An+overview+of+interest+rate+and+bond+valuation

Multiple Choice Questions1. The term structure of interest rates is:A) The relationship between the rates of interest on all securities.B) The relationship between the interest rate on a security and its time to maturity.C) The relationship between the yield on a bond and its default rate.D) All of the above.E) None of the above.Answer: B Difficulty: EasyRationale: The term structure of interest rates is the relationship between two variables, years and yield to maturity (holding all else constant).2. The yield curve shows at any point in time:A) The relationship between the yield on a bond and the duration of the bond.B) The relationship between the coupon rate on a bond and time to maturity of thebond.C) The relationship between yield on a bond and the time to maturity on the bond.D) All of the above.E) None of the above.Answer: C Difficulty: Easy3. An inverted yield curve implies that:A) Long-term interest rates are lower than short-term interest rates.B) Long-term interest rates are higher than short-term interest rates.C) Long-term interest rates are the same as short-term interest rates.D) Intermediate term interest rates are higher than either short- or long-term interestrates.E) none of the above.Answer: A Difficulty: EasyRationale: The inverted, or downward sloping, yield curve is one in which short-term rates are higher than long-term rates. The inverted yield curve has been observedfrequently, although not as frequently as the upward sloping, or normal, yield curve.4. An upward sloping yield curve is a(n) _______ yield curve.A) normal.B) humped.C) inverted.D) flat.E) none of the above.Answer: A Difficulty: EasyRationale: The upward sloping yield curve is referred to as the normal yield curve, probably because, historically, the upward sloping yield curve is the shape that has been observed most frequently.5. According to the expectations hypothesis, a normal yield curve implies thatA) interest rates are expected to remain stable in the future.B) interest rates are expected to decline in the future.C) interest rates are expected to increase in the future.D) interest rates are expected to decline first, then increase.E) interest rates are expected to increase first, then decrease.Answer: C Difficulty: EasyRationale: An upward sloping yield curve is based on the expectation that short-term interest rates will increase.6. Which of the following is not proposed as an explanation for the term structure ofinterest rates?A) The expectations theory.B) The liquidity preference theory.C) The market segmentation theory.D) Modern portfolio theory.E) A, B, and C.Answer: D Difficulty: EasyRationale: A, B, and C are all theories that have been proposed to explain the term structure.7. The expectations theory of the term structure of interest rates states thatA) forward rates are determined by investors' expectations of future interest rates.B) forward rates exceed the expected future interest rates.C) yields on long- and short-maturity bonds are determined by the supply and demandfor the securities.D) all of the above.E) none of the above.Answer: A Difficulty: EasyRationale: The forward rate equals the market consensus expectation of future short interest rates.8. Which of the following theories state that the shape of the yield curve is essentiallydetermined by the supply and demands for long-and short-maturity bonds?A) Liquidity preference theory.B) Expectations theory.C) Market segmentation theory.D) All of the above.E) None of the above.Answer: C Difficulty: EasyRationale: Market segmentation theory states that the markets for different maturities are separate markets, and that interest rates at the different maturities are determined by the intersection of the respective supply and demand curves.9. According to the "liquidity preference" theory of the term structure of interest rates, theyield curve usually should be:A) inverted.B) normal.C) upward slopingD) A and B.E) B and C.Answer: E Difficulty: EasyRationale: According to the liquidity preference theory, investors would prefer to be liquid rather than illiquid. In order to accept a more illiquid investment, investors require a liquidity premium and the normal, or upward sloping, yield curve results.Use the following to answer questions 10-13:Suppose that all investors expect that interest rates for the 4 years will be as follows:10. What is the price of 3-year zero coupon bond with a par value of $1,000?A) $863.83B) $816.58C) $772.18D) $765.55E) none of the aboveAnswer: B Difficulty: ModerateRationale: $1,000 / (1.05)(1.07)(1.09) = $816.5811. If you have just purchased a 4-year zero coupon bond, what would be the expected rateof return on your investment in the first year if the implied forward rates stay the same?(Par value of the bond = $1,000)A) 5%B) 7%C) 9%D) 10%E) none of the aboveAnswer: A Difficulty: ModerateRationale: The forward interest rate given for the first year of the investment is given as 5% (see table above).12. What is the price of a 2-year maturity bond with a 10% coupon rate paid annually? (Parvalue = $1,000)A) $1,092B) $1,054C) $1,000D) $1,073E) none of the aboveAnswer: D Difficulty: ModerateRationale: [(1.05)(1.07)]1/2 - 1 = 6%; FV = 1000, n = 2, PMT = 100, i = 6, PV =$1,073.3413. What is the yield to maturity of a 3-year zero coupon bond?A) 7.00%B) 9.00%C) 6.99%D) 7.49%E) none of the aboveAnswer: C Difficulty: ModerateRationale: [(1.05)(1.07)(1.09)]1/3 - 1 = 6.99.Use the following to answer questions 14-16:The following is a list of prices for zero coupon bonds with different maturities and par value of $1,000.14. What is, according to the expectations theory, the expected forward rate in the thirdyear?A) 7.00%B) 7.33%C) 9.00%D) 11.19%E) none of the aboveAnswer: C Difficulty: ModerateRationale: 881.68 / 808.88 - 1 = 9%15. What is the yield to maturity on a 3-year zero coupon bond?A) 6.37%B) 9.00%C) 7.33%D) 10.00%E) none of the aboveAnswer: C Difficulty: ModerateRationale: (1000 / 808.81)1/3 -1 = 7.33%16. What is the price of a 4-year maturity bond with a 12% coupon rate paid annually? (Parvalue = $1,000)A) $742.09B) $1,222.09C) $1,000.00D) $1,141.92E) none of the aboveAnswer: D Difficulty: DifficultRationale: (1000 / 742.09)1/4 -1 = 7.74%; FV = 1000, PMT = 120, n = 4, i = 7.74, PV = $1,141.9217. The market segmentation theory of the term structure of interest ratesA) theoretically can explain all shapes of yield curves.B) definitely holds in the "real world".C) assumes that markets for different maturities are separate markets.D) A and B.E) A and C.Answer: E Difficulty: EasyRationale: Although this theory is quite tidy theoretically, both investors and borrows will depart from their "preferred maturity habitats" if yields on alternative maturities are attractive enough.18. An upward sloping yield curveA) may be an indication that interest rates are expected to increase.B) may incorporate a liquidity premium.C) may reflect the confounding of the liquidity premium with interest rateexpectations.D) all of the above.E) none of the above.Answer: D Difficulty: EasyRationale: One of the problems of the most commonly used explanation of termstructure, the expectations hypothesis, is that it is difficult to separate out the liquidity premium from interest rate expectations.19. The "break-even" interest rate for year n that equates the return on an n-periodzero-coupon bond to that of an n-1-period zero-coupon bond rolled over into a one-year bond in year n is defined asA) the forward rate.B) the short rate.C) the yield to maturity.D) the discount rate.E) None of the above.Answer: A Difficulty: EasyRationale: The forward rate for year n, fn, is the "break-even" interest rate for year n that equates the return on an n-period zero- coupon bond to that of an n-1-periodzero-coupon bond rolled over into a one-year bond in year n.20. When computing yield to maturity, the implicit reinvestment assumption is that theinterest payments are reinvested at the:A) Coupon rate.B) Current yield.C) Yield to maturity at the time of the investment.D) Prevailing yield to maturity at the time interest payments are received.E) The average yield to maturity throughout the investment period.Answer: C Difficulty: ModerateRationale: In order to earn the yield to maturity quoted at the time of the investment, coupons must be reinvested at that rate.21. Which one of the following statements is true?A) The expectations hypothesis indicates a flat yield curve if anticipated futureshort-term rates exceed the current short-term rate.B) The basic conclusion of the expectations hypothesis is that the long-term rate isequal to the anticipated long-term rate.C) The liquidity preference hypothesis indicates that, all other things being equal,longer maturities will have lower yields.D) The segmentation hypothesis contends that borrows and lenders are constrained toparticular segments of the yield curve.E) None of the above.Answer: D Difficulty: ModerateRationale: A flat yield curve indicates expectations of existing rates. Expectations hypothesis states that the forward rate equals the market consensus of expectations of future short interest rates. The reverse of C is true.22. The concepts of spot and forward rates are most closely associated with which one ofthe following explanations of the term structure of interest rates.A) Segmented Market theoryB) Expectations HypothesisC) Preferred Habitat HypothesisD) Liquidity Premium theoryE) None of the aboveAnswer: B Difficulty: ModerateRationale: Only the expectations hypothesis is based on spot and forward rates. A andC assume separate markets for different maturities; liquidity premium assumes higheryields for longer maturities.Use the following to answer question 23:23. Given the bond described above, if interest were paid semi-annually (rather thanannually), and the bond continued to be priced at $850, the resulting effective annual yield to maturity would be:A) Less than 12%B) More than 12%C) 12%D) Cannot be determinedE) None of the aboveAnswer: B Difficulty: ModerateRationale: FV = 1000, PV = -850, PMT = 50, n = 40, i = 5.9964 (semi-annual);(1.059964)2 - 1 = 12.35%.24. Interest rates might declineA) because real interest rates are expected to decline.B) because the inflation rate is expected to decline.C) because nominal interest rates are expected to increase.D) A and B.E) B and C.Answer: D Difficulty: EasyRationale: The nominal rate is comprised of the real interest rate plus the expectedinflation rate.25. Forward rates ____________ future short rates because ____________.A) are equal to; they are both extracted from yields to maturity.B) are equal to; they are perfect forecasts.C) differ from; they are imperfect forecasts.D) differ from; forward rates are estimated from dealer quotes while future short ratesare extracted from yields to maturity.E) are equal to; although they are estimated from different sources they both are usedby traders to make purchase decisions.Answer: C Difficulty: EasyRationale: Forward rates are the estimates of future short rates extracted from yields to maturity but they are not perfect forecasts because the future cannot be predicted with certainty; therefore they will usually differ.26. The pure yield curve can be estimatedA) by using zero-coupon bonds.B) by using coupon bonds if each coupon is treated as a separate "zero."C) by using corporate bonds with different risk ratings.D) by estimating liquidity premiums for different maturities.E) A