Fundamentals of Corporate Finance Australasian 2Nd Edition Parrino Test Bank Full Chapter PDF

Fundamentals of Corporate Finance
Australasian 2nd Edition Parrino Test

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Testbank
to accompany
Fundamentals of
Corporate Finance 2nd
edition
Prepared by
Gabrielle Parle
University of the Sunshine Coast
© John Wiley & Sons Australia, Ltd 2013

Chapter 8: Bond valuation and the structure of interest rates
Chapter 8 - Bond valuation and the structure of interest rates
True/False
1. A security's intrinsic value is the price that reflects investors' estimates of the value of the
cash flows they expect to receive in the future.
*a. True
b. False
Correct answer: a
2. In an efficient capital market, security prices fully reflect the knowledge and expectations
of all investors at a particular point in time.
*a. True
b. False
Correct answer: a
3. If market prices reflect all relevant information about securities at a particular point in
time, it is called operational efficiency.
a. True
*b. False
Correct answer: b
4. If a market is strong-form market efficient, one would be able to beat the market with
inside information.
a. True
*b. False
Correct answer: b
5. Semi-strong market efficiency implies that only public information that is available to all
investors is reflected in a security's market price.
*a. True
b. False
© John Wiley & Sons Australia, Ltd 2013 8.2

Testbank to accompany Fundamentals of Corporate Finance 2e
Correct answer: a
6. Public share markets in developed countries like Australia have strong-form of market
efficiency.
a. True
*b. False
Correct answer: b
7. The largest investors in corporate bonds are life insurance companies and superannuation
funds.
*a. True
b. False
Correct answer: a
8. Most secondary market transactions for corporate bonds take place through dealers in the
over-the-counter (OTC) market.
*a. True
b. False
Correct answer: a
9. A thin market for a security implies a high frequency of trades for that type of security in
the markets.
a. True
*b. False
Correct answer: b
10. Corporate bonds have a thin market relative to shares.
*a. True
b. False
Correct answer: a

11. Prices in the corporate bond market tend to be more volatile than securities sold in
markets with greater trading volumes.
*a. True
b. False
Correct answer: a
12. Vanilla bonds have coupon payments that are fixed for the life of the bond, with the
principal being repaid at maturity.
*a. True
b. False
Correct answer: a
13. Zero coupon bonds sell well above their par value because they offer no coupons.
a. True
*b. False
Correct answer: b
14. Convertible bonds can be converted into ordinary shares at some predetermined ratio at
the discretion of the bondholder.
*a. True
b. False
Correct answer: a
15. The value, or price, of any asset is the present value of its future cash flows.
*a. True
b. False
Correct answer: a

16. The yield to maturity of a bond is the discount rate that makes the present value of the
coupon and principal payments equal to the price of the bond.
*a. True
b. False
Correct answer: a
17. Interest rate risk is the risk that bond prices will fluctuate as interest rate changes.
*a. True
b. False
Correct answer: a
18. As interest rates fall, the prices of bonds decline.
a. True
*b. False
Correct answer: b
19. Higher coupon bonds have greater interest rate risk.
a. True
*b. False
Correct answer: b
20. All other things being equal, a given change in the interest rates will have a greater
impact on the price of a low-coupon bond than a higher-coupon bond with the same
maturity.
*a. True
b. False
Correct answer: a

21. Bonds with a call provision sell at lower market yields than comparable noncallable
bonds.
a. True
*b. False
Correct answer: b
22. The risk that the lender may not receive payments as promised is called default risk.
*a. True
b. False
Correct answer: a
23. Australian government securities do not have any default risk and are the best proxy
measure for the risk-free rate.
*a. True
b. False
Correct answer: a
24. Ascending or normal yield curves are upward-sloping yield curves that occur when an
economy is heading into recession.
a. True
*b. False
Correct answer: b
25. If investors believe inflation will be increasing in the future, the prevailing yield will be
downward sloping.
a. True
*b. False
Correct answer: b

26. The real rate of interest varies with the business cycle, with the highest rates seen at the
end of a period of business expansion and the lowest at the bottom of a recession.
*a. True
b. False
Correct answer: a

Multiple Choice – Rate of difficulty noted after learning objective (basic, moderate,
challenging)
27. In an efficient capital market,
a. security prices fully reflect the knowledge and expectations of all investors at a
particular point in time.
b. investors and financial managers have no reason to believe the securities are not
priced at or near their true value.
c. prices of securities adjust as new information becomes available to the market.
*d. All of the above are true.
Correct answer: d
Learning Objective 8.1 ~ explain what an efficient capital market is and why ‘market efficiency’
is important to financial managers (Moderate)
28. Which one of the following statements is NOT true?
a. The overall efficiency of a capital market depends on its operational efficiency

and its informational efficiency.
b. Operational efficiency focuses on bringing buyers and sellers together at the
lowest possible cost.
*c. If market prices reflect all relevant information about securities at a particular
point in time, the market is operationally efficient.
d. All of the above are true.
Correct answer: c
a. Competition among investors is an important driver of informational efficiency.

b. If market prices reflect all relevant information about securities at a particular
point in time, the market is informationally efficient.
c. In an informationally efficient market, market prices adjust quickly to new
information about a security as it becomes available.
Correct answer: d

30. With strong-form market efficiency:
a. the price of a security in the market reflects all public information only.
*b. it would not be possible to earn abnormally high returns by trading on private
information.
c. investors who have access to inside or private information will be able to earn
abnormal returns.
d. None of the above.
Correct answer: b
31. With semi-strong form market efficiency:
*a. the price of a security in the market reflects all public information only.
b. it would be possible to earn abnormally high returns by trading on public
information.
c. investors who have access to inside or private information will be unable to earn
abnormal returns.
Correct answer: a
is important to financial managers (Basic)
a. Weak-form market efficiency implies that investors who have access to inside or
private information will be able to earn abnormal returns.
b. Semi-strong form market efficiency implies that investors who have access to
inside or private information will be able to earn abnormal returns.
*c. Strong-form market efficiency implies that investors who have access to inside or
private information will be able to earn abnormal returns.
Correct answer: c

33. Which ONE of the following statements is true?
a. The largest investors in corporate bonds are life insurance companies and
superannuation funds.
b. The market for corporate bonds is thin.
c. Prices in the corporate bond market also tend to be more volatile.
Correct answer: d
is important to financial managers (Basic)
a. Prices in the corporate bond market also tend to be more volatile than the markets
for shares or money market securities.
*b. Corporate bonds are more marketable than the securities that have higher daily
trading volumes.
c. The market for corporate bonds is thin.
d. The largest investors in corporate bonds are life insurance companies and
superannuation funds.
Correct answer: b
Learning Objective 8.2 ~ describe the market for corporate bonds and three types of corporate
bonds (Moderate)
35. It is easy for individuals to trade in the corporate bond market because
a. the corporate bond market is considered to be very transparent.

