financial statements to the lender.
		E)	The firm must maintain its D/E ratio at or below its current level.


3	Which bond would most likely possess the highest degree of interest rate risk?
		A)	8% coupon rate, 20 years to maturity
		B)	8% coupon rate, 10 years to maturity
		C)	10% coupon rate, 10 years to maturity
		D)	10% coupon rate, 20 years to maturity
		E)	12% coupon rate, 20 years to maturity


4	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 similar bonds regardless of maturity.
		B)	Sell at a discount.
		C)	Sell at a premium.
		D)	Sell for either a premium or a discount but it's impossible to tell which.
		E)	Sell for par value.


5	Suppose you read that a bond with a face value of $1,000 and a coupon of $80 per year has a yield to maturity of exactly 8%. How many years remain until maturity? I. Greater than 20 years II. Greater than 10 years but less than 20 III. Less than 10 years
		A)	I only
		B)	II only
		C)	III only
		D)	I, II, or III may be correct
		E)	Cannot be computed since price is not given


6	Your neighbor is bragging that the coupon payment on the bonds he bought five years ago have increased in each of the last three years. You know he must own __________.
		A)	a zero coupon bond
		B)	a floating rate bond
		C)	a convertible bond
		D)	a put bond
		E)	an income bond


7	You presently own stock that you purchased one year ago. Your return on the stock for the past year was 25%. You calculate your real return on investment was 13.63%. The rate of inflation must have been __________.
		A)	1.1%
		B)	3.6%
		C)	42.0%
		D)	25.0%
		E)	10.0%


8	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%


9	You earn a 5% real return. If the inflation rate is 4%, what is your nominal return?
		A)	9.20%
		B)	1.09%
		C)	9.00%
		D)	0.96%
		E)	10.92%


10	J&J Enterprises wants to issue eighty 20-year, $1,000 zero-coupon bonds. If each bond is to yield 8%, how much will J&J receive (ignoring issuance costs) when the bonds are first sold?
		A)	$11,212
		B)	$12,393
		C)	$17,164
		D)	$18,880
		E)	$20,000

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