and B.Answer: E Difficulty: ModerateRationale: The pure yield curve is calculated using zero coupon bonds, but coupon bonds may be used if each coupon is treated as a separate "zero."27. The on the run yield curve isA) a plot of yield as a function of maturity for zero-coupon bonds.B) a plot of yield as a function of maturity for recently issued coupon bonds trading ator near par.C) a plot of yield as a function of maturity for corporate bonds with different riskratings.D) a plot of liquidity premiums for different maturities.E) A and B.Answer: B Difficulty: Moderate28. The market segmentation and preferred habitat theories of term structureA) are identical.B) vary in that market segmentation is rarely accepted today.C) vary in that market segmentation maintains that borrowers and lenders will notdepart from their preferred maturities and preferred habitat maintains that marketparticipants will depart from preferred maturities if yields on other maturities areattractive enough.D) A and B.E) B and C.Answer: E Difficulty: ModerateRationale: Borrowers and lenders will depart from their preferred maturity habitats if yields are attractive enough; thus, the market segmentation hypothesis is no longerreadily accepted.29. The yield curveA) is a graphical depiction of term structure of interest rates.B) is usually depicted for U. S. Treasuries in order to hold risk constant acrossmaturities and yields.C) is usually depicted for corporate bonds of different ratings.D) A and B.E) A and C.Answer: D Difficulty: EasyRationale: The yield curve (yields vs. maturities, all else equal) is depicted for U. S.Treasuries more frequently than for corporate bonds, as the risk is constant acrossmaturities for Treasuries.Use the following to answer questions 30-32:30. What should the purchase price of a 2-year zero coupon bond be if it is purchased at thebeginning of year 2 and has face value of $1,000?A) $877.54B) $888.33C) $883.32D) $893.36E) $871.80Answer: A Difficulty: DifficultRationale: $1,000 / [(1.064)(1.071)] = $877.5431. What would the yield to maturity be on a four-year zero coupon bond purchased today?A) 5.80%B) 7.30%C) 6.65%D) 7.25%E) none of the above.Answer: C Difficulty: ModerateRationale: [(1.058) (1.064) (1.071) (1.073)]1/4 - 1 = 6.65%32. Calculate the price at the beginning of year 1 of a 10% annual coupon bond with facevalue $1,000 and 5 years to maturity.A) $1,105B) $1,132C) $1,179D) $1,150E) $1,119Answer: B Difficulty: DifficultRationale: i = [(1.058) (1.064) (1.071) (1.073) (1.074)]1/5 - 1 = 6.8%; FV = 1000, PMT = 100, n = 5, i = 6.8, PV = $1,131.9133. Given the yield on a 3 year zero-coupon bond is 7.2% and forward rates of 6.1% in year1 and 6.9% in year 2, what must be the forward rate in year 3?A) 8.4%B) 8.6%C) 8.1%D) 8.9%E) none of the above.Answer: B Difficulty: ModerateRationale: f3 = (1.072)3 / [(1.061) (1.069)] - 1 = 8.6%34. An inverted yield curve is oneA) with a hump in the middle.B) constructed by using convertible bonds.C) that is relatively flat.D) that plots the inverse relationship between bond prices and bond yields.E) that slopes downward.Answer: E Difficulty: EasyRationale: An inverted yield curve occurs when short-term rates are higher thanlong-term rates.35. Investors can use publicly available financial date to determine which of the following?I)the shape of the yield curveII)future short-term ratesIII)the direction the Dow indexes are headingIV)the actions to be taken by the Federal ReserveA) I and IIB) I and IIIC) I, II, and IIID) I, III, and IVE) I, II, III, and IVAnswer: A Difficulty: ModerateRationale: Only the shape of the yield curve and future inferred rates can be determined.The movement of the Dow Indexes and Federal Reserve policy are influenced by term structure but are determined by many other variables also.36. Which of the following combinations will result in a sharply increasing yield curve?A) increasing expected short rates and increasing liquidity premiumsB) decreasing expected short rates and increasing liquidity premiumsC) increasing expected short rates and decreasing liquidity premiumsD) increasing expected short rates and constant liquidity premiumsE) constant expected short rates and increasing liquidity premiumsAnswer: A Difficulty: ModerateRationale: Both of the forces will act to increase the slope of the yield curve.37. The yield curve is a component ofA) the Dow Jones Industrial Average.B) the consumer price index.C) the index of leading economic indicators.D) the producer price index.E) the inflation index.Answer: C Difficulty: EasyRationale: Since the yield curve is often used to forecast the business cycle, it is used as one of the leading economic indicators.38. The most recently issued Treasury securities are calledA) on the run.B) off the run.C) on the market.D) off the market.E) none of the above.Answer: A Difficulty: EasyUse the following to answer questions 39-42:Suppose that all investors expect that interest rates for the 4 years will be as follows:39. What is the price of 3-year zero coupon bond with a par value of $1,000?A) $889.08B) $816.58C) $772.18D) $765.55E) none of the aboveAnswer: A Difficulty: ModerateRationale: $1,000 / (1.03)(1.04)(1.05) = $889.0840. If you have just purchased a 4-year zero coupon bond, what would be the expected rateof return on your investment in the first year if the implied forward rates stay the same?(Par value of the bond = $1,000)A) 5%B) 3%C) 9%D) 10%E) none of the aboveAnswer: B Difficulty: ModerateRationale: The forward interest rate given for the first year of the investment is given as 3% (see table above).41. What is the price of a 2-year maturity bond with a 5% coupon rate paid annually? (Parvalue = $1,000)A) $1,092.97B) $1,054.24C) $1,028.51D) $1,073.34E) none of the aboveAnswer: C Difficulty: ModerateRationale: [(1.03)(1.04)]1/2 - 1 = 3.5%; FV = 1000, n = 2, PMT = 50, i = 3.5, PV =$1,028.5142. What is the yield to maturity of a 3-year zero coupon bond?A) 7.00%B) 9.00%C) 6.99%D) 4%E) none of the aboveAnswer: D Difficulty: ModerateRationale: [(1.03)(1.04)(1.05)]1/3 - 1 = 4%.Use the following to answer questions 43-46:The following is a list of prices for zero coupon bonds with different maturities and par value of $1,000.43. What is, according to the expectations theory, the expected forward rate in the thirdyear?A) 7.23B) 9.37%C) 9.00%D) 10.9%E) none of the aboveAnswer: B Difficulty: ModerateRationale: 862.57 / 788.66 - 1 = 9.37%44. What is the yield to maturity on a 3-year zero coupon bond?A) 6.37%B) 9.00%C) 7.33%D) 8.24%E) none of the aboveAnswer: D Difficulty: ModerateRationale: (1000 / 788.66)1/3 -1 = 8.24%45. What is the price of a 4-year maturity bond with a 10% coupon rate paid annually? (Parvalue = $1,000)A) $742.09B) $1,222.09C) $1,035.66D) $1,141.84E) none of the aboveAnswer: C Difficulty: DifficultRationale: (1000 / 711.00)1/4 -1 = 8.9%; FV = 1000, PMT = 100, n = 4, i = 8.9, PV =$1,035.6646. You have purchased a 4-year maturity bond with a 9% coupon rate paid annually. Thebond has a par value of $1,000. What would the price of the bond be one year from now if the implied forward rates stay the same?A) $995.63B) $1,108.88C) $1,000.00D) $1,042.78E) none of the aboveAnswer: A Difficulty: DifficultRationale: (925.16 / 711.00)]1/3 - 1.0 = 9.17%; FV = 1000, PMT = 90, n = 3, i = 9.17, PV = $995.63Use the following to answer question 47:47. Given the bond described above, if interest were paid semi-annually (rather thanannually), and the bond continued to be priced at $917.99, the resulting effective annual yield to maturity would be:A) Less than 10%B) More than 10%C) 10%D) Cannot be determinedE) None of the aboveAnswer: B Difficulty: ModerateRationale: FV = 1000, PV = -917.99, PMT = 45, n = 36, i = 4.995325 (semi-annual);(1.4995325)2 - 1 = 10.24%.Use the following to answer questions 48-50:48. What should the purchase price of a 2-year zero coupon bond be if it is purchased at thebeginning of year 2 and has face value of $1,000?A) $877.54B) $888.33C) $883.32D) $894.21E) $871.80Answer: D Difficulty: DifficultRationale: $1,000 / [(1.055)(1.06)] = $894.2149. What would the yield to maturity be on a four-year zero coupon bond purchased today?A) 5.75%B) 6.30%C) 5.65%D) 5.25%E) none of the above.Answer: A Difficulty: ModerateRationale: [(1.05) (1.055) (1.06) (1.065)]1/4 - 1 = 5.75%50. Calculate the price at the beginning of year 1 of an 8% annual coupon bond with facevalue $1,000 and 5 years to maturity.A) $1,105.47B) $1,131.91C) $1,084.25D) $1,150.01E) $719.75Answer: C Difficulty: DifficultRationale: i = [(1.05) (1.055) (1.06) (1.065) (1.07)]1/5 - 1 = 6%; FV = 1000, PMT = 80, n = 5, i = 6, PV = $1084.2551. Given the yield on a 3 year zero-coupon bond is 7% and forward rates of 6% in year 1and 6.5% in year 2, what must be the forward rate in year 3?A) 7.2%B) 8.6%C) 8.5%D) 6.9%E) none of the above.Answer: C Difficulty: ModerateRationale: f3 = (1.07)3 / [(1.06) (1.065)] - 1 = 8.5%Use the following to answer questions 52-61:52. What should the purchase price of a 1-year zero coupon bond be if it is purchased todayand has face value of $1,000?A) $966.37B) $912.87C) $950.21D) $956.02E) $945.51Answer: D Difficulty: DifficultRationale: $1,000 / (1.046) = $956.0253. What should the purchase price of a 2-year zero coupon bond be if it is purchased todayand has face value of $1,000?A) $966.87B) $911.37C) $950.21D) $956.02E) $945.51Answer: B Difficulty: DifficultRationale: $1,000 / [(1.046)(1.049)] = $911.3754. What should the purchase price of a 3-year zero coupon bond be if it is purchased todayand has face value of $1,000?A) $887.42B) $871.12C) $879.54D) $856.02E) $866.32Answer: E Difficulty: DifficultRationale: $1,000 / [(1.046)(1.049)(1.052)] = $866.3255. What should the purchase price of a 4-year zero coupon bond be if it is purchased todayand has face value of $1,000?A) $887.42B) $821.15C) $879.54D) $856.02E) $866.32Answer: B Difficulty: DifficultRationale: $1,000 / [(1.046)(1.049)(1.052)(1.055)] = $821.1556. What should the purchase price of a 5-year zero coupon bond be if it is purchased todayand has face value of $1,000?A) $776.14B) $721.15C) $779.54D) $756.02E) $766.32Answer: A Difficulty: DifficultRationale: $1,000 / [(1.046)(1.049)(1.052)(1.055)(1.058)] = $776.1457. What is the yield to maturity of a 1-year bond?A) 4.6%B) 4.9%C) 5.2%D) 5.5%E) 5.8%Answer: A Difficulty: ModerateRationale: 4.6% (given in table)58. What is the yield to maturity of a 5-year bond?A) 4.6%B) 4.9%C) 5.2%D) 5.5%E) 5.8%Answer: C Difficulty: ModerateRationale: [(1.046)(1.049)(1.052)(1.055)(1.058)]1/5 -1 = 5.2%59. What is the yield to maturity of a 4-year bond?A) 4.69%B) 4.95%C) 5.02%D) 5.05%E) 5.08%Answer: C Difficulty: ModerateRationale: [(1.046)(1.049)(1.052)(1.055)]1/4 -1 = 5.05%60. What is the yield to maturity of a 3-year bond?A) 4.6%B) 4.9%C) 5.2%D) 5.5%E) 5.8%Answer: B Difficulty: ModerateRationale: [(1.046)(1.049)(1.052)]1/3 -1 = 4.9%61. What is the yield to maturity of a 2-year bond?A) 4.6%B) 4.9%C) 5.2%D) 4.7%E) 5.8%Answer: D Difficulty: ModerateRationale: [(1.046)(1.049)]1/2 -1 = 4.7%Essay Questions62. Discuss the three theories of the term structure of interest rates. Include in yourdiscussion the differences in the theories, and the advantages/disadvantages of each.Difficulty: ModerateAnswer:The expectations hypothesis is the most commonly accepted theory of term structure.The theory states that the forward rate equals the market consensus expectation of future short-term rates. Thus, yield to maturity is determined