b. prices in the corporate bond market tend to be more stable.
c. centralised reporting of deals between buyers and sellers take place.
*d. None of the above statements are true.
Correct answer: d
bonds (Moderate)

36. Which one of the following statements about vanilla bonds is NOT true?
a. They have no special provisions.

b. The face value, or par value, for most corporate bonds is $1,000.
*c. Coupon payments are usually made quarterly.
d. The bond's coupon rate is calculated as the annual coupon payment divided by the
bond's face value.
Correct answer: c
bonds (Moderate)
a. Zero coupon bonds have no coupon payments over its life and only offer a single
payment at maturity.
b. Zero coupon bonds sell well below their face value (at a deep discount) because
they offer no coupons.
c. Zero coupon bonds must sell for less than similar bonds that make coupon
payments before maturity.
Correct answer: d
bonds (Moderate)
a. To secure the conversion option on a bond, bondholders would be willing to pay a

premium.
b. The conversion ratio is set so that the company's share price must appreciate 15 to
20 percent before it is profitable to convert bonds into equity.
c. Convertible bonds can be converted into ordinary shares at some predetermined
ratio at the discretion of the bondholder.
Correct answer: d
bonds (Moderate)

39. Which one of the following statements about bond price is NOT true?
a. To calculate a bond's price, one needs to calculate the present value of the bond's
expected cash flows.
*b. The value, or price, of any asset is the future value of its cash flows.
c. The required rate of return, or discount rate, for a bond is the market interest rate
called the bond's yield to maturity
d. Estimate the expected future cash flows using the coupons that the bond will pay
and the maturity value to be received.
Correct answer: b
Learning Objective 8.3 ~ explain how to calculate the value of a bond and why bond prices vary
negatively with interest rate movements (Moderate)
40. Bonds sell at a discount off the par value when market rates for similar bonds are
a. less than the bond's coupon rate.

*b. greater than the bond's coupon rate.
c. equal to the bond's coupon rate.
d. Market rates are irrelevant in determining a bond's price.
Correct answer: b
negatively with interest rate movements (Basic)
41. In calculating the current price of a bond paying semiannual coupons, one needs to
a. use double the number of payments.

b. use half the annual coupon.
c. use half the annual rate as the discount rate.
*d. All of the above need to be done.
Correct answer: d

42. Which one of the following statements about zero coupon bonds is NOT true?
a. Zero coupon bonds have no coupon payments but promise a single payment at
maturity.
b. Zero coupon bonds must sell for less than similar bonds that make periodic
coupon payments.
*c. Zero coupon bonds make coupon payments but no principal payment at maturity.
d. All of the above statements are true.
Correct answer: c
43. Bond price: Briar Corp is issuing a 10-year bond with a coupon rate of 7 percent. The
interest rate for similar bonds is currently 9 percent. Assuming annual payments, what is
the present value of the bond? (Round to the nearest dollar.)
*a. $872
b. $1,066
c. $990
d. $945
Correct answer: a
44. Bond price: Regatta Ltd has six-year bonds outstanding that pay an 8.25 percent coupon
rate. Investors buying the bond today can expect to earn a yield to maturity of 6.875
percent. What should the company's bonds be priced at today? Assume annual coupon
payments. (Round to the nearest dollar.)
a. $972
*b. $1,066
c. $1,014
d. $923
Correct answer: b

45. Bond price: Triumph Company issued five-year bonds that pay a coupon of 6.375
annually. The current market rate for similar bonds is 8.5 percent. How much will you be
willing to pay for Triumph's bond today? Round to the nearest dollar.
a. $1,023
b. $1,137
*c. $916
d. $897
Correct answer: c
46. Bond price: Your friend recommends that you invest in a three-year bond issued by
Trimer Ltd that will pay annual coupons of 10 percent. Similar investments today will
yield 6 percent. How much should you pay for the bond? (Round to the nearest dollar.)
a. $1,024
b. $979
c. $886
*d. $1,107
Correct answer: d
47. Bond price: Kevin Rogers is interested in buying a five-year bond that pays a coupon of
10 percent on a semiannual basis. The current market rate for similar bonds is 8.8 percent.
What should be the current price of this bond? (Round to the nearest dollar.)
*a. $1,048
b. $965
c. $1,099
d. $982
Correct answer: a

48. Bond price: Giant Electronics is issuing 20-year bonds that will pay coupons
semiannually. The coupon rate on this bond is 7.8 percent. If the market rate for such
bonds is 7 percent, what will the bonds sell for today? (Round to the nearest dollar.)
a. $1,037
*b. $1,085
c. $861
d. $923
Correct answer: b
49. Bond price: Jane Thorpe has been offered a seven-year bond issued by Barone Ltd at a
price of 943.22. The bond has a coupon rate of 9 percent and pays the coupon
semiannually. Similar bonds in the market will yield 10 percent today. Should she buy
the bonds at the offered price? (Round to the nearest dollar.)
a. Yes, the bond is worth more at $1,015.

b. No, the bond is only worth $921.
*c. Yes, the bond is worth more at $951.
d. No, the bond is only worth $912.
Correct answer: c
50. Bond price: Kevin Oh is planning to sell a bond that he owns. This bond has four years
to maturity and pays a coupon of 10 percent on a semiannual basis. Similar bonds in the
current market will yield 12 percent. What will be the price that he will get for his bond?
(Round to the nearest dollar.)
a. $1,044
*b. $938
c. $970
d. $1,102
Correct answer: b

51. Bond price: Jeremy Kohn is planning to invest in a 10-year bond that pays a 12 percent
coupon. The current market rate for similar bonds is 9 percent. Assume semiannual
coupon payments. What is the maximum price that should be paid for this bond? (Round
to the nearest dollar.)
a. $951
b. $882
c. $1,033
*d. $1,195
Correct answer: d
52. Zero coupon bonds: Shana Norris wants to buy five-year zero coupon bonds with a face
value of $1,000. Her opportunity cost is 8.5 percent. Assuming annual compounding,
what would be the current market price of these bonds? (Round to the nearest dollar.)
a. $1,023
*b. $665
c. $890
d. $1,113
Correct answer: b
53. Zero coupon bonds: The Australian Treasury has issued 10-year zero coupon bonds
with a face value of $1,000. Assume that coupon payments are normally semiannual.
What will be the current market price of these bonds if the opportunity cost for similar
investments in the market is 6.75 percent? (Round to the nearest dollar.)
a. $684
b. $860
*c. $515
d. $604
Correct answer: c

