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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 2

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1	In the event of default,___________ debt holders must give preference to more ___________ debt holders in the priority of repayment distributions.
		A)	short-term; long-term
		B)	subordinated; senior
		C)	senior; junior
		D)	senior; subordinated
		E)	long-term; short-term


2	The relationship between nominal rates, real rates, and inflation is known as the:
		A)	Miller and Modigliani theorem.
		B)	Interest rate risk premium.
		C)	Gordon growth model.
		D)	Term structure of interest rates.
		E)	Fisher effect.


3	A bond with a face value of $1,000 has annual coupon payments of $100 and was issued 7 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. par value III. coupon rate
		A)	I, II and III
		B)	I and III only
		C)	III only
		D)	II and III only
		E)	I only


4	Which of the following statements about bond ratings is/are accurate? I. Bond ratings are typically paid for by a company's bondholders. II. Bond ratings are based solely on information acquired from sources other than the firm itself. III. Bond ratings represent an independent assessment of the creditworthiness of bonds.
		A)	II only
		B)	III only
		C)	I and II only
		D)	I and III only
		E)	II and III only


5	Dizzy Corp. bonds bearing a coupon rate of 15%, pay coupons semiannually, have two years remaining to maturity, and are currently priced at $980 per bond. What is the yield to maturity?
		A)	15.00%
		B)	15.99%
		C)	16.21%
		D)	16.25%
		E)	16.57%


6	You purchased a bond one year ago for $839.67 and just received the annual coupon of $80. You sell the bond today for $829.33. What is your real return if inflation was 5%?
		A)	10.26%
		B)	6.02%
		C)	6.47%
		D)	9.80%
		E)	3.14%


7	If investors require a 7% nominal return and the expected inflation rate is 3%, what is the expected real return?
		A)	1.04%
		B)	3.00%
		C)	4.00%
		D)	3.88%
		E)	10.21%


8	Suppose you purchase a zero coupon bond with face value $1,000, maturing in twenty years, for $214.55. If the yield to maturity on the bond remains unchanged, what will the price of the bond be five years from now?
		A)	$315.24
		B)	$387.52
		C)	$410.91
		D)	$680.58
		E)	$1,000.00


9	J&J Enterprises wants to issue 20-year, $1,000 face value zero-coupon bonds. If each bond is to yield 8%, what is the minimum number of bonds J&J must sell if they wish to raise $2 million from the sale? (Ignore issuance costs.)
		A)	4,290
		B)	13,880
		C)	10,164
		D)	9,322
		E)	16,159


10	J&J Manufacturing just issued a bond with a $1,000 face value and a coupon rate of 7%. If the bond has a life of 30 years, pays annual coupons, and the yield to maturity is 6.8%, what is the total present value of the bond's coupon payments?
		A)	$138.95
		B)	$241.15
		C)	$886.37
		D)	$921.12
		E)	$1,025.32

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