solely by current and expected future one-period interest rates. An upward sloping, or normal, yield curve wouldindicate that investors anticipate an increase in interest rates. An inverted, or downward sloping, yield curve would indicate an expectation of decreased interest rates. Ahorizontal yield curve would indicate an expectation of no interest rate changes.The liquidity preference theory of term structure maintains that short-term investorsdominate the market; thus, in general, the forward rate exceeds the expected short-term rate. In other words, investors prefer to be liquid to illiquid, all else equal, and willdemand a liquidity premium in order to go long term. Thus, liquidity preference readily explains the upward sloping, or normal, yield curve. However, liquidity preferencedoes not readily explain other yield curve shapes.Market segmentation and preferred habitat theories indicate that the markets fordifferent maturity debt instruments are segmented. Market segmentation maintains that the rates for the different maturities are determined by the intersection of the supply and demand curves for the different maturity instruments. Market segmentation readilyexplains all shapes of yield curves. However, market segmentation is not observed in the real world. Investors and issuers will leave their preferred maturity habitats if yields are attractive enough on other maturities.The purpose of this question is to ascertain that students understand the variousexplanations (and deficiencies of these explanations) of term structure.63. Term structure of interest rates is the relationship between what variables? What isassumed about other variables? How is term structure of interest rates depictedgraphically?Difficulty: ModerateAnswer:Term structure of interest rates is the relationship between yield to maturity and term to maturity, all else equal. The "all else equal" refers to risk class. Term structure ofinterest rates is depicted graphically by the yield curve, which is usually a graph of U.S.governments of different yields and different terms to maturity. The use of U.S.governments allows one to examine the relationship between yield and maturity,holding risk constant. The yield curve depicts this relationship at one point in time only.This question is designed to ascertain that students understand the relationshipsinvolved in term structure, the restrictions on the relationships, and how therelationships are depicted graphically.64. Although the expectations of increases in future interest rates can result in an upwardsloping yield curve; an upward sloping yield curve does not in and of itself imply the expectations of higher future interest rates. Explain.Difficulty: ModerateAnswer:The effects of possible liquidity premiums confound any simple attempt to extractexpectation from the term structure. That is, the upward sloping yield curve may be due to expectations of interest rate increases, or due to the requirement of a liquiditypremium, or both. The liquidity premium could more than offset expectations ofdecreased interest rates, and an upward sloping yield would result.The purpose of this question is to assure that the student understands the confounding of the liquidity premium with the expectations hypothesis, and that the interpretations of term structure are not clear-cut.。

习题答案PrinciplesofCorporateFinance第⼗版Chapter14 CHAPTER 14An Overview of Corporate Financing Answers to Problem Sets1. a. Falseb. Truec. True2. a. 40,000/.50 = 80,000 sharesb. 78,000 sharesc. 2,000 shares are held as Treasury stockd. 20,000 sharese. See table belowf. See table below3. a. 80 votesb. 10 X 80 = 800 votes.4. a. subordinatedb. floating ratec. convertibled. warrante. common stock; preferred stock.5. a. Falseb. Truec. False6. a. Par value is $0.05 per share, which is computed as follows:$443 million/8,863 million sharesb. The shares were sold at an average price of:[$443 million + $70,283 million]/8,863 million shares = $7.98c. The company has repurchased:8,863 million – 6,746 million = 2,117 million sharesd. Average repurchase price:$57,391 million/2,117 million shares = $27.11 per share.e. The value of the net common equity is:$443 million + $70,283 million + $44,148 million – $57,391 million= $57,483 million7. a. The day after the founding of Inbox:Common shares ($0.10 par value) $ 50,000Additional paid-in capital 1,950,000Retained earnings 0Treasury shares 0Net common equity $ 2,000,000b. After 2 years of operation:Common shares ($0.10 par value) $ 50,000Additional paid-in capital 1,950,000Retained earnings 120,000Treasury shares 0Net common equity $ 2,120,000c. After 3 years of operation:Common shares ($0.10 par value) $ 150,000 Additional paid-in capital 6,850,000Retained earnings 370,000Treasury shares 0Net common equity $ 7,370,0008. a.Common shares ($1.00 par value) $1,008Additional paid-in capital 5,444Retained earnings 16,250Treasury shares (14,015)Net common equity $8,687b.Common shares ($1.00 par value) $1,008Additional paid-in capital 5,444Retained earnings 16,250Treasury shares (14,715)Net common equity $7,9879. One would expect that the voting shares have a higher price because theyhave an added benefit/responsibility that has value.10. a.Gross profits $ 760,000Interest 100,000EBT $ 660,000Tax (at 35%) 231,000Funds available to common shareholders $ 429,000b.Gross profits (EBT) $ 760,000Tax (at 35%) 266,000Net income $ 494,000Preferred dividend 80,000Funds available to common shareholders $ 414,00011. Internet exercise; answers will vary.12. a. Less valuableb. More valuablec. More valuabled. Less valuable13. Answers may differ. Some key events of the financial crisis through the end of2008 include:June 2007: Bear Stearns pledges $3.2 billion to aid one of its ailing hedge funds Sept. 2007: Northern Rock receives emergency funding from the Bank of England Oct. 2007: Citigroup begins a string of writedowns based on mortgage losses Dec. 2007: Fed establishes Term Auction Facility linesJan. 2008: Ratings agencies threaten to downgrade Ambac and MBIA (major bond issuers)Feb. 2008: Economic stimulus package signed into lawMar. 2008: JPMorgan purchases Bear Stearns with support from the FedMar. 2008: SEC proposes ban on naked short sellingJuly 2008: FDIC takes over IndyMac BankSept. 2008: Lehman forced into bankruptcyB of A purchases Merrill Lynch10 banks create $70 billion liquidity fundAIG debt downgradedRMC money market fund “breaks the buck”Treasury bailout plan voted down in the HouseOct. 2008: 9 large banks agree to capital injection from TreasuryRevised bailout plan passes in HouseConsumer confidence hits lowest point on recordThe NY Fed has an excellent timeline of events at:/doc/24f5ef393968011ca30091d5.html /research/global_economy/Crisis_Timeline.pdf14. Answers will differ. Some purported causes of the financial crisis include:Long periods of very low interest rates leading to easy credit conditionsHigh leverage ratiosThe bursting of the US housing market bubbleHigh rates of default on subprime mortgagesMassive losses on investments in mortgage backed securitiesOpaque derivative markets and amplified losses through credit default swaps High rates of unemployment and job losses 15.a.For majority voting, you must own or otherwise control the votes of a simple majority of the shares outstanding, i.e., one-half of the shares outstanding plus one. Here, with 200,000 shares outstanding, you must control the votes of 100,001 shares. b.With cumulative voting, the directors are elected in order of the total number of votes each receives. With 200,000 shares outstanding and five directors to be elected, there will be a total of 1,000,000 votes cast. To ensure you can elect at least one director, you must ensure that someone else can elect at most four directors. That is, you must have enough votes so that, even if the others split their votes evenly among five other candidates, the number of votes your candidate gets would be higher by one.Let x be the number of votes controlled by you, so that others control (1,000,000 - x) votes. To elect one director:Solving, we find x = 166,666.8 votes, or 33,333.4 shares. Because there are no fractional shares, we need 33,334 shares.15x000,000,1x +-=。

Concept Questions◆Define pure discount bonds, level-coupon bonds, and consols.A pure discount bond is one that makes no intervening interest payments. One receives a single lump sum payment at maturity. A level-coupon bond is a combination of an annuity and a lump sum at maturity. A consol is a bond that makes interest payments forever.◆Contrast the state interest rate and the effective annual interest rate for bonds paying semi-annual interest. Effective annual interest rate on a bond takes into account two periods of compounding per year received on the coupon payments. The state rate does not take this into account.◆What is the relationship between interest rates and bond prices?There is an inverse relationship. When one goes up, the other goes down.◆How does one calculate the yield to maturity on a bond?One finds the discount rate that equates the promised future cash flows with the price of the bond.◆What are the three factors determining a firm's P/E ratio?Today's expectations of future growth opportunities.The discount rate.The accounting method.◆What is the closing price of General Data?The closing price of General Data is 6 3/16.◆What is the PE of General House?The PE of General House is 29.◆What is the annual dividend of General Host?The annual dividend of General Host is zero.Concept Questions - Appendix To Chapter 5◆What is the difference between a spot interest rate and the yield to maturity?The yield to maturity is the geometric average of the spot rates during the life of the bond.◆Define the forward rate.Given a one-year bond and a two-year bond, one knows the spot rates for both. The forward rate is the rate of return implicit on a one-year bond purchased in the second year that would equate the terminal wealth of purchasing the one-year bond today and another in one year with that of the two-year bond.◆What is the relationship between the one-year spot rate, the two-year spot rate and the forward rate over the second year?The forward rate f2 = [(1+r2)2 /(1+r1 )] - 1◆What is the expectation hypothesis?Investors set interest rates such that the forward rate over a given period equals the spot rate for that period.◆What is the liquidity-preference hypothesis?This hypothesis maintains that investors require a risk premium for holding longer-term bonds (i.e. they prefer to be liquid or short-term investors). This implies that the market sets the forward rate for a given period above the expected spot rate for that period.Questions And ProblemsHow to Value Bonds5.1 What is the present value of a 10-year, pure discount bond that pays $1,000 at maturity and is priced to yield the following rates?a. 5 percentb. 10 percentc. 15 percentSolutions a. $1,000 / 1.0510 = $613.91b. $1,000 / 1.1010 = $385.54c. $1,000 / 1.1510 = $247.185.2 Microhard has issued a bond with the following characteristics:Principal: $1,000Term to maturity: 20 yearsCoupon rate: 8 percentSemiannual paymentsCalculate the price of the Microhard bond if the stated annual interest rate is:a. 8 percentb. 10 percentc. 