54. Zero coupon bonds: Robertsons Ltd is planning to expand its specialty stores into five
other states and finance the expansion by issuing 15-year zero coupon bonds with a face
value of $1,000. If your opportunity cost is 8 percent and similar coupon-bearing bonds
will pay semiannually, what will be the price at which you will be willing to purchase
these bonds? (Round to the nearest dollar.)
*a. $308
b. $383
c. $803
d. $866
Correct answer: a
55. Zero coupon bonds: Jarmine Company is planning to fund a project by issuing 10-year
zero coupon bonds with a face value of $1,000. Assuming semiannual coupons to be the
norm, what will be the price of these bonds if the appropriate discount rate is 14 percent?
(Round to the closest answer.)
a. $852
*b. $258
c. $419
d. $841
Correct answer: b
56. If a bond's coupon rate is equal to the market rate, then the bond will sell
*a. at a price equal to its face value.

b. at a price greater than its face value.
c. at a price less than its face value.
d. None of the above are true.
Correct answer: a
Learning Objective 8.4 ~ distinguish between a bond’s coupon rate, yield to maturity and
effective annual yield, and be able to calculate their values (Basic)

a. The yield to maturity of a bond is the discount rate that makes the present value of
the coupon and principal payments equal to the price of the bond.
b. It is the yield that the investor earns if the bond is held to maturity, and all the
coupon and principal payments are made as promised.
c. A bond's yield to maturity changes daily as interest rates increase or decrease.
Correct answer: d
effective annual yield, and be able to calculate their values (Moderate)
58. The yield to maturity of a bond is the discount rate that makes the present value of the
coupon and principal payments
a. exceed the price of the bond.

b. equal to zero.
*c. equal to the price of the bond.
d. less than the price of the bond.
Correct answer: c
a. The realised yield is the return earned on a bond given the cash flows actually
received by the investor.
b. The realised yield is equal to the yield to maturity even if the bond is sold prior to
maturity.
*c. It is the interest rate at which the present value of the actual cash flows generated
by the investment equals the bond's price at the time of sale of the bond.
d. All of the above are true.
Correct answer: c

60. Yield to maturity: Jenny LePlaz is looking to invest in some five-year bonds that pay
annual coupons of 6.25 percent and are currently selling at $912.34. What is the current
market yield on such bonds? (Round to the closest answer.)
a. 9.5%
*b. 8.5%
c. 6.5%
d. 7.5%
Correct answer: b
61. Yield to maturity: Nathan Akpan is planning to invest in a seven-year bond that pays
annual coupons at a rate of 7 percent. It is currently selling at $927.23. What is the
current market yield on such bonds? (Round to the closest answer.)
a. 10.4%
b. 9.5%
*c. 8.4%
d. 7.5%
Correct answer: c
62. Yield to maturity: Jane Almeda is interested in a 10-year bond issued by Roberts
Company that pays a coupon of 10 percent annually. The current price of this bond is
$1,174.45. What is the yield that Jane would earn by buying it at this price and holding it
to maturity? (Round to the closest answer.)
a. 7%
*b. 7.5%
c. 8%
d. 8.5%
Correct answer: b

63. Yield to maturity: Shawna Carter wants to invest her recent bonus in a four-year bond
that pays a coupon of 11 percent semiannually. The bonds are selling at $962.13 today. If
she buys this bond and holds it to maturity, what would be her yield? (Round to the
closest answer.)
b. 11.8%
c. 12.5%
*d. 12.2%
Correct answer: d
effective annual yield, and be able to calculate their values (Moderate)a. 11.5%
64. Yield to maturity: Alice Trang is planning to buy a six-year bond that pays a coupon of
10 percent semiannually. Given the current price of $878.21, what is the yield to maturity
on these bonds?
a. 11%
b. 12%
*c. 13%
d. 14%
Correct answer: c
65. Yield to maturity: John Wong purchased a five-year bond today at $1,034.66. The bond
pays 6.5 percent semiannually. What will be his yield to maturity?
a. 6.7%
b. 6.2%
c. 5.9%
*d. 5.7%
Correct answer: d

66. Yield to maturity: Huan Zhang bought a 10-year bond that pays 8.25 percent
semiannually for $911.10. What is the yield to maturity on this bond?
a. 7.6%
b. 8.6%
*c. 9.6%
d. 10.6%
Correct answer: c
67. Realised yield: Five years ago, Shirley Harper bought a 10-year bond that pays 8 percent
semiannually for $981.10. Today, she sold it for $1,067.22. What is the realised yield on
her investment? (Round to the nearest percent.)
a. 7%
b. 8%
c. 9%
*d. 10%
Correct answer: d
effective annual yield, and be able to calculate their values (Challenging)
68. Realised yield: Rachel McGovern bought a 10-year bond for $921.77 seven years ago.
The bond pays a coupon of 15 percent semiannually. Today, the bond is priced at
$961.92. If she sold the bond today, what would be her realised yield? (Round to the
nearest percent.)
*a. 17%
b. 18%
c. 9%
d. 16%
Correct answer: a

69. Realised yield: Jorge Cabrera paid $980 for a 15-year bond 10 years ago. The bond pays
a coupon of 10 percent semiannually. Today, the bond is priced at $1,054.36. If he sold
the bond today, what would be his realised yield? (Round to the nearest percent.)
a. 12%
b. 10%
*c. 11%
d. 9%
Correct answer: c
70. Effective annual yield: Suppose an investor earned a semiannual yield of 6.4 percent on
a bond paying coupons twice a year. What is the effective annual yield (EAY) on this investment?
a. 12.80%
b. 6.40%
*c. 13.21%
d. None of the above
Correct answer: c
71. Effective annual yield: Stanley Hart invested in a state government bond that promised
an annual yield of 6.7 percent. The bond pays coupons twice a year. What is the effective
annual yield (EAY) on this investment?
a. 13.4%
*b. 6.81%
c. 6.70%
d. None of the above
Correct answer: b

a. Interest rate risk is the risk that bond prices will change as interest rates change.
b. Interest rate changes and bond prices are inversely related.
*c. As interest rates increase, bond prices increase.
d. Long-term bonds are more price volatile than short-term bonds of similar risk.
Correct answer: c
Learning Objective 8.5 ~ explain why investors in bonds are subject to interest rate risk and why
it is important to understand the bond theorems (Moderate)
a. Long-term bonds have lower price volatility than short-term bonds.

*b. As interest rates decline, the prices of bonds rise; and as interest rates rise, the
prices of bonds decline.
c. All other things being equal, short-term bonds are more risky than long-term
bonds.
d. Interest rate risk decreases as maturity increases.
Correct answer: b
74. Marketability is the ability of an investor
*a. to sell a security quickly, at a low transaction cost, and at a price close to its fair
market value.
b. to sell at a profit under all circumstances.
c. to sell the security above its par value.
Correct answer: a
it is important to understand the bond theorems (Basic)
a. The lower the transaction costs are, the greater a security's marketability.
b. The interest rate, or yield, on a security varies inversely with its degree of
marketability.
c. U.S. Treasury bills have the largest and most active secondary market and are
considered to be the most marketable of all securities.

