DBM5028BusinessFinance/Chapter6

TUTORIAL6
INTERESTRATESANDBONDVALUATION

1. Fill in the blank for the correct term:

Current yield Market value Coupon Loan value

Coupon rate Maturity Yield to maturity Face value

a. Stated interest payment made on a bond. __________

b. The principal amount of a bond that is repaid at the end of the term. _________
c. The date on which the principal amount of a bond is paid. _________
d. The annual coupon divided by the face value. __________
e. The rate required in the market on a bond. __________
f. A bonds annual coupon divided by its price. __________

2. Which of the following is NOT an example of a bond?

A. Put bond.
B. Street bond.
C. Convertible bond.
D. Income bond.

3. When interest payments are made to whoever holds the bond, the bond is said to
be in ____________ form.

A. street
B. bearer
C. registered
D. secure

4. The indenture is a legal document which _________________.

A. outlines the rights and responsibilities of corporate shareholders

B. describes the conditions necessary before bond interest can be paid
C. outlines the primary rights of the senior management of a firm regarding their
ownership of debt in the firm
D. outline the terms and provisions of a bond issue

5. Karisma Corporation is issuing a 17-year, unsecured bond. Based on this

information, you know that this debt can be described as a _____________.

A. debenture
B. note
C. bearer form bond
D. registered form bond

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 DBM5028BusinessFinance/Chapter6

6. Another term for deep discount bond is ______________.

A. floating rate bond

B. convertible bond
C. zero coupon bond
D. debenture

7. Which of the following best shows the timeline (unit of time is 6 months period)
for cash flows for a three-year bond with face value of RM1,000, a coupon rate
of 4 percent, and semiannual payments?

A. 0 1 2 3
+-------+-------+-------+
RM40 RM40 RM1,040

B. 0 1 2 3
+-------+-------+-------+
RM80 RM80 RM1,080

C. 0 1 2 3 4 5 6
+-------+-------+-------+-------+-------+-------+
RM40 RM40 RM40 RM40 RM40 RM1,040

D. 0 1 2 3 4 5 6
+-------+-------+-------+-------+-------+-------+
RM20 RM20 RM20 RM20 RM20 RM1,020

8. If the market required rate of return is less than the coupon rate, the bond will sell
at ___________.

A. book value
B. a premium
C. par
D. a discount

9. Which of the following statements is INCORRECT?

A. The bond certificate typically specifies that the coupons will be paid
periodically until the maturity date of the bond.
B. The only cash payments the investor will receive from a zero-coupon bond
are the interest payments that are paid up until the maturity date.
C. Usually, the face value of a bond is repaid at maturity.
D. The bond certificate indicates the amounts and dates of all payments to be
made.

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 DBM5028BusinessFinance/Chapter6

10. A corporate bond makes payments of RM5.50 every month for ten years with a
final payment of RM1,005.50. Which of the following best describe this bond?

A. A 10 year bond with a face value of RM1,000 and a coupon rate of 5.5
percent with monthly payments.
B. A 10 year bond with a face value of RM1,000 and a coupon rate of 6.6
percent with monthly payments.
C. A 10 year bond with a face value of RM1,005.50 and a coupon rate of 5.5
percent with monthly payments.
A 10 year bond with a face value of RM1,005.50 and a coupon rate of 6.6
percent with monthly payments.

11. The City Company has two bonds outstanding that are the same except for the
maturity date. Bond A matures in 5 years, while Bond B matures in 8 years. If the
required return changes by 10 percent, _______________.

A. Bond A will have greater change in price

B. Bond B will have greater change in price
C. the price change for the bonds will be equal
D. the price of the bonds will be constant

12. The Fisher Effect tells us that the relationship between nominal rates, real rates,
and inflation can be written as ____________.

A. 1 + R = (1 + r) x (1 + h)
B. R = 1 (r + h)
C. 1 + R = (1 / r) x (1/ h )
D. 1 R = (1 r ) x (1 h)

13. The "R" in the Fisher effect formula represents the _____________.

A. inflation rate
B. nominal return
C. current yield
D. coupon rate

14. Kitaku Company had just issued a10year5percentcouponbond.Thefacevalue

of the bond is RM1,000 and the bond makes annual coupon payments. The
requiredreturnonthebondis10percent.Answerthefollowingquestions:

a. What is the bond price?

b. Isitsellingatpar,discountorpremium?
c. Whatisthecurrentyield?

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 DBM5028BusinessFinance/Chapter6

15. Elmina Corporation bonds have a face value of RM1,000. The bonds carry a 7
percent coupon, was issued two years ago and have 18 years left until maturity.
Calculate the current price of these bonds if the yield to maturity is 6.2 percent.

16. Cikucak Company has RM1,000 face value bonds outstanding with a market
price of RM1,045. The bonds pay interest annually, mature in 12 years, and have
a yield to maturity of 5.5 percent. What is the current yield?

17. The yield to maturity of a RM1,000 bond with a 6 percent coupon rate,
semiannualcoupon,andthreeyearstomaturityis5percentAPR,compounded
semiannually.Whatisthecurrentmarketpriceofthebond?

18. SuriaCorporationwantstoissue12year,zerocouponbondsthatyield8percent
andhaveaparvalueofRM1,000.Answerthefollowingquestions.

a.WhatpriceshouldSuriaCorporationchargeforthesebonds?
b.Basedonthepriceyougetin(a),howmuchSuriaCorporationapproximately
willraiseifthecompanyabletosell12,000unitsofzerocouponbond?

19. A bond has a par value of RM1,000, a current yield of 7 percent, and semi-annual
interest payments. If the bond is selling at RM900. What is the amount of each
coupon payment?

20. A bond has a RM1,000 face value bond, a market price of RM920, and pays
annual interest payments of RM60 and matures in 11 years. What is the coupon
rate?

21. Lestary has bonds on the market with 12 years to maturity, an YTM of 8.2
percent,andcurrentpriceofRM900.Thebondsmakesemiannualpayments.
Whatisthecouponrate?

22. Suppose the real rate is 5.2 percent and the inflation rate is 3.6 percent. What will
be the nominal rate?

23. If your nominal rate of return is 7 percent and your real rate of return is 2.2
percent, what is the inflation rate?

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