6 percentSolutions The amount of the semi-annual interest payment is $40 (=$1,000 ⨯ 0.08 / 2). There are a total of 40 periods; i.e., two half years in each of the twenty years in the term to maturity.The annuity factor tables can be used to price these bonds. The appropriate discount rate touse is the semi-annual rate. That rate is simply the annual rate divided by two. Thus, for part b the rate to be used is 5% and for part c is it 3%.a. $40 (19.7928) + $1,000 / 1.0440 = $1,000Notice that whenever the coupon rate and the market rate are the same, the bond ispriced at par.b. $40 (17.1591) + $1,000 / 1.0540 = $828.41Notice that whenever the coupon rate is below the market rate, the bond is pricedbelow par.c. $40 (23.1148) + $1,000 / 1.0340 = $1,231.15Notice that whenever the coupon rate is above the market rate, the bond is pricedabove par.5.3 Consider a bond with a face value of $1,000. The coupon is paid semiannually and the market interest rate (effective annual interest rate) is 12 percent. How much would you pay for the bond if a. the coupon rate is 8 percent and the remaining time to maturity is 20 years?b. the coupon rate is 10 percent and the remaining time to maturity is 15 years?Solutions Semi-annual discount factor = (1.12)1/2 - 1 = 0.05830 = 5.83%a. Price = $40400583.0A+ $1,000 / 1.058340= $614.98 + $103.67= $718.65b. Price = $50300583.0A+ $1,000 / 1.058330= $700.94 + $182.70 = $883.645.4 Pettit Trucking has issued an 8-percent, 20-year bond that pays interest semiannually. If the market prices the bond to yield an effective annual rate of 10 percent, what is the price of the bond? Solutions Effective annual rate of 10%:Semi-annual discount factor = (1.1)0.5 - 1 = 0.04881 = 4.881%Price = $404004881.0A+ $1,000 / 1.0488140= $846.335.5 A bond is sold at $923.14 (below its par value of $1,000). The bond has 15 years to maturity and investors require a 10-percent yield on the bond. What is the coupon rate for the bond if the coupon is paid semiannually?Solutions $923.14 = C3005.0A+ $1,000 / 1.0530= (15.37245) C + $231.38C = $45The annual coupon rate = $45 ⨯ 2 / $1,000 = 0.09 = 9%5.6 You have just purchased a newly issued $1,000 five-year Vanguard Company bond at par. This five-year bond pays $60 in interest semiannually. You are also considering the purchase of another Vanguard Company bond that returns $30 in semiannual interest payments and has six years remaining before it matures. This bond has a face value of $1,000.a. What is effective annual return on the five-year bond?b. Assume that the rate you calculated in part (a) is the correct rate for the bond with six years remaining before it matures. What should you be willing to pay for that bond?c. How will your answer to part (b) change if the five-year bond pays $40 in semiannual interest? Solutionsa. The semi-annual interest rate is $60 / $1,000 = 0.06. Thus, the effective annual rate is 1.062 - 1 =0.1236 = 12.36%.b. Price = $301206.0A+ $1,000 / 1.0612= $748.48c. Price = $301204.0A+ $1,000 / 1.0412= $906.15Note: In parts b and c we are implicitly assuming that the yield curve is flat. That is, the yield in year 5 applies for year 6 as well.Bond Concepts5.7 Consider two bonds, bond A and bond B, with equal rates of 10 percent and the same face values of $1,000. The coupons are paid annually for both bonds. Bond A has 20 years to maturity while bond B has10 years to maturity.a. What are the prices of the two bonds if the relevant market interest rate is 10 percent?b. If the market interest rate increases to 12 percent, what will be the prices of the two bonds?c. If the market interest rate decreases to 8 percent, what will be the prices of the two bonds?Solutionsa. PA = $1002010.0A+ $1,000 / 1.1020 = $1,000PB = $1001010.0A+ $1,000 / 1.1010 = $1,000b. PA = $1002012.0A+ $1,000 / 1.1220 = $850.61PB = $1001012.0A+ $1,000 / 1.1210 = $887.00c. PA = $1002008.0A+ $1,000 / 1.0820 = $1,196.36PB = $1001008.0A+ $1,000 / 1.0810 = $1,134.205.8 a. If the market interest rate (the required rate of return that investors demand) unexpectedly increases, what effect would you expect this increase to have on the prices of long-term bonds? Why?b. What would be the effect of the rise in the interest rate on the general level of stock prices? Why? Solutionsa. The price of long-term bonds should fall. The price is the PV of the cash flowsassociated with the bond. As the interest rate rises, the PV of those flows falls.This can be easily seen by looking at a one-year, pure discount bond.Price = $1,000 / (1 + i)As i. increases, the denominator rises. This increase causes the price to fall.b. The effect upon stocks is not as certain as that upon the bonds. The nominalinterest rate is a function of both the real interest rate and the inflation rate; i.e.,(1 + i) = (1 + r) (1 + inflation)From this relationship it is easy to conclude that as inflation rises, the nominalinterest rate rises. Stock prices are a function of dividends and future prices aswell as the interest rate. Those dividends and future prices are determined by theearning power of the firm. When inflation occurs, it may increase or decreasefirm earnings. Thus, the effect of a rise in the level of general prices upon thelevel of stock prices is uncertain.5.9 Consider a bond that pays an $80 coupon annually and has a face value of $1,000. Calculate the yield to maturity if the bond hasa. 20 years remaining to maturity and it is sold at $1,200.b. 10 years remaining to maturity and it is sold at $950.Solutions a. $1,200 = $8020rA+ $1,000 / (1 + r)20r = 0.0622 = 6.22%b. $950 = $8010rA+ $1,000 / (1 + r)10r = 0.0877 = 8.77%5.10 The Sue Fleming Corporation has two different bonds currently outstanding. Bond A has a face value of $40,000 and matures in 20 years. The bond makes no payments for the first six years and then pays $2,000 semiannually for the subsequent eight years, and finally pays $2,500 semiannually for the last six years. Bond B also has a face value of $40,000 and a maturity of 20 years; it makes no coupon payments over the life of the bond. If the required rate of return is 12 percent compounded semiannually, what is the current price of Bond A? of Bond B?Solutions PA = ($2,0001606.0A) / (1.06)12 + ($2,5001206.0A) / (1.06)28 + $40,000 / (1.06)40= $18,033.86PB = $ 40,000 / (1.06)40 = $3,888.89The Present Value of Common Stocks5.11 Use the following February 11, 2000, WSJ quotation for AT&T Corp. Which of the following statements is false?a. The closing price of the bond with the shortest time to maturity was $1,000.b. The annual coupon for the bond maturing in year 2016 is $90.00.c. The price on the day before this quotation (i.e., February 9) for the ATT bond maturing in year 2022 was $1.075 per bond contract.d. The current yield on the ATT bond maturing in year 2002 was 7.125%e. The ATT bond maturing in year 2002 has a yield to maturity less than 7.125%.Bonds Cur Yld Vol Close Net ChgATT 9s 16 ? 10 117 _ 1/4ATT 5 1/8 01 ? 5 100 _ 3/4ATT 7 1/8 02 ? 193 104 1/8 _ 1/4ATT 8 1/8 22 ? 39 107 3/8 _ 1/8Solutions a. TrueTrueFalseFalseTrue5.12 Following are selected quotations for New York Exchange Bonds from the Wall Street Journal. Which of the following statements about Wilson’s bond is false?a. The bond maturing in year 2000 has a yield to maturity greater th an 63⁄8%.b. The closing price of the bond with the shortest time to maturity on the day before this quotation was $1,003.25.c. This annual coupon for the bond maturing in year 2013 is $75.00.d. The current yield on the Wilson’s bond with the longest time to maturity was 7.29%.e. None of the above.Quotations as of 4 P.M. Eastern TimeFriday, April 23, 1999Bonds Current Yield Vol Close NetWILSON 6 3/8 99 ? 76 100 3/8 _ 1/8WILSON 6 3/8 00 ? 9 98 1/2WILSON 7 1/4 02 ? 39 103 5/8 1/8WILSON 7 1/2 13 ? 225 102 7/8 _ 1/8Solutions a. TrueFalseTrueTrueFalse5.13 A common stock pays a current dividend of $2. The dividend is expected to grow at an 8-percent annual rate for the next three years; then it will grow at 4 percent in perpetuity.The appropriate discount rate is 12 percent. What is the price of this stock?Solutions Price = $2 (1.08) / 1.12 + $2 (1.082) / 1.122 + $2 (1.083) / 1.123+ {$2 (1.083) (1.04) / (0.12 - 0.04)} / 1.123= $28.895.14 Use the following February 12, 1998, WSJ quotation for Merck & Co. to answer the next question. 52 Weeks Yld Vol NetHi Lo Stock Sym Div % PE 100s Hi Lo Close Chg120. 80.19 Merck MRK 1.80 ? 30 195111 115.9 114.5 115 _1.25Which of the following statements is false?a. The dividend yield was about 1.6%.b. The 52 weeks’ trading range was $39.81.c. The closing price per share on February 10, 1998, was $113.75.d. The closing price per share on February 11, 1998, was $115.e. The earnings per share were about $3.83.Solutions a. FalseTrueFalseFalseTrue5.15 Use the following stock quote.52 Weeks Yld Vol NetHi Lo Stock Sym Div % PE 100s Hi Lo Close Chg126.25 72.50 Citigroup CCI 1.30 1.32 16 20925 98.4 97.8 98.13 _.13The expected growth rate in Citigroup’s dividends is 7% a year. Suppose you use the discounted dividend model to price Citigroup’s shares. The constant growth dividend model would suggest that the required return on the Citigroup’s stock is what?98.125 = 1.30 ( 1.07) / r - 0.07r = 8.4175 %5.16 You own $100,000 worth of Smart Money stock. At the end of the first year you receive a dividend of $2 per share; at the end of year 2 you receive a $4 dividend. At the end of year 3 you sell the stock for $50 per share. Only ordinary (dividend) income is taxed at the rate of 28 percent. Taxes are paid at the time dividends are received. The required rate of return is 15 percent. How many shares of stock do you own? Solutions Price = $2 (0.72) / 1.15 + $4 (0.72) / 1.152 + $50 / 1.153= $36.31The number of shares you own = $100,000 / $36.31 = 2,754 shares5.17 Consider the stock of Davidson Company that will pay an annual dividend of $2 in the coming year. The dividend is expected to grow at a constant rate of 5 percent permanently.The market requires a 12-percent return on the company.a. What is the current price of a share of the stock?b. What will the stock price be 10 years from today?Solutionsa. P = $2 / (0.12 - 0.05) = $28.57b. P10 = D11 / (r - g)= $2 (1.0510) / (0.12 - 0.05) = $46.545.18 Easy Type, Inc., is one of a myriad of companies selling word processor programs. Their newest program will cost $5 million to develop. First-year net cash flows will be $2 million. As a result of competition, profits will fall by 2 percent each year thereafter.All cash inflows will occur at year-end. If the market discount rate is 14 percent, what is the value of this new program?SolutionsValue = -$5,000,000 + $2,000,000 / {0.14 - (-0.02)}= $7,500,0005.19 Whizzkids, Inc., is experiencing a period of rapid growth. Earnings and dividends per share are expected to grow at a rate of 18 percent during the next two years, 15 percent in the third year, and at a constant rate of 6 percent thereafter. Whizzkids’ last dividend, which has just been paid, was $1.15. If the required rate of return on the stock is 12 percent, what is the price of a share of the stock today? SolutionsPrice = $1.15 (1.18) / 1.12 + $1.15 (1.182) / 1.122 + $1.152 (1.182) / 1.123+ {$1.152 (1.182) (1.06) / (0.12 - 0.06)} / 1.123= $26.955.20 Allen, Inc., is expected to pay an equal amount of dividends at the end of the first two years. Thereafter, the dividend will grow at a constant rate of 4 percent indefinitely. The stock is currently traded at $30. What is the expected dividend per share for the next year if the required rate of return is 12 percent? Solutions$30 = D / 1.12 + D / 1.122 + {D (1 + 0.04) / (0.12 - 0.04)} / 1.122= 12.053571 DD = $2.495.21 Calamity Mining Company’s reserves of ore are being