Correct answer: d
*a. The longer the maturity of a security, the greater its interest rate risk.
b. If investors believe inflation will be subsiding in the future, the prevailing yield
will be upward sloping.
c. The real rate of interest varies with the business cycle, with the lowest rates seen
at the end of a period of business expansion and the lowest at the bottom of a
recession.
d. The interest risk premium always adds a downward bias to the slope of the yield
curve.
Correct answer: a
a. The risk that the lender may not receive payments as promised is called default
risk.
*b. Investors must pay a premium to purchase a security that exposes them to default
risk.
c. Australian government securities do not have any default risk and are the best
proxy measure for the risk-free rate.
d. All of the above are true statements.
Correct answer: b
Learning Objective 8.6 ~ discuss the concept of default risk and know how to calculate a default
risk premium (Basic)
78. Inverted yield curves are observed when
a. the economy is growing.

b. the economy is stagnant.
*c. the economy is in recession.
Correct answer: c
Learning Objective 8.7 ~ describe the factors that determine the level and shape of the yield
curve (Basic)

*a. The relationship between yield and marketability is known as the term structure of
interest rates.
b. The shape of the yield curve is not constant over time.
c. As the general level of interest rises and falls over time, the yield curve shifts up
and down and has different slopes.
d. Yield curves show graphically how market yields vary as term to maturity
changes.
Correct answer: a
curve (Moderate)
80. The three economic factors that determine the shape of the yield curve are
a. the real rate of interest, the expected rate of inflation, and marketability.
*b. the real rate of interest, the expected rate of inflation, and interest rate risk.
c. the nominal rate of interest, the expected rate of inflation, and interest rate risk.
d. the real rate of interest, the nominal rate of interest, and interest rate risk.
Correct answer: b
curve (Basic)

Essay Questions
81. Under what economic conditions would investors demand floating rate bonds?
Answer: As interest rates increase, the coupons of fixed-rate bonds do not change, and investors
receive interest payments that are below the market rate. However, investors of floating-rate
notes will not be hurt in an increasing interest rate scenario. Thus, demand from investors will
increase when interest rates are expected to increase.
82. What is the marketability premium? Why should an issuing company consider paying this
premium?
Answer: Marketability is the ability of an investor to sell a security quickly at a low transaction
cost and at its fair market value. The difference in interest rates or yields between the most
marketable security and a less marketable security is known as the marketability premium.
Investors would prefer more marketable securities. Investors prefer securities that can be easily
converted to cash without a loss in value. The lower the marketability of a particular bond, the
higher the compensation that would be demanded by investors. In order for investors to buy
securities that are less marketable, issuing companies have to pay a marketability premium.
83. Why does the default risk premium vary over the business cycle?
Answer: Default risk premiums vary over the business cycle. Larger premiums are required
during recessionary times, while economic expansions reduce such premiums. During periods of
economic expansion, investors are willing to hold bonds with low credit ratings in their
portfolios because there is little chance of default and these bonds normally have higher yields.
During such times, investors tend to seek out the highest-yielding investments. On the other hand,
during a recession, the prime concern of investors becomes safety. We call this the flight to
quality. Since companies have a higher probability of failing during an economic downturn,
investors are more concerned about default risk and will demand a higher default risk premium.
84. What economic factors affect the shape of the yield curve? Explain.
Answer: Three economic factors determine the shape of the yield curve: (1) the real rate of
interest; (2) the expected rate of inflation; and (3) the interest rate risk.
As an economy grows, the real rate of interest will increase, causing the yield curve to have an
upward slope. Similarly, if investors think that inflation will increase in the future, they will
require a higher inflation premium, again forcing an upward tilt to the yield curve. Since the
observed or nominal interest rate is a combination of these two factors (see Chapter 2), the slope
of the yield curve will shift upward. The opposite will happen during an economic downturn.
The third factor that we discussed earlier in this chapter will cause longer term securities to have
a higher yield than shorter term securities, again giving the yield curve an upward bias.

85. Why are investors and managers concerned about market efficiency?
Answer: Market efficiency can be said to be made up of two kinds of efficiency-operational

efficiency and informational efficiency.
Operational efficiency deals with the issue of bringing buyers and sellers in the market at the
lowest transaction cost. Higher transaction costs make the market prices more volatile and lead
to fewer transactions taking place. Thus, both investors who provide funds and managers
(companies) who raise money are concerned when high transaction costs lead to inefficient
markets.
We call a market informationally efficient when new information about a company reaches the
market and is quickly assimilated and reflected in the market price of the company's security.
This is critical for buyers and sellers of securities because efficient markets allow them to trade
at prices that are closer to the true equilibrium price than would otherwise be possible.

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contractile base and simple tentacles. The body-wall is provided with
numerous simple or compound outgrowths or vesicles, usually
arranged in vertical rows. Alicia mirabilis is a rare Anemone from
Madeira with a very broad base, capable of changing its position with
considerable activity, and of becoming free and floating upside down
at the surface of the sea. Other genera of the family are
Bunodeopsis and Cystiactis. The genus Thaumactis, described by
Fowler,[405] from the Papeete reefs, has many peculiarities, but is
probably capable of crawling rapidly and of floating at the surface
like other members of the family. The remarkable Anemone Lebrunia
from the West Indies may be included in this family.
Fam. 5. Phyllactidae.—These are distinguished by the presence of
a broad collar of foliaceous or digitate processes outside the circle of
tentacles. The processes have some resemblance to the foliaceous
tentacles of the Stichodactylinae. They are found in the
Mediterranean, Red Sea, and on the shores of the Atlantic Ocean,
but have not yet been found in the British area.
Fam. 6. Bunodidae.—This family is characterised by prominent

verrucae and tubercles of the body-wall. It contains several British
species, of which Bunodes gemmacea found between tide marks on
our southern shores is fairly common. The very common British
species Urticina (Tealia) crassicornis is usually placed in this family,
but exhibits some peculiarities which seem to warrant its removal to
another division of the Actiniaria. It is found in tide pools attached to
rocks, but is usually partially hidden by adherent sand or small
stones.
Fam. 7. Minyadidae.—This family contains a number of floating

