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AB1201-FINANCIAL MANAGEMENT 2019/2020 Semester 2 Main Content

Lecture 4 - Bonds and Their Valuation Review Test Submission: Lecture 4: Online Assignment

Review Test Submission: Lecture 4: Online Assignment

User CoB (NBS) LOOMBA RISHABH

Course AB1201-FINANCIAL MANAGEMENT 2019/2020 Semester 2 Main
Test Lecture 4: Online Assignment
Started 2/18/20 7:52 PM
Submitted 2/18/20 7:56 PM
Due Date 2/24/20 11:59 PM
Status Completed
Attempt Score 100 out of 100 points  
Time Elapsed 3 minutes
Instructions Answer the questions below to check your understanding of the concepts
covered in Lecture 4.

Results All Answers, Submitted Answers, Correct Answers, Feedback, Incorrectly

Displayed Answered Questions

Question 1 10 out of 10 points

Three $1,000 face value, 10-year, noncallable, bonds have the same amount of
risk, hence their YTMs are equal.
Bond 8 has an 8% annual coupon, Bond 10 has a 10% annual coupon, and Bond
12 has a 12% annual coupon. Bond 10 sells at par.
Assuming that interest rates remain constant for the next 10 years, which of the
following statements is CORRECT?

Selected B.
Answer: Bond 8 sells at a discount (its price is less than par), and its price is
expected to increase over the next year.

Answers: A.
Over the next year, Bond 8’s price is expected to decrease, Bond 10’s
price is expected to stay the same, and Bond 12’s price is expected to
increase.

B.
Bond 8 sells at a discount (its price is less than par), and its price is
expected to increase over the next year.

C.
Bond 12 sells at a premium (its price is greater than par), and its price
is expected to increase over the next year.
 D.
Since the bonds have the same YTM, they should all have the same
price, and since interest rates are not expected to change, their prices
should all remain at their current levels until maturity.

E. Bond 8’s current yield will increase each year.

Response Note that Bond 10 sells at par, so the required return on all these
Feedback: bonds is 10%. 10's price will remain constant; 8 will sell initially at a
discount and will rise, and 12 will sell initially at a premium and will
decline. Note too that since it has larger cash ows from its higher
coupons, Bond 12 would be less sensitive to interest rate changes,
i.e., it has less price risk. It has more default risk.

Question 2 10 out of 10 points

The market value of any real or nancial asset, including stocks, bonds, or art
work purchased in hope of selling it at a pro t, may be estimated by determining
future cash ows and then discounting them back to the present.

Selected Answer: True

Answers: True
False

Question 3 10 out of 10 points

Which of the following events would make it more likely that a company would
call its outstanding callable bonds?

Selected E. Market interest rates decline sharply.

Answer:

Answers: A. Market interest rates rise sharply.

B. In ation increases signi cantly.

C.
The company's nancial situation deteriorates signi cantly.

D. The company’s bonds are downgraded.

E. Market interest rates decline sharply.

Question 4 10 out of 10 points

Assume that you are considering the purchase of a 20-year, noncallable bond with
an annual coupon rate of 9.5%. The bond has a face value of $1,000, and it makes
semiannual interest payments.
If you require an 8.4% nominal yield to maturity on this investment, what is the
maximum price you should be willing to pay for the bond?
 Selected Answer: A. $1,105.69

Answers: A. $1,105.69

B. $1,133.34

C. $1,161.67

D. $1,190.71

E. $1,220.48

Response Par value     $1,000

Feedback:
Coupon rate   9.5%
Periods/year   2
Yrs to maturity   20
Periods = Yrs to maturity x Periods/year   40
Required rate   8.4%
Periodic rate = Required rate/2 = I/YR   4.20%
PMT per period = Coupon rate/2 x Par value   $47.50
Maturity value = FV   $1,000
PV   $1,105.69

Question 5 10 out of 10 points

Sinking funds are provisions included in bond indentures that require companies
to retire bonds on a scheduled basis prior to their nal maturity. Many indentures
allow the company to acquire bonds for sinking fund purposes by either (1)
purchasing bonds on the open market at the going market price or (2) selecting
the bonds to be called by a lottery administered by the trustee, in which case the
price paid is the bond's face value.