depleted, and its costs of recovering a declining quantity of ore are rising each year. As a result, the company’s earnings are declining at the rate of 10 percent per year. If the dividend per share that is about to be paid is $5 and the required rate of return is 14 percent, what is the value of the firm’s stock?SolutionsDividend one year from now = $5 (1 - 0.10) = $4.50Price = $5 + $4.50 / {0.14 - (-0.10)} = $23.75Since the current $5 dividend has not yet been paid, it is still included in the stock price.5.22 The Highest Potential, Inc., will pay a quarterly dividend per share of $1 at the end of each of the next 12 quarters. Subsequently, the dividend will grow at a quarterly rate of 0.5 percent indefinitely. The appropriate rate of return on the stock is 10 percent. What is the current stock price?Estimates of Parameters in the Dividend-Discount ModelSolutionsPrice = $112025.0A+ {$1 (1 + 0.005) / (0.025 - 0.005)} / 1.02512= $10.26 + $37.36= $47.625.23 The newspaper reported last week that Bradley Enterprises earned $20 million. The report also stated that the firm’s return on equity remains on its historical trend of 14 percent. Bradley retains 60 percent of its earnings. What is the firm’s growth rate of earnings? What will next year’s earnings be? SolutionsGrowth rate g = 0.6 ⨯ 0.14 = 0.084 = 8.4%Next year earnings = $20 million ⨯ 1.084 = $21.68 million5.24 Von Neumann Enterprises has just reported earnings of $10 million, and it plans to retain 75 percent of its earnings. The company has 1.25 million shares of common stock outstanding. The stock is selling at $30. The historical return on equity (ROE) of 12 percent is expected to continue in the future. What is the required rate of return on the stock?Growth Opportunitiesg = retention ratio ⨯ ROE = 0.75 ⨯ 0.12= 0.09 = 9%Dividend per share = $10 million ⨯ (1 - 0.75) / 1.25 million= $2The required rate of return = $2 (1.09) / $30 + 0.09= 0.1627 = 16.27%5.25 Rite Bite Enterprises sells toothpicks. Gross revenues last year were $3 million, and total costs were $1.5 million. Rite Bite has 1 million shares of common stock outstanding. Gross revenues and costs are expected to grow at 5 percent per year. Rite Bite pays no income taxes, and all earnings are paid out as dividends.a. If the appropriate discount rate is 15 percent and all cash flows are received at year’s end, what is the price per share of Rite Bite stock?b. The president of Rite Bite decided to begin a program to produce toothbrushes. The project requires an immediate outlay of $15 million. In one year, another outlay of $5 million will be needed. The year after that, net cash inflows will be $6 million. This profit level will be maintained in perpetuity. What effect will undertaking this project have on the price per share of the stock?Solutionsa. Price = ($3 - $1.5) ⨯ 1.05 / (0.15 - 0.05)= $15.75b. NPVGO = -$15,000,000 - $5,000,000 / 1.15 + ($6,000,000 / 0.15) / 1.15= $15,434,783The price increases by $15.43 per share.5.26 California Electronics, Inc., expects to earn $100 million per year in perpetuity if it does not undertake any new projects. The firm has an opportunity that requires an investment of $15 million today and $5 million in one year. The new investment will begin to generate additional annual earnings of $10 million two years from today in perpetuity. The firm has 20 million shares of common stock outstanding, and the required rate of return on the stock is 15 percent.a. What is the price of a share of the stock if the firm does not undertake the new project?b. What is the value of the growth opportunities resulting from the new project?c. What is the price of a share of the stock if the firm undertakes the new project?Solutionsa. Price = EPS / r = {$100 million / 20 million} / 0.15= $33.33b. NPV = -$15 million - $5 million / 1.15 + ($10 million / 0.15) / 1.15= $38,623,188c. Price = $33.33 + $38,623,188 / 20,000,000= $35.265.27 Suppose Smithfield Foods, Inc., has just paid a dividend of $1.40 per share. Sales and profits for Smithfield Foods are expected to grow at a rate of 5% per year. Its dividend is expected to grow by the same rate. If the required return is 10%, what is the value of a share of Smithfield Foods?SolutionsPrice = 1.40 (1.05) / 0.10 - 0.05Price = $29.405.28 In order to buy back its own shares, Pennzoil Co. has decided to suspend its dividends for the next two years. It will resume its annual cash dividend of $2.00 a share 3 years from now. This level of dividends will be maintained for one more year. Thereafter, Pennzoil is expected to increase its cash dividend payments by an annual growth rate of 6% per year forever. The required rate of return on Pennzoil’s stock is 16%. According to the discounted dividend model, what should Pennzoil’s current share price be? SolutionsPrice = 2 / (1.16) 3 + 2 / (1.16)4 + 2.12 / 0.16 - 0.06= 1.28 + 1.10 + 21.20= $23.585.29 Four years ago, Ultramar Diamond Inc. paid a dividend of $0.80 per share. This year Ultramar paid a dividend of $1.66 per share. It is expected that the company will pay dividends growing at the same rate for the next 5 years. Thereafter, the growth rate will level at 8% per year. The required return on this stock is 18%. According to the discounted dividend model, what would Ultramar’s cash dividend be in 7 years? a. $2.86c. $3.68d. $4.30e. $4.82Solutionsa. g = 0.4 ⨯ 0.15 = 0.06 = 6%b. Dividend per share = $1.5 million ⨯ 0.6 / 300,000= $3Price = $3 (1.06) / (0.13 - 0.06)= $45.43c. Assuming the additional earnings generated are all paid out as cash dividends.NPV = -$1.2 million + $0.3 million {1 / (0.13 - 0.10)} {1 - (1.10 / 1.13)10}= $1,159,136.93d. Price = $45.43 + $1,159,136.93 / 300,000= $49.295.30 The Webster Co. has just paid a dividend of $5.25 per share. The company will increase its dividendby 15 percent next year and will then reduce its dividend growth by 3 percent each year until it reaches the industry average of 5 percent growth, after which the company will keep a constant growth, forever. The required rate of return for the Webster Co. is 14 percent. What will a share of stock sell for?SolutionsPrice = 3 / 1.15 + 4.5 / ( 1.15)2 + 4.725 / 0.15- 0.05= 2.61 + 3.40 + 47.52= $53.535.31 Consider Pacific Energy Company and U.S. Bluechips, Inc., both of which reported recent earnings of $800,000 and have 500,000 shares of common stock outstanding. Assume both firms have the same required rate of return of 15 percent a year.a. Pacific Energy Company has a new project that will generate cash flows of $100,000 each year in perpetuity. Calculate the P/E ratio of the company.Chapter 5 How to Value Bonds and Stocks 129b. U.S. Bluechips has a new project that will increase earnings by $200,000 in the coming year. The increased earnings will grow at 10 percent a year in perpetuity. Calculate the P/E ratio of the firm. Solutionsa. P/E of Pacific Energy Company:EPS = ($800,000 / 500,000) = $1.6NPVGO = {$100,000 / 500,000} / 0.15 = $1.33P/E = 1 / 0.15 + 1.33 / 1.6 = 7.50b. P/E of U. S. Bluechips, Inc.:NPVGO = {$200,000 / 500,000} / (0.15 - 0.10) = $8P/E = 1 / 0.15 + 8 / 1.6 = 11.675.32 (Challenge Question) Lewin Skis Inc. (today) expects to earn $4.00 per share for each of the future operating periods (beginning at time 1) if the firm makes no new investments (and returns the earnings as dividends to the shareholders). However, Clint Williams, President and CEO, has discovered an opportunity to retain (and invest) 25% of the earnings beginning three years from today (starting at time 3). This opportunity to invest will continue (for each period) indefinitely. He expects to earn 40% (per year) on this new equity investment (ROE of 40), the return beginning one year after each investment is made. The firm’s equity discount rate is 14% throughout.a. What is the price per share (now at time 0) of Lewin Skis Inc. stock without making the new investment?b. If the new investment is expected to be made, per the preceding information, what would the value of the stock (per share) be now (at time 0)?c. What is the expected capital gain yield for the second period, assuming the proposed investment is made? What is the expected capital gain yield for the second period if the proposed investment is not made?d. What is the expected dividend yield for the second period if the new investment is made? What is the expected dividend yield for the second period if the new investment is not made?Solutionsa. Price = $4 / 0.14 = $28.57Price = 28.57 + (-1 + 0.40 / 0.14) / 0.04(1.14) 3= 28.57 + 31.33The expected return of 14% less the dividend yield of 5% providesa capital gain yield of 9%. If there is no investment the yield is 14%.$3 / $59.90 = .05 and $4 / $28.57 = .14 without the investment.Appendix to Chapter 5 Questions And ProblemsA.1 The appropriate discount rate for cash flows received one year from today is 10 percent. The appropriate annual discount rate for cash flows received two years from today is 11 percent.a. What is the price of a two-year bond that pays an annual coupon of 6 percent?b. What is the yield to maturity of this bond?Solutionsa. P = $60 / 1.10 + $1,060 / (1.11)2= $54.55 + $ 860.32= $914.87$914.87 = $60 / ( 1 + y ) + $1,060 / ( 1 + y )2y = YTM = 10.97%A.2 The one-year spot rate equals 10 percent and the two-year spot rate equals 8 percent. What should a 5-percent coupon two-year bond cost?SolutionsP = $50 / 1.10 + $1,050 / (1.08)2= $45.45 + $900.21= $945.66A.3 If the one-year spot rate is 9 percent and the two-year spot rate is 10 percent, what is the forward rate? Solutions ( 1 + r1 )( 1 + ƒ2 ) = ( 1 + r2 )2( 1.09 ) ( 1 + ƒ2 ) = ( 1.10 )2ƒ2 = .1101A.4 Assume the following spot rates:Maturity Spot Rates (%)1 52 73 10What are the forward rates over each of the three years?Solutions( 1 + r2 )2 = ( 1+ r1 ) ( 1 + ƒ2 )( 1.07 )2 = ( 1.05 )( 1 + ƒ2 )ƒ2 = .0904, one-year forward rate over the 2nd year is 9.04%.( 1 + r3 )3 = ( 1 + r2 )2 ( 1 + ƒ3 )( 1.10 )3 = ( 1.07 )2 ( 1 + ƒ3 )ƒ3 = .1625, one-year forward rate over the 3rd year is 16.25%.。

Setting up a business:建立一个公司：独资企业；合资企业；公司；授权经营1.Sole Proprietorship:（A sole proprietorship is a business owned and controlled byone person.）A:Simple to Establish;Free in Decision-Making;Easy to Keep Opreational and Financial Secrecy;Less Tax burden;Exclusive Use of Profits.D:Unlimited Liability;Limited Access to Capital;Limited Managerial Expertise. 2.Partnership(Those who believe that”two heads are better than one”often chooseworking in a partnership rather than running their business alone)A:Improved Access to Capital and Credit;Greater Possibility for Good Management;Definite LegalFramework;Better Prospects for Groweh.D:Unlimited Liability;Internal Conflicts;Problem of Continuity.3.Corporation:A:Limited Liability;Easy to Expand;Separated Ownership andManagement;Continuous life;D:Double Taxation;High Organizing Costs;Lack of Secrecy.4.Franchising:A:Instant customer recognition;still enjoy some independence as asole proprietor.D:Do not guarantee success;sacrifice some independence.Marketing: an overview1.The Functions of Marketing 营销的功能：Marketing Research ;Acquiring;Selling;Transportation;Storge;Finance and Credit;Risk Taking;Standardization and Grading.2;The Marketing Mix 营销组合：Product Price Promotion PlaceMarket Segmentation 市场细分：Geographic Variables;Demographic Variables; Psychographic Variables;Produce-use Variables3.Types of products产品分类：Consumer Products ; Industrial Products4.Development of New Products:Generating New Produce Ideas;Screening; Development;Testing;Commercialization5.Product Life Cycle产品的生命周期：Introduction,Growth;Maturity;Decline. Pricing Objectives 定价的目标:Prodit-Oriented Objectives;Sales-Oriented Objectives;Follow-the-Leader Objectives.Princing Strategies定价策略:Skimming Strategy;Penetration Strategy;Loss Leader Pricing Stratrgy;Odd Pricing Strategy;Price Lining Strategy.Wholesalers 批发商1.Retailers零售商:Department Stoeres;Discount Srores;Supermarkete;Hypermarkets; General Stoers;Specialty Stores;Door-to-Door Sellers;Mail-Order Houses;Vending Machines;Virtual Stores.2.The Cost and Value of Middlemen 中间商的价值Time Utility ; Place Utility ; Ownersship Utility ; Information Utility ; Form Utility 3.Modes of Transportation 运输方式：Rail;Truck;Pipeline;Water;Air.Promotion1.Advertising:Newspaper,Television,Radio,Direct,Mail,Magazines,Internet,Outdoor, Others2.Personal Selling:Prospect,Quqlify,Approach,Make Presentation,Handle Objections, Close,Follow-up.Money and Banking1.Money:portability,divisibility,stability,durability,acceptability.Printed paper纸币，metal coins硬币2.what does money do?medium of exchange，a store of value,a unit of account3.Types of Money钱的分类:M-1:currency,demand deposits,and other checkabledeposits现金，活期存款，支票存款;Time deposits定期存款。