Anemones. The basal disc is folded over to form a gas bladder lined
by a cuticular secretion. The species are principally found in the seas
of the southern hemisphere.
Sub-Order 2. Stichodactylina.
Fam. 1. Corallimorphidae.—In this family the marginal cycle of
tentacles and accessory tentacles are all of the same kind. The
accessory tentacles are arranged in radial rows. All the tentacles are
knobbed at the extremity. The musculature is weak. Capnea
sanguinea, Corynactis viridis, and Aureliania heterocera belong to
the British fauna. They are all small Anemones of exquisite colours,
but are not very common. The genus Corallimorphus is principally
found in the southern hemisphere.
Fam. 2. Discosomatidae.—The tentacles are all of one kind and are

very numerous. The mesenteries are also very numerous. The
sphincter muscle is strong.
This family includes a rather heterogeneous assembly of forms, and

will probably require some rearrangement as our knowledge
increases. Nearly all the species are found in the shallow waters of
the tropics, and among them are to be found some of the largest
Anemones of the world. Stoichactis kenti, from the Barrier Reef, is
from one to four feet in diameter across the disc. In the West Indies
these Anemones do not attain to such a great size, but
Homostichanthus anemone from Jamaica is sometimes 8 inches in
diameter.
Fam. 3. Rhodactidae.—In this family the body-wall is smooth and

the oral disc greatly expanded. The tentacles are of two kinds. On
the margin there is a single cycle of minute tentacles, while on the
disc there are numerous tuberculate or lobed tentacles. Many of the
species of this family are quite small, but Actinotryx mussoides from
Thursday Island has an oral disc 8 inches in diameter. The genera
and species are widely distributed in the warm, shallow waters of the
world.
Fam. 4. Thalassianthidae.—The tentacles are simple or ramified

(Fig. 166), and in some cases very long (Actinodendron arboreum).
Many of the specimens of A. plumosum and Megalactis griffithsi are
of very large size, 8 to 12 inches in diameter. Of the former of these
two species Saville Kent remarks: "The colours are lacking in
brilliancy, being chiefly represented by varying shades of light brown
and white, which are probably conducive to its advantage by
assimilating it to the tint of its sandy bed. When fully extended the
compound tentacles are elevated to a height of 8 or 10 inches, and
bear a remarkable resemblance to certain of the delicately
branching, light brown sea-weeds that abound in its vicinity." The
same author calls attention to their stinging, which is "nearly as
powerful as the ordinary stinging nettle."
Fig. 166.—Actinodendron plumosum. D, disc of attachment; Si, siphonoglyph; t,
t, lobes of the marginal disc bearing the tentacles; W, body-wall. Height of
the column 200 mm. (After Haddon.)
Order III. Madreporaria.

The Madreporaria form a heterogeneous group of Zoantharia
characterised by a single common feature, the formation of an
extensive skeletal support of carbonate of lime. In a great many
cases the skeleton exhibits cups or "calices" into which the zooids
may be completely or partially retracted, and these calices usually
exhibit a series of radially disposed vertical laminae, the "septa,"
corresponding with the inter-mesenteric spaces of the zooids.
Calices and structures simulating septa also occur in Heliopora,
which is an Alcyonarian, and in certain fossil corals which are
probably not Zoantharians. The anatomy of the zooids of a great
many Madreporaria is now known, and, although a great deal of
work yet remains to be done, it may be said that the Madreporaria
exhibit close affinities in structure with the Actiniaria. The chief points
in the anatomy of the zooids are described under the different sub-
divisions, but a few words are necessary in this section to explain the
principal features exhibited by the skeleton.
There is no more difficult task than the attempt to explain upon any
one simple plan the various peculiarities of the Madreporarian
skeleton.[406] The authorities upon the group are not agreed upon
the use of the terms employed, nor are the current theories of the
evolution of the skeleton consistent. It is necessary, however, to
explain the sense in which certain terms are employed in the
systematic part that follows, and in doing so to indicate a possible
line of evolution of the more complicated compound skeletons from
the simple ones.
Fig. 167.—Series of diagrams to illustrate the structure of the Madreporarian

skeleton. A, young stage of a solitary coral with simple protheca (p.t). B,
solitary coral, with theca (th), epitheca (e.t), and prototheca (p.t). C, young
stage of colonial coral, showing coenosteum (coe) and theca (th), and the
formation of the theca of a bud (b). D, two zooids of a more advanced stage
of a colonial coral. coe, Coenosteum; th, theca. The black horizontal
partitions are the tabulae. E, transverse section of a calyx. c, Costa; col,
columella; d, dissepiment; g, septum; p, pali.
There can be no doubt whatever that the whole of the skeleton of

these animals is formed by the ectoderm, and is external to their
bodies. If we could get rid of the influence of tradition upon our use
of popular expressions we should call this skeleton a shell. There
can be little doubt, moreover, that this skeleton is formed by a single
layer of specialised ectoderm cells called the "calicoblasts."
The calicoblasts form, in the first instance, a skeletal plate at the

aboral end of the coral embryo, which becomes turned up at the
edges to form a shallow saucer or cup. This cup is called the
"prototheca."[407] At this stage the body-wall of the living zooid may
or may not overflow the edge of the prototheca. In the former case
the growth of the rim of the prototheca is brought about by the
calicoblasts of an inner and outer layer of epiblast, and the cup is
then called the "theca." In the latter case, the growth of the rim of the
prototheca is continued by the calicoblasts of one layer of epiblast
only, and it is called the "epitheca" (Flabellum). With the continued
growth of the theca the tissues that have overflowed—the
"episarc"—retreat from the base, and in doing so the ectoderm of the
edge and, to some extent, the outer side of the episarc secrete a
layer of epitheca which becomes more or less adherent to the theca.
Thus the cup may have a double wall, the theca and the epitheca
(Caryophyllia).
Fig. 168.—Diagram of a vertical section of a young Caryophyllia, showing the

septa (S) covered with endoderm projecting into the coelenteric cavity. M,
mouth; St, stomodaeum. (After G. von Koch.)
Fig. 169.—A young Caryophyllia, viewed from above, showing the tentacles (t)
and the stomodaeum (St). The letter m points to a space between a pair of
mesenteries, and the darker shading in this place shows a septum
projecting radially from the wall of the theca. (After G. von Koch.)
With the growth of the theca and epitheca a certain number of

radially disposed laminae of lime rise from the walls and grow
centripetally. These are the "septa." Additional ridges on the inner
wall of the cup between the septa are called the "dissepiments."
Corresponding with the septa there may be a circle of columns or
bands rising from the basal parts of the prototheca—the "pali"; and
from the actual centre a single column called the "columella." The
longitudinal ridges on the outside of the theca, corresponding in
position with the septa inside, are called the "costae" (Fig. 167, E, c).
We may imagine that in the primitive forms that gave rise to colonies,
the episarc of the primary zooid overflowed on to the substance to
which it was attached, and gave rise to successive layers of
epithecal skeleton, which may be called the "coenosteum." The
ectoderm at the base of the original prototheca is in some corals
periodically dragged away from the skeleton, and forms another cup
or platform of lime at a little distance from it—the "tabula." New
zooids are developed at some distance from the primary one by a
process of gemmation in the episarc, and independent thecae,
septa, etc., are formed in it; the skeleton of the new zooid thus
originated being connected with that of the primary zooid by the
coenosteum.
There are many modifications of this simple description of skeleton

formation to be considered before a thorough knowledge of coral
structure can be understood, but sufficient has been said to explain
the use of the terms that it is necessary to employ in the description
of the families. When it is necessary to speak of the cup in which the
zooid is situated without expressing an opinion as to the homology of
its wall, it is called the calyx.
There are many forms of asexual reproduction observed in the