Selected Answer: True

Answers: True
False

Question 6 10 out of 10 points

Grossnickle Corporation issued 20-year, noncallable, 7.5% annual coupon bonds

at their par value of $1,000 one year ago. Today, the market interest rate on these
bonds is 5.5%.
What is the current price of the bonds, given that they now have 19 years to
maturity?

Selected Answer: E. $1,232.15

Answers: A. $1,113.48

B. $1,142.03

C. $1,171.32
 D. $1,201.35

E. $1,232.15

Response Feedback: Par value = Maturity value = FV       $1,000

Coupon rate   7.5%
Years to maturity = N   19
Required rate = I/YR   5.5%
(Coupon rate)(Par value) = PMT   $75
PV   $1,232.15

Question 7 10 out of 10 points

Under normal conditions, which of the following would be most likely to increase
the coupon rate required for a bond to be issued at par?

Selected C. Adding a call provision.

Answer:

Answers: A.
Adding additional restrictive covenants that limit management's
actions.

B.
The rating agencies change the bond's rating from Baa to Aaa.

C. Adding a call provision.

D. Adding a sinking fund.

E.
Making the bond a rst mortgage bond rather than a debenture.

Question 8 10 out of 10 points

A 12-year bond has an annual coupon of 9%. The coupon rate will remain xed
until the bond matures. The bond has a yield to maturity of 7%.
Which of the following statements is CORRECT?

Selected E.
Answer: If market interest rates remain unchanged, the bond’s price one year
from now will be lower than it is today.

Answers: A.
If market interest rates remain unchanged, the bond’s price one year
from now will be higher than it is today.

B.
If market interest rates decline, the price of the bond will also
decline.

C. The bond should currently be selling at its par value.

D. The bond is currently selling at a price below its par value.

 E.
If market interest rates remain unchanged, the bond’s price one year
from now will be lower than it is today.

Question 9 10 out of 10 points

Which of the following statements is CORRECT?

Selected B.
Answer: The total (rate of) return on a bond during a given year is the sum of the
coupon interest payments received during the year and the change in the
value of the bond from the beginning to the end of the year, divided by
the bond's price at the beginning of the year.

Answers: A.
The price of a 20-year, 10% bond is less sensitive to changes in
interest rates than the price of a 5-year, 10% bond.

B.
The total (rate of) return on a bond during a given year is the sum of the
coupon interest payments received during the year and the change in the
value of the bond from the beginning to the end of the year, divided by
the bond's price at the beginning of the year.

C.
10-year, zero coupon bonds have more reinvestment risk than 10-
year, 10% coupon bonds.

D.
A $1,000 bond with $100 annual interest payments that has 5 years to
maturity and is not expected to default would sell at a discount if
interest rates were below 9% and at a premium if interest rates were
greater than 11%.

E.
A 10-year, 10% coupon bond has less reinvestment risk than a 10-
year, 5% coupon bond (assuming all else equal).

Question 10 10 out of 10 points

Which of the following statements is CORRECT?

Selected B.
Answer: Long term zero-coupon bonds are more sensitive to changes in
interest rates than are short-term low-coupon bonds.

Answers: A.
The price of a bond is always inversely related to changes in its
coupon rate.

B.
Long term zero-coupon bonds are more sensitive to changes in
interest rates than are short-term low-coupon bonds.
 C.
Two coupon bonds with the same maturity must have the same yield
to maturity.

D.
The price of a discount bond will decrease over time to its maturity,
assuming that the bond’s yield to maturity remains constant over
time.

E.
Bonds with low coupon rates are more sensitive to changes in
interest rates than similar maturity bonds with zero-coupon rates.

Tuesday, February 18, 2020 7:56:10 PM SGT

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