FinanceChapter1 IntroductionWhy Study Money, Banking, and Financial Markets An Overview of the Financial SystemWhat Is Money?Lecture 1Why Study Money, Banking, and Financial Markets?•Course Overview•Why Study Financial Markets?•Why Study Financial Institutions and Banking?•Why Study Money and Monetary Policy?Learning Objectives：How to construct a preliminary financial knowledge system Types of financial marketsTypes of financial institutionsHow the central bank implement monetary policyWhat is monetary theoryPart 1Why Study Financial Markets?1.1 Financial MarketsFinancial Markets (P2)：Markets in which funds are transferred from people who have an excess of available funds to people who have a shortage.金融市场：资金从那些可用资金过剩的人转移到资金短缺的人的市场。

Why study financial markets?•Channel funds from savers to borrowers, thereby promoting economic efficiency•Affect personal wealth and behavior of business firms1.2 The Bond Market and Interest RatesBond (P3) is a debt security that promises to make periodic payments for a specified period of time.债券：是一种债务性证券，承诺在一个特定时间段内定期支付。

货币银行学第六章纸质练习姓名：班级：学号：请注意，选择题的答案请写在下面的方框中，否则判为0分。

Multiple Choice1)The risk structure of interest rates is(a)the structure of how interest rates move over time.(b)the relationship among interest rates of different bonds with the same maturity.(c)the relationship among the term to maturity of different bonds.(d)the relationship among interest rates on bonds with different maturities.2)Default risk is the risk that(a)a bond issuer is unable to make interest payments.(b)a bond issuer is unable to make a profit.(c)a bond issuer is unable to pay the face value at maturity.(d)all of the above.(e)both (a) and (c) above.3)The spread between the interest rates on bonds with default risk and default-free bonds iscalled the(a)risk premium.(b)junk margin.(c)bond margin.(d)default premium.4)When the default risk in corporate bonds decreases, other things equal, the demand curve forcorporate bonds shifts to the _____ and the demand curve for Treasury bonds shifts to the _____.(a)right; right(b)right; left(c)left; left(d)left; right5)The risk premium on corporate bonds becomes smaller if(a)the riskiness of corporate bonds increases.(b)the liquidity of corporate bonds increases.(c)the liquidity of corporate bonds decreases.(d)the riskiness of corporate bonds decreases.(e)both (b) and (d) occur.6) A decrease in the liquidity of corporate bonds will _____ the price of corporate bondsand _____ the yield of Treasury bonds.(a)increase; increase(b)reduce; reduce(c)increase; reduce(d)reduce; increase(e)reduce; not affect7)An increase in marginal tax rates would likely have the effect of _____ the demandfor municipal bonds, and _____ the demand for U.S. government bonds.(a)increasing; increasing(b)increasing; decreasing(c)decreasing; increasing(d)decreasing; decreasing8)Three factors explain the risk structure of interest rates:(a)liquidity, default risk, and the income tax treatment of a security.(b)maturity, default risk, and the income tax treatment of a security.(c)maturity, liquidity, and the income tax treatment of a security.(d)maturity, default risk, and the liquidity of a security.(e)maturity, default risk, and inflation.9)The term structure of interest rates is(a)the relationship among interest rates of different bonds with the same maturity.(b)the structure of how interest rates move over time.(c)the relationship among the term to maturity of different bonds.(d)the relationship among interest rates on bonds with different maturities.10)When yield curves are steeply upward sloping,(a)long-term interest rates are above short-term interest rates.(b)short-term interest rates are above long-term interest rates.(c)short-term interest rates are about the same as long-term interest rates.(d)medium-term interest rates are above both short-term and long-term interest rates.(e)medium-term interest rates are below both short-term and long-term interest rates.11)According to the expectations theory of the term structure(a)the interest rate on long-term bonds will equal an average of short-term interestrates that people expect to occur over the life of the long-term bonds.(b)buyers of bonds do not prefer bonds of one maturity over another.(c)yield curves should be as equally likely to slope downward as slope upward.(d)all of the above.(e)only (a) and (b) of the above.12)If the expected path of one-year interest rates over the next five years is 4 percent, 5percent, 7 percent, 8 percent, and 6 percent, then the expectations theory predicts that today’s interest rate on the five-year bond is(a)4 percent.(b)5 percent.(c)6 percent.(d)7 percent.(e)8 percent.13)According to the segmented markets theory of the term structure(a)the interest rate for each maturity bond is determined by supply and demand forthat maturity bond.(b)investors’ strong preferences for short-term relative to long-term bondsexplains why yield curves typically slope upward.(c)bonds of one maturity are close substitutes for bonds of other maturities, therefore,interest rates on bonds of different maturities move together over time.(d)all of the above.(e)only (a) and (b) of the above.14)The liquidity premium theory of the term structure(a)indicates that today’s long-term interest rate equals the average of short-terminterest rates that people expect to occur over the life of the long-term bond.(b)assumes that bonds of different maturities are perfect substitutes.(c)suggests that markets for bonds of different maturities are completely separatebecause people have preferred habitats.(d)does none of the above.15)If 1-year interest rates for the next four years are expected to be 4, 2, 3, and 3 percent, andthe 4-year term premium is 1 percent, than the 4-year bond rate will be(a)1 percent.(b)2 percent.(c)3 percent.(d)4 percent.(e)5 percent.16)According to the liquidity premium theory of the term structure(a)when short-term interest rates are expected to rise in the future, the yield curvewill be steeply upward sloping.(b)when short-term interest rates are expected to remain unchanged in the future, theyield curve is likely to be slightly upward sloping.(c)when short-term interest rates are expected to decline moderately in the future, theyield curve is likely to be flat.(d)all of the above.(e)only (a) and (b) of the above.17)Which of the following theories of the term structure is (are) able to explain the factthat interest rates on bonds of different maturities tend to move together over time?(a)The expectations theory(b)The segmented markets theory(c)The liquidity premium theory(d)Both (a) and (b) of the above(e)Both (a) and (c) of the above18)The preferred habitat theory of the term structure is closely related to the(a)expectations theory of the term structure.(b)segmented markets theory of the term structure.(c)liquidity premium theory of the term structure.(d)the inverted yield curve theory of the term structure.(e)risk premium theory of the term structure19)A particularly attractive feature of the _____ is that it tells you what the market ispredicting about future short-term interest rates by just looking at the slope of the yield curve.(a)segmented markets theory(b)expectations theory(c)liquidity premium theory(d)both (a) and (b) of the aboveFigure 6-120)The steeply upward sloping yield curve in Figure 6-1 indicates that(a)short-term interest rates are expected to rise in the future.(b)short-term interest rates are expected to fall moderately in the future.(c)short-term interest rates are expected to fall sharply in the future.(d)short-term interest rates are expected to remain unchanged in the future.Essay Questions21)Demonstrate graphically and explain how a reduction in default risk affects the demandor supply of corporate and Treasury bonds.22)What is the shape of the yield curve when short rates are expected to fall in themedium term, and then increase? Demonstrate this graphically.。

CHAPTER 5Interest Rate and Bond Valuation Multiple Choice QuestionsI. DEFINITIONSCOUPONa 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.Difficulty level: EasyFACE VALUEb 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.Difficulty level: EasyMATURITYc 3. The specified date on which the principal amount of a bond is repaid is called the bond’s:a. coupon.b. face value.c. maturity.d. yield to maturity.e. coupon rate.Difficulty level: EasyYIELD TO MATURITYd 4. 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.Difficulty level: EasyCOUPON RATEe 5. The annual coupon of a bond divided by its face value is called t he bond’s:a. coupon.b. face value.c. maturity.d. yield to maturity.e. coupon rate.Difficulty level: EasyPAR BONDSa 6. A bond with a face value of $1,000 that sells for $1,000 in the market is called a _____ bond.a. par valueb. discountc. premiumd. zero coupone. floating rateDifficulty level: EasyDISCOUNT BONDSb 7. A bond with a face value of $1,000 that sells for less than $1,000 in the market is called a_____ bond.a. parb. discountc. premiumd. zero coupone. floating rateDifficulty level: EasyPREMIUM BONDSc 8. A bond with a face value of $1,000 that sells for more than $1,000 in the market is called a_____ bond.a. parb. discountc. premiumd. zero coupone. floating rateDifficulty level: EasyUNFUNDED DEBTd 9. The unfunded debt of a firm is generally understood to mean the firm’s:a. preferred stock.b. debts that mature in more than one year.c. debentures.d. debts that mature in less than one year.e. secured debt.Difficulty level: EasyINDENTUREa 10. The written, legally binding agreement between the corporate borrower and the lender detailingthe terms of a bond issue is called the:a. indenture.b. covenant.c. terms of trade.d. form 5140.e. call provision.Difficulty level: EasyREGISTERED BONDSb 11. The form of bond issue in which the registrar of the company records ownership of each bond,with relevant payments made directly to the owner of record, is called the _____ form.a. new-issueb. registeredc. bearerd. debenturee. collateralDifficulty level: MediumBEARER BONDSc 12. The form of bond issue in which the bond is issued without record of the owner’s name, withrelevant payments made directly to whoever physically holds the bond, is called the _____form.a. new-issueb. registeredc. bearerd. debenturee. collateralDifficulty level: EasyDEBENTURESe 