Madreporaria. Of these the most frequent is gemmation. The buds
are formed either on the episarc or on the canals running between
zooids at the surface of the coenenchym. When the young zooids
that have been formed by gemmation reach maturity they have the
same characters as their parents. Fission occurs in the production of
a great many colonies of Madreporaria. It occurs occasionally in
such genera as Madrepora and Porites, where reproduction by
gemmation prevails, but it is said that gemmation never occurs in
those forms such as the Astraeidae Fissiparantes where fission is
the rule. In fission a division of the zooid takes place in a vertical
plane passing through the stomodaeum and dividing the zooid into
two equal parts. In some cases these two parts become separated
during the further growth of the coral. In other cases, however,
further divisions of the stomodaeum occur before the separation of
the zooids, and then elongated, serpentine polyps are produced (as
in Meandrina, etc.), which consist of a number of imperfectly
separated zooids, each with a distinct mouth and stomodaeum but
with continuous coelenteric cavities. Two kinds of fission must be
distinguished from each other. In Madrepora and Porites the plane of
fission passes dorso-ventrally through the zooids, that is, between
the dorsal and ventral pairs of directive mesenteries. In these cases
the zooids produced by fission are similar to the parent form. In most
Madreporaria, however, the plane of fission appears to be more or
less at right angles to this, and the resulting zooids are unlike the
original parent form in having either no directive mesenteries at all or
only one pair of them.
Fig. 170.—Diagrammatic transverse sections of Porites to illustrate the process

of fission. A, before division; B, fission nearly completed. In A four bilateral
pairs (a, b, c, d) of mesenteries have appeared in the entocoele of the
ventral directives (VD). These are increased to six pairs and then fission
commences as seen in B, the plane of fission passing through the
entocoeles of the last pair of secondary mesenteries (f) and of the dorsal
directives (DD). I, II, V, VI, the protocnemes in the order of their
development. (After Duerden.)
The section Fungacea presents us with some exceptional and

remarkable forms of asexual reproduction. The embryo Fungia gives
rise to a conical fixed coral called a "trophozooid." The upper part of
the calyx of this trophozooid expands and becomes disc-shaped.
This is called the "anthocyathus," and after it has reached a certain
size it breaks away from the rest of the trophozooid as an adult
Fungia. Several anthocyathi may be formed in succession from one
trophozooid. This may be described as a process of successive
transverse fission. In Diaseris the disc divides into four quadrants,
and each quadrant appears to be capable of acquiring the shape
and size of the undivided parent.
Without doubt a process of sexual reproduction occurs in all

Madreporaria. In some genera sexual reproduction appears to be
almost continuous throughout the year; in others the sexual organs
are formed only at periods separated by considerable intervals of
sterility. According to the researches of Duerden the Madreporaria
appear to be usually viviparous, the early stages of development are
passed through within the body of the parent, and the young coral is
discharged into the water as a free-swimming ciliated larva. The
larvae are spheroidal, oval, or pear-shaped, but change their shape
a good deal, and sometimes become elongated, straight, or spirally
twisted rods. The larvae are at first dense and opaque, but
subsequently they become distended by the absorption of water, and
more nearly transparent. They swim about for one or two days, and
then settle down by the aboral pole and become fixed. The tentacles
are not formed, in any species that has yet been observed, during
the free-swimming stage of existence.
Fig. 171.—A fixed stage in the development of Fungia. The trophozooid has
become differentiated into a discoid crown, the anthocyathus (Cy) and a
pedicle, the anthocaulus (Ca). (After G. C. Bourne.)
Distribution of Reef Corals.—The principal reef-forming corals

reach their greatest size and grow with greatest rapidity in the warm,
shallow waters of the world, but they are not confined to this habitat.
A species of Madrepora has been found in the very cold waters of
Archangel, and Manicina areolata occurs in Simon's Bay, Cape of
Good Hope, many degrees south of the region of the East African
coral reefs. As regards the distribution of these corals in depth, very
little is known at present. The face of the growing coral reef that is
turned towards the open sea is so steep that it has been found
impossible to determine to what depth the living reef corals actually
extend.
The survey of the Macclesfield bank proved that a considerable

number of reef corals are to be found alive at depths ranging from 30
to 50 fathoms.[408] To give one example:—In the dredging No. 50,
depth 32 to 35 fathoms, living examples of the following genera of
corals were obtained: Madrepora, Montipora, Psammocora, Pavonia,
and Astraeopora.
Coral Reefs and Atolls.—In many regions of the tropical seas,

banks and islands are found which are built up of blocks of coral,
coral detritus, and altered or modified limestone. These are the
famous coral reefs of which so much has been said and written
during the last half-century. There can be little doubt that the
superficial strata of these formations are entirely due to the action of
coral-forming animals and plants living in warm, shallow sea-water.
Fig. 172.—Plan of Minikoi Atoll in Laccadive Archipelago. A, the land elevated

above the level of high-water mark; Ch, the boat channel; 5 fm, the five
fathom line; 2 fm, the two fathom line; L, the lagoon with a maximum depth
of 7 fathoms; R, the reef continuing the circle on the east side of the atoll,
awash at high tides. (After Stanley Gardiner.)
Three classes of coral reefs are usually recognised: the "fringing
reefs" which follow the contour of the coast at a distance of a few
hundred yards, and are separated from the beach at low tide by
sand flats or a shallow lagoon; the "barrier reefs," following the
contour of the coast less regularly than the fringing reefs, but at a
much greater distance, and separated from the beach by a lagoon of
sufficient depth to serve as a harbour for ships of great size; and,
finally, the "atolls," which are ring-shaped, or broken circlets of low
islands enclosing a lagoon which is, in some cases, of considerable
depth.
It was observed by the early surveyors that in many cases the sea-
bottom slopes downwards steeply or almost precipitously from the
outer edge of the barrier reefs and atolls to very great depths—to
depths, in fact, at which reef-forming corals do not live.
It seems obvious, therefore, that the atolls and barrier-reefs are

resting upon some stratum which could not possibly have been
formed by reef-building organisms at the same relative position it has
now, and the questions arose, What is the substratum and how was
it formed?
If this stratum is a coral rock, it is clear that it must have been formed
at a time when it was nearer to the surface of the sea than it is now,
and that it must have subsided subsequently to greater depths. If, on
the other hand, it is a primitive rock, we must assume that in such
regions as the Indian Ocean and the South Pacific, where the
archipelagoes of atolls extend for hundreds of miles, there are
chains of mountain ranges with peaks reaching to a uniform level
beneath the surface of the sea. "But we cannot believe that a broad
mountain summit lies buried at the depth of a few fathoms beneath
every atoll, and nevertheless that throughout the immense areas
above named not one point of rock projects above the level of the
sea. For we may judge of mountains beneath the sea by those on
land, and where can we find a single chain, much less several such
chains many hundred miles in length, and of considerable breadth,
with broad summits attaining the same height from within 120 to 180
feet?"[409]
To account for the observed facts of the atolls and barrier-reefs,