13. The unsecured debts of a firm with maturities greater than 10 years are most literally called:a. unfunded liabilities.b. sinking funds.c. bonds.d. notes.e. debentures.Difficulty level: EasyNOTESd 14. The unsecured debts of a firm with maturities less than 10 years are most literally called:a. unfunded liabilities.b. sinking funds.c. bonds.d. notes.e. debentures.Difficulty level: EasySINKING FUNDa 15. An account managed by the bond trustee for early bond redemption payments is called a:a. sinking fund.b. collateral payment account.c. deed in trust account.d. call provision.e. par value fund.Difficulty level: EasyCALL PROVISIONb 16. An agreement giving the bond issuer the option to repurchase the bond at a specified price priorto maturity is the _____ provision.a. sinking fundb. callc. seniorityd. collaterale. trusteeDifficulty level: EasyCALL PREMIUMc 17. The amount by which the call price exceeds the bond’s par value is the:a. coupon rate.b. redemption value.c. call premium.d. original-issue discount.e. call rate.Difficulty level: EasySENIORITYe 18. In the event of default, _____ debt holders must give preference to more _____ debt holders inthe priority of repayment distributions.a. short-term; long-termb. long-term; short-termc. senior; juniord. senior; subordinatede. subordinated; seniorDifficulty level: MediumDEFERRED CALL PROVISIONd 19. A deferred call provision refers to the:a. open market price of a callable bond on a certain date.b. seniority of callable bonds to noncallable bonds in the event of corporate default.c. prohibition of a company from ever redeeming callable bonds.d. prohibition of a company from redeeming callable bonds prior to a certain date.e. amount by which the call price for a callable bond exceeds its par value.Difficulty level: EasyTREASURY BONDSa 20. The long-term bonds issued by the United States government are called _____ bonds.a. Treasuryb. municipalc. floating-rated. junke. zero couponDifficulty level: EasyMUNICIPAL BONDSb 21. The long-term bonds issued by state and local governments in the United States are called_____ bonds.a. Treasuryb. municipalc. floating-rated. junke. zero couponDifficulty level: EasyZERO COUPON BONDSe 22. A bond that makes no coupon payments and is initially priced at a deep discount is called a_____ bond.a. Treasuryb. municipalc. floating-rated. junke. zero couponDifficulty level: EasyFLOATING-RATE BONDSc 23. A bond that pays a variable amount of coupon interest over time is called a _____ bond.a. Treasuryb. municipalc. floating-rated. junke. zero couponDifficulty level: EasyPROTECTIVE COVENANTe 24. Parts of the indenture limiting certain actions that might be taken during the term of the loan toprotect the interests of the lender are called:a. trustee relationships.b. sinking funds provisions.c. bond ratings.d. deferred call provisions.e. protective covenants.Difficulty level: EasyCONVERTIBLE BONDSd 25. A bond which, at the election of the holder, can be swapped for a fixed number of shares ofcommon stock at any time prio r to the bond’s maturity is called a _____ bond.a. zero couponb. callablec. putabled. convertiblee. warrantDifficulty level: MediumPRICE TRANSPARENCYa 26. A financial market is _____ if it is possible to easily observe its prices and trading volume.a. transparentb. openc. orderedd. in equilibriume. chaoticDifficulty level: MediumCURRENT YIELDb 27. 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.Difficulty level: EasyTIP BONDSb 28. A TIP bond’s interest rate is linked to:a. income.b. inflation.c. liquidity.d. maturity of the 30 year government bond.e. corporate tax rates.Difficulty level: MediumPUT BONDa 29. A bond that allows the holder to force the issuer to buy back bonds at a stated rate is called a:a. put bond.b. call bond.c. guaranteed bond.d. TIP bond.e. none of the above.Difficulty level: MediumNOMINAL RATESe 30. Interest rates or rates of return on investments that have not been adjusted for the effects ofinflation are called _____ rates.a. couponb. strippedc. effectived. reale. nominalDifficulty level: MediumREAL RATESa 31. Interest rates or rates of return on investments that have been adjusted for the effects ofinflation are called _____ rates.a. realb. nominalc. effectived. strippede. couponDifficulty level: MediumFISHER EFFECTb 32. The relationship between nominal rates, real rates, and inflation is known as the:a. Miller and Modigliani theorem.b. Fisher effect.c. Gordon growth model.d. term structure of interest rates.e. interest rate risk premium.Difficulty level: MediumTERM STRUCTURE OF INTEREST RATESc 33. The relationship between nominal interest rates on default-free, pure discount securities and thetime to maturity is called the:a. liquidity effect.b. Fisher effect.c. term structure of interest rates.d. inflation premium.e. interest rate risk premium.Difficulty level: MediumINFLATION PREMIUMd 34. The _____ premium is that portion of a nominal interest rate or bond yield that representscompensation for expected future overall price appreciation.a. default riskb. taxabilityc. liquidityd. inflatione. interest rate riskDifficulty level: EasyDEFAULT RISK PREMIUMa 35. The _____ premium is that portion of a nominal interest rate or bond yield that representscompensation for the possibility of nonpayment by the bond issuer.a. default riskb. taxabilityc. liquidityd. inflatione. interest rate riskDifficulty level: EasyII. CONCEPTSBOND FEATURESd 36. A bond with a 7 % coupon that pays interest semi-annually and is priced at par will have amarket price of _____ and interest payments in the amount of _____ each.a. $1,007; $70b. $1,070; $35c. $1,070; $70d. $1,000; $35e. $1,000; $70Difficulty level: MediumBOND PRICES AND YIELDSe 37. All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon rate.a. a premium; higher thanb. a premium; equal toc. at par; higher thand. at par; less thane. a discount; higher thanDifficulty level: MediumBOND PRICES AND YIELDSd 38. All else constant, a coupon bond that is selling at a premium, must have:a. a coupon rate that is equal to the yield to maturity.b. a market price that is less than par value.c. semi-annual interest payments.d. a yield to maturity that is less than the coupon rate.e. a coupon rate that is less than the yield to maturity.Difficulty level: EasyBOND PRICESc 39. The market price of a bond is equal to the present value of the:a. face value minus the present value of the annuity payments.b. annuity payments plus the future value of the face amount.c. face value plus the present value of the annuity payments.d. face value plus the future value of the annuity payments.e. annuity payments minus the face value of the bond.Difficulty level: EasyBOND PRICESa 40. As the yield to maturity increases, the:a. amount the investor is willing to pay to buy a bond decreases.b. longer the time to maturity.c. lower the coupon rate desired by that investor.d. higher the price the investor offers to buy a bond.e. lower the rate of return desired by the investor.Difficulty level: EasySEMIANNNUAL BONDSe 41. American Fortunes is preparing a bond offering with an 8 % coupon rate. Thebonds will be repaid in 10 years. The company plans to issue the bonds at par value and payinterest semiannually. Given this, which of the following statements are correct?I. The initial selling price of each bond will be $1,000.II. A fter the bonds have been outstanding for 1 year, you should use 9 as the number of compounding periods when calculating the market value of the bond.III. Each interest payment per bond will be $40.IV. The yield to maturity when the bonds are first issued is 8 %.a. I and II onlyb. II and III onlyc. II, III, and IV onlyd. I, II, and III onlye. I, III, and IV onlyDifficulty level: MediumSEMIANNUAL BONDS AND EFFECTIVE ANNUAL RATEd 42. The newly issued bonds of the Wynslow Corp. offer a 6 % coupon with semiannual interestpayments. The bonds are currently priced at par value. The effective annual rate provided bythese bonds must be:a. equal to 3 %.b. greater than 3 % but less than 4 %.c. equal to 6 %.d. greater than 6 % but less than 7 %.e. equal to 12 %.Difficulty level: MediumINTEREST RATE RISKd 43. Which one of the following statements is correct concerning interest rate risk as it relates tobonds, all else equal?a. The shorter the time to maturity, the greater the interest rate risk.b. The higher the coupon rate, the greater the interest rate risk.c. For a bond selling at par value, there is no interest rate risk.d. The greater the number of semiannual interest payments, the greater the interest rate risk.e. The lower the amount of each interest payment, the lower the interest rate risk.Difficulty level: MediumINTEREST RATE RISKe 44. Which one of the following bonds has the greatest interest rate risk?a. 5-year; 9 % couponb. 5-year; 7 % couponc. 7-year; 7 % coupond. 9-year; 9 % coupone. 9-year; 7 % couponDifficulty level: MediumINTEREST RATE RISKb 45. Interest rate risk _____ as the time to maturity increases.a. increases at an increasing rateb. increases at a decreasing ratec. increases at a constant rated. decreases at an increasing ratee. decreases at a decreasing rateDifficulty level: MediumINTEREST RATE RISKc 46. You own a bond that has a 7 % coupon and matures in 12 years. You purchasedthis bond at par value when it was originally issued. If the current market rate for thistype and quality of bond is 7.5 %, then you would expect:a. the bond issuer to increase the amount of each interest payment on these bonds.b. the yield to maturity to remain constant due to the fixed coupon rate.c. to realize a capital loss if you sold the bond at the market price today.d. today’s market price to exceed the face value of the bond.e. the current yield today to be less than 7 %.Difficulty level: MediumINTEREST RATE RISKb 47. A brand with semi-annual interest payments, all else equal, would be priced _________ thanone with annual interest payments.a. higherb. lowerc. the samed. it is impossible to telle. either higher or the sameDifficulty level: MediumYIELD TO MATURITY AND CURRENT YIELDe 48. All else constant, as the market price of a bond increases the current yield _____ andthe yield to maturity _____a. increases; increases.b. increases; decreases.c. remains constant; increases.d. decreases; increases.e. decreases; decreases.Difficulty level: MediumBOND FEATURESd 49. Which of the following statements concerning bond features is (are) correct?I. Bondholders generally have voting power in a corporation.II. Bond interest is tax-deductible as a business expense.III. The repayment of the bond principle is tax-deductible.IV. Failure to pay either the interest payments or the bond principle as agreed can cause a firm to go into bankruptcy.a. II onlyb. I and II onlyc. III and IV onlyd. II and IV onlye. II, III, and IV onlyDifficulty level: MediumBOND INDENTUREd 50. Which of the following items are generally included in a bond indenture?I. call provisionsII. security descriptionIII. current yieldIV. protective covenantsa. I and II onlyb. II and IV onlyc. II, III, and IV onlyd. I, II, and IV onlye. I, II, III, and IVDifficulty level: MediumBOND CLASSIFICATIONSe 51. Which one of the following statements is correct concerning bond classifications?a. A debenture is a long-term bond secured by the fixed assets of a firm.b. A mortgage security is a bond issued solely by a home builder.c. A note is a bond which has an original maturity date longer than 10 years.d. A subordinated bond receives preferential