Darwin conceived and expounded the subsidence theory. According
to this theory, the regions where atolls now occur were at one time
dry land, or an archipelago of volcanic islands surrounded by fringing
reefs of the ordinary type. A gradual subsidence of the land took
place, and the area of the land diminished; but the area enclosed by
the coral reefs did not diminish in a corresponding degree, and the
young corals growing on the débris of the older ones as they sank
continued the growth of the reef in a direction nearly vertical to the
sea-bottom. The fringing reefs thus became barrier reefs, and they
were separated from the land by a lagoon of considerable depth.
Finally, when the mountain peaks disappeared beneath the waves, a
ring-shaped reef or atoll was all that was left to mark the position of
the former land.
The fundamental assumption in the subsidence-theory is that the

substratum of the coral reefs and islands is coral-formed limestone.
To test the truth of this assumption an expedition was sent out to
obtain, by boring, evidence of the character of the substratum of a
typical atoll. The island of Funafuti in the Ellice group of the Pacific
Ocean was selected, and after several attempts a successful boring
was made to a depth of 1114 feet. The material from the boring was
found to consist of rocks or sands entirely derived from the
calcareous skeletons of marine Invertebrate animals and calcareous
Algae.[410] Moreover, in the cores from various depths down to the
lowermost the fossilised skeletons of the common genera of recent
corals, and very few or no representatives of genera of corals now
extinct were discovered.
Fig. 173.—Section of the outer edge of one of the Maldive Atolls. A, foundation
of primitive rock cut down by the currents; B, upgrowth of the rim by the
deep-sea-, intermediate depth- and (B') reef-organisms; C, extension
outwards by means of the talus slope; D, lagoon. Scale in fathoms. (After
Stanley Gardiner.)
These facts, therefore, prove the justice of Darwin's assumption as

to the nature of the substratum—and give support to the subsidence-
theory as applied to this particular island. A strong opinion has,
however, been expressed by several authors of recent years that the
subsidence-theory cannot account for the formation of all the atolls
and barrier reefs that have now been investigated, and alternate
hypotheses have been put forward to account for particular cases.
The main chain of the Maldive Archipelago in the Indian Ocean, for
example, presents special difficulties to the acceptance of the
subsidence-theory as one of general application.[411] The main chain
of these islands is more than 300 miles long, and lies at right angles
to the monsoon currents of the Indian Ocean. Here the action of the
currents appears to have cut down a great tract of land to form a
plateau more than 100 fathoms in depth. The outer rim of this
plateau may have grown in height by the deposit of the skeletons of
surface-swimming animals, and the skeletons of deep-sea corals,
until it reached a level where reef-forming corals can thrive. A certain
number of channels would be retained and even deepened as the
rim grew up, and thus the coral would eventually reach the surface
not as a single large atoll, but as a series of coral islands. When the
coral reef has thus reached the surface and cannot grow farther in
height, it spreads radially like a fairy ring on the talus formed by
broken corals that have fallen down the slopes. The central parts, no
longer protected by living organisms, are continually subject to the
solvent action of the sea water penetrating the porous substratum,
and sink to form the lagoon.
It is not only in the reefs of the Indian Ocean, however, but in many
of the archipelagoes of the Pacific Ocean, where there is evidence of
very extensive elevation of the land areas in the neighbourhood of
atolls and barrier reefs, that the subsidence-theory does not
satisfactorily account for all the observed facts. It appears probable,
therefore, that although a gradual subsidence of the land may have
been the primary cause of coral reef formation in some areas, similar
reefs may have been formed in other areas by other natural
methods.
Fossil Corals.—A great number of the genera of corals found in the

newer Tertiary deposits, and a smaller number of those occurring in
the older Tertiary and Cretaceous strata clearly belong to families
now represented by recent corals. In the earlier strata, however,
fossils are found which cannot be placed in our system with any
degree of certainty. Attempts have been made from time to time to
arrange these corals in their proper positions by the careful study
and comparison of their skeletal features, but the reasons given are
not convincing. The genus Syringopora, and the families
Favositidae, Heliolitidae, and Coccoseridae have been noticed in the
chapter on Alcyonaria (pp. 343-346). The family Zaphrentidae will be
noticed when dealing with the order Zoanthidea.
Among the families of fossil corals of uncertain position which may

still be included in the order Madreporaria, the more important are:—
Cyathophyllidae, a family of solitary and colonial corals with

numerous radially arranged septa, extending from the Silurian to the
Carboniferous limestone. It includes the genera Cyathophyllum,
which was very abundant in Devonian times, and Lithostrotion,
which, in the times of the formation of the Carboniferous limestone,
occurred in continuous masses extending over great areas of the
sea-bottom. The Cyathophyllidae may possibly be ancestral to the
representatives of both Astraeidae and Fungiidae, which appeared in
the Triassic strata.
The Cyathaxoniidae form a family of solitary turbinate or horn-
shaped corals, with septa showing a regular, radial arrangement,
and may have been the ancestors of the modern family
Turbinoliidae. They have the same geological range as the
Cyathophyllidae.
The Cystiphyllidae.—This family consists of solitary corals with very

thin septa; the interseptal spaces are filled with an abundant
vesicular substance called the "stereoplasm." The systematic
position of this family is very doubtful, as the structure is evidently
much destroyed, but by some authors it is supposed to be ancestral
to the family Eupsammiidae.
These three families, together with the Zaphrentidae (p. 406), were
formerly grouped together as the Tetracoralla or Rugosa.
Sub-Order 1. Entocnemaria.
Madreporaria forming perforate coralla, with calices that do not
project above, or project only slightly above the surface of the
coenosarc. The zooids of each colony are usually small and
crowded. The mesenteries arise in bilateral pairs, and the increase in
their number takes place in the chamber between the ventral or the
dorsal pairs of directives. The corals included in this order are
among the most important of the reef-builders. On many of the
recent coral reefs they occur in enormous numbers and of great
individual size. But although so prevalent upon recent reefs, they
appear to have played a far less important part in the formation of
the reefs of the early Tertiary times, and in the reefs of times
antecedent to the Tertiary they were rare or absent.
Judging from the structure of the skeleton and the palaeontological

history alone it might be thought that the Entocnemaria represent the
most recent types of Madreporarian structure, but the anatomy of the
zooids points to a contrary conclusion. The zooids are of very simple
structure; the mesenteries are found only in bilateral pairs, and all
the new mesenteries formed after the protocnemes originate in one
of the directive chambers. These are characters indicating a very
ancient history, suggesting affinities with the Edwardsiidea on the
one hand, and some ancient type of Cerianthidea on the other.
There can be little doubt that it was owing to the evolution of a
porous skeleton of rapid growth that these corals have caught up
and passed the Astraeidae and other more specialised forms in the
struggle for predominance on the coral reefs.
Fam. 1. Madreporidae.—The calices of the corallum are small and

contain a few perfectly distinct septa. The coenosteum is porous and
contains a plexus of the coenosarcal canals, which connects the
cavities of neighbouring zooids. This family is divided into a number
of sub-families, but it is only necessary here to mention the
peculiarities of a few of the well-known genera.
Madrepora.—This genus is represented by an immense number of

forms on the coral reefs of both the old and new world. Attempts
have been made at various times to divide these forms into specific
groups, and a large number of species have been defined and
named. The differences between these species, however, are such
as may be due to varying conditions of life upon the reefs and not to
characters transmitted from generation to generation by heredity.
There can be no doubt that when our knowledge of the soft tissues
of these corals is extended the number of species will be greatly
reduced. There are, however, three principal forms of growth or
facies in the genus.
1. The flabellate or palmate colonies with large flat or concave

fronds, radiating from an encrusting base: Forma palmata.
2. Much branched colonies, several branches radiating obliquely

from a common centre: Forma prolifera.
3. Large and more erect colonies, less branched except towards the
periphery: Forma cervicornis.
On some reefs one of these forms of growth predominates, and for

miles the reef seems to be built up mainly of corals of this shape. On
other reefs two or sometimes all three of these forms may be found
within a stone's throw of one another. Notwithstanding the difficulty of
distinguishing the species, the genus itself is quite well defined. The
calices project slightly from the surface of the branches and contain
six septa, of which the pair that is parallel with the axis of the branch
is the strongest. This strong pair of septa can usually be well seen
when a slender branch of a Madrepore is examined by a lens by
transmitted light. At the apex of each branch there is a terminal zooid
and in the skeleton an apical calyx. The terminal zooid is (in some
species at least) different from the lateral or radial zooids. The
former is radially symmetrical and has six long equal digitiform
tentacles, the latter have usually twelve tentacles, of which six are
larger than the others. These tentacles alternate, but they are so
arranged on the disc as to give a distinctly bilateral appearance to
the zooids.
The colour of the West Indian Madrepores appears to be entirely due

to Zooxanthellae (pp. 86, 125). They are lighter or darker shades of
brown, sometimes becoming green, yellow, or orange. On the
Australian barrier reef and other reefs of the eastern seas the
growing points of the branches are variable and often brilliantly
coloured, emerald green, violet, or red; giving some of the most
wonderful colour effects for which the reef pools are famous. The
cause of these brilliant apical colours has not yet been ascertained.
The genus is found in shallow water of all seas of the tropical belt
except on the western side of the continent of America.
Montipora.—In this genus the calices are small and situated in

depressions in the coenosteum, and there are six, sometimes
twelve, septa of approximately equal size. There is no terminal calyx
at the apex of the branches. This is a genus of very variable form
and wide distribution in all tropical seas except on the shores of the
Atlantic Ocean.
Turbinaria.—This genus is usually cup-shaped or foliaceous and

twisted in form. The septa may be six to thirty in number. Some of
the species of this genus attain to a very great size in favourable
localities. There is a specimen in the British Museum that is 16 feet
in circumference and weighed, when dried, 1500 lbs.
Fam. 2. Poritidae.—The corallum is usually encrusting, foliaceous,

lobed or tufted, rarely dendritic. The whole skeleton is built up of a
system of trabeculae and stout cross bars, and in section the limits
of the calices are not well defined. The septa are represented by
twelve trabeculae. The zooids are small and are usually provided
with twelve tentacles. The most important genus is Porites, which is
so abundant on many reefs that it may be said to rival Madrepora
itself in the luxuriance of its growth. On the Australian barrier reef a
species of Porites builds up coralla over twenty feet in length and as
many in height. According to Saville Kent they are usually found on
the outer side of the reef and form a basis of support for the high-
level Madreporas and other corals.[412]
The colours of Porites are very variable and often beautiful. In

Jamaica[413] the prevailing colours are bright blue, pale yellow, and
yellowish green. In Australia the colours are less brilliant perhaps,
but among the prevailing tints are light or bright lilac, a delicate pink,
dark yellow, and brown. The genus Porites occurs in Eocene and
Miocene deposits, and is now found on all the more important coral
reefs of the world.
The genus Alveopora is usually placed with the Poritidae. According

to Bernard,[414] however, its affinities with this family are remote, and
it is more closely related to the Favositidae (see p. 344). The walls of
the calices are contiguous and the septa are reduced to rows of
spines, as in the Favositidae. It is found in shallow water in the
Pacific, the Indian Ocean, and the Red Sea.
Sub-Order 2. Cyclocnemaria.
Madreporaria forming perforate or imperforate coralla. Solitary or
colonial. The zooids have usually a large number of mesenteries
arranged in two or more cycles. The mesenteries beyond the
protocnemic pairs arise in unilateral pairs in chambers other than
those between the directives.
Sect. 1. Aporosa.—Cyclocnemaria in which the theca and septa

are not perforated. The zooids of the colonial forms may
communicate by means of superficial canals of the coenosarc, or
they may be in contact with one another only at their edges.
Several families are included in this section, of which the more

important are:—
Fam. 1. Turbinoliidae.—The corals included in this family are

mostly solitary forms attached to foreign objects, or living partly
embedded in sand. In some cases a small colony is formed by
gemmation.
The genus Flabellum is a solitary coral of a compressed top shape. It

has a large number of septa arranged radially on the cup-wall. This
cup-wall is not a true theca but an epitheca. In some forms root-like
tubes grow out from the sides of the cup near its base and may
serve to support the coral on solid objects. In some remarkably fine
specimens recently obtained from the Persian Gulf these tubes
served to attach the coral to a telegraph cable. Flabellum seems to
be cosmopolitan in its distribution. It is usually found in deep or
moderately deep water, but some specimens have been dredged in
water of 2 to 9 fathoms.
Fig. 174.—Side view of Trochocyathus hastatus, with exsert septa, well-marked
costae (c), and with three spinous projections (Sp) at the base formed by
outgrowths from primary costae. (After G. C. Bourne.)
Caryophyllia is a conical coral fixed by a slightly expanded base. The

cup-wall is a true theca covered below by an epitheca. There is a
spongy columella surrounded by a single circle of pali. There is one
British species, C