treatment over all other bonds in abankruptcy.e. A callable bond can be repurchased by the issuer prior to the initial maturity date.Difficulty level: MediumCALLABLE BONDSb 52. Callable bonds generally:a. allow the bondholder to decide when the bond is to be called.b. are associated with sinking funds.c. permit the issuer to repurchase the bonds at a discount.d. are called within the first couple of years after issuance.e. are required to have a deferred call provision if they have a “make-whole” callprovision.Difficulty level: MediumPROTECTIVE COVENANTSc 53. Which of the following is a (are) positive covenant(s) that might be found in a bondindenture?I. The company shall maintain a current ratio of 1.5 or better.II. The company must limit the amount of dividends it pays according to the stated formula.III. The company cannot lease any major assets without approval by the lender.IV. The company must maintain the loan collateral in good working order.a. I onlyb. I and II onlyc. I and IV onlyd. II and IV onlye. I, II, and IV onlyDifficulty level: ChallengePROTECTIVE COVENANTSe 54. Protective covenants:a. are primarily designed to protect the issuing corporation from unreasonable demandsof bondholders.b. are consistent for all bonds issued by a corporation within the United States.c. are limited to stating actions which a firm must take.d. only apply to bonds that have a deferred call provision.e. are primarily designed to protect bondholders from future actions of the bond issuer.Difficulty level: MediumBOND RATINGSb 55. Which one of the following statements concerning bond ratings is correct?a. Standard and Poor’s and Value Line are the primary bond rating agencies.b. Bond ratings are solely an assessment of the creditworthiness of the bond issuer.c. Investment grade bonds include only those bonds receiving one of the highest threebond ratings.d. Bond ratings evaluate the expected price volatility of a bond issue.e. All bonds receive the same rating classification from all rating agencies.Difficulty level: MediumBOND RATINGSd 56. A “fallen angel” is a bond that:a. lowered its annual interest payment.b. has moved from being a long-term obligation to being a short-term obligation.c. has moved from having a yield to maturity in excess of the coupon rate to having ayield to maturity that is less than the coupon rate.d. has moved from being an investment-grade bond to being a junk bond.e. is rated as Ba by one rating agency and rated as BB by another rating agency.Difficulty level: MediumTREASURY BONDSa 57.Bonds issued by the U.S. government:I. are considered to be free of default risk.II. are considered to be free of interest rate risk.III. provide totally tax-free income.IV. pay interest that is exempt from federal income taxes.a. I onlyb. I and III onlyc. I and IV onlyd. II and III onlye. II and IV onlyDifficulty level: MediumTREASURY BONDSd 58. Treasury bonds are:a. those bonds issued by any governmental agency in the U.S.b. issued only on the first day of each fiscal year by the U.S. Department of Treasury.c. preferred by high-income individuals because they offer the best tax benefits.d. generally issued as coupon bonds.e. totally risk-free.Difficulty level: MediumMUNICIPAL BONDSa 59. Municipal bonds:a. offer income tax advantages to individuals.b. generally pay a higher rate of return than corporate bonds.c. are those bonds issued only by local municipalities, such as a city or a borough.d. are rarely callable.e. pay interest that is always exempt from both federal and state income taxes.Difficulty level: EasyTAXABLE VERSUS MUNICIPAL BONDSd 60. The break-even tax rate between a taxable corporate bond yielding 7 % and acomparable nontaxable municipal bond yielding 5 % can be expressed as:a. .07 ÷ (1 - t*) = .05.b. .05 ÷ (1 - t*) = .07.c. .07 + (1 - t*) = .05.d. .07 ⨯ (1 - t*) = .05.e. .05 ⨯ (1 - t*) = .07.Difficulty level: MediumZERO COUPON BONDSe 61. A zero coupon bond:a. is sold at a large premium.b. has a price equal to the future value of the face amount given a specified rate ofreturn.c. can only be issued by the U.S. Treasury.d. has less interest rate risk than a comparable coupon bond.e. has implicit interest which is calculated by amortizing the loan.Difficulty level: MediumZERO COUPON BONDSb 62. The total interest paid on a zero-coupon bond is equal to:a. zero.b. the face value minus the issue price.c. the face value minus the market price on the maturity date.d. $1,000 minus the face value.e. $1,000 minus the par value.Difficulty level: MediumFLOATING-RATE BONDSd 63. The collar of a floating-rate bond refers to the minimum and maximum:a. call periods.b. maturity dates.c. market prices.d. coupon rates.e. yields to maturity.Difficulty level: MediumFLOATING-RATE BONDSd 64. Which of the following are common characteristics of floating-rate bonds?I. adjustable coupon ratesII. adjustable maturity datesIII. put provisionIV. coupon capa. I and II onlyb. II and III onlyc. I, II, and IV onlyd. I, III, and IV onlye. I, II, III, and IVDifficulty level: MediumFLOATING RATE BONDSc 65. A corporation is more prone to issue floating-rate bonds when they expect futureinterest rates to _____ over the life of the bond.a. remain constantb. increase briefly and then decline slightlyc. continually declined. decline briefly and then increase significantlye. continually increaseDifficulty level: EasyYIELD TO MATURITYe 66. The yield to maturity isa. the rate that equates the price of the bond with the discounted cash flows.b. the expected rate to be earned if held to maturity.c. the rate that is used to determine the market price of the bond.d. equal to the current yield for bonds priced at par.e. All of the above.Difficulty level: MediumTYPES OF BONDS AND INVESTOR PREFERENCESc 67. Investors generally tend to buy:a. Treasury bonds for their high yields.b. municipal bonds for their high yields.c. convertible bonds for their potential price appreciation.d. corporate bonds for their liquidity.e. Treasury bonds for their preferential tax treatment.Difficulty level: MediumTYPES OF BONDSb 68. A convertible bond is a bond that can be:a. exchanged for cash at prescribed points in time.b. exchanged for a stated number of shares of common stock of the bond issuer.c. modified from a fixed coupon bond into a floating coupon bond at prescribed points intime.d. submitted to the issuer for redemption at the discretion of the bondholder.e. submitted for payment any time the economy converts into a recessionary period.Difficulty level: EasyPUT PROVISIONc 69. A put provision in a bond indenture allows:a. a bond issuer to recall the bond after a specified period of time at a price that exceedsthe face amount.b. a bondholder to force the issuer to increase the coupon rate if inflation increases by more than aspecified amount.c. the bondholder to force the issuer to buy back the bond at a specified price prior tomaturity.d. the issuer to convert a coupon bond into a zero coupon bond at their discretion.e. t he issuer to suspend interest payments for any year in which the interest expense exceeds thenet income of the firm.Difficulty level: EasyFACE VALUEe 70. Face value isa. always higher than current price.b. always lower than current price.c. the same as the current price.d. the coupon amount.e. None of the above.Difficulty level: EasyBASIS POINTa 71. One basis point is equal to:a. .01 %.b. .10 %.c. 1.0 %.d. 10 %.e. 100 %.Difficulty level: EasyCORPORATE BOND QUOTEc 72. The “EST SPREAD” shown in The Wall Street Journal listing of corporate bondsrepresents the estimated:a. yield to maturity.b. difference between the current yield and the yield to maturity.c. difference between the bond’s yield and the yield of a particular Treasury issue.d. range of yields to maturity provided by the bond over its life to date.e. difference between the yield to call and the yield to maturity.Difficulty level: MediumCOUPON PAYMENTb 73. A bond is listed in The Wall Street Journal as a 12 3/4s of July 2009. This bonds paysa. $127.50 in July and January.b. $63.75 in July and January.c. $127.50 in July.d. $63.75 in July.e. None of the above.Difficulty level: EasyYIELD TO MATURITYc 74. If its yield to maturity is less than its coupon rate, a bond will sell at a _____, and increases inmarket interest rates will _____.a. discount; decrease this discount.b. discount; increase this discount.c. premium; decrease this premium.d. premium; increase this premium.e. None of the above.Difficulty level: MediumCLEAN VERSUS DIRTY PRICESc 75. Today, August 13, you want to buy a bond with a quoted price of 101.5. The bondpays interest on February 1 and August 1. The price you will pay to purchase thisbond is equal to the:a. clean price.b. muddy price.c. dirty price.d. par value price.e. bid price.Difficulty level: MediumREAL RATE OF RETURNd 76. The increase you realize in buying power as a result of owning a bond is referred to asthe _____ rate of return.a. inflatedb. realizedc. nominald. reale. risk-freeDifficulty level: EasyFISHER EFFECTe 77. The Fisher formula is expressed as:a. 1 + r = (1 + R) ÷ (1 + h).b. 1 + r = (1 + R) ⨯ (1 + h).c. 1 + h = (1 + r) ÷ (1 + R).d. 1 + R = (1 + r) ÷ (1 + h).e. 1 + R = (1 + r) ⨯ (1 + h).Difficulty level: MediumFISHER EFFECTd 78. The Fisher Effect primarily emphasizes the effects of _____ risk on an inv estor’s rateof return.a. defaultb. marketc. interest rated. inflatione. maturityDifficulty level: EasyTERM STRUCTURE OF INTEREST RATESa 79. The term structure of interest rates reflects the:a. pure time value of money for various lengths of time.b. actual risk premium being paid for corporate bonds of varying maturities.c. pure inflation adjustment applied to bonds of various maturities.d. interest rate risk premium applicable to bonds of varying maturities.e. nominal interest rates applicable to coupon bonds of varying maturities.Difficulty level: EasyBOND VALUESa 80. The market price of _____ maturity bonds fluctuates _____ compared with _____ maturitybonds as interest rates change.a. shorter; less; longerb. longer; less; shorterc. shorter; more; longerd. Both B and c.e. None of the above.Difficulty level: MediumCORPORATE VERSUS TREASURY BONDSc 81. Two of the primary differences between a corporate bond and a Treasury bond withidentical maturity dates are related to:a. interest rate risk and time value of money.b. time value of money and inflation.c. taxes and potential default.d. taxes and inflation.e. inflation and interest rate risk.Difficulty level: MediumIII. PROBLEMSBOND VALUATIONc 82. Consider a bond which pays 7% semiannually and has 8 years to maturity. The market requiresan interest rate of 8% on bonds of this risk. What is this bond's price?a. $ 942.50b. $ 911.52c. $ 941.74d. $1,064.81e. None of the above.Difficulty level: EasyZERO COUPON BONDa 83. The value of a 20 year zero-coupon bond when the market required rate of return of 9%(semiannual) is ____ .a. $171.93b. $178.43c. $318.38d. $414.64e. None of the above.Difficulty level: EasyYIELD TO MATURITYc 84. The bonds issued by Jensen & Son bear a 6 % coupon, payable semiannually. The bondmatures in 8 years and has a $1,000 face value. Currently, the bond sells at par. What is theyield to maturity?a. 5.87 %b. 5.97 %c. 6.00 %d. 6.09 %e. 6.17 %Difficulty level: MediumYIELD TO MATURITYa 85. A General Co. bond has an 8 % coupon and pays interest annually. The face value is $1,000and the current market price is $1,020.50. The bond matures in 20 years. What is the yield tomaturity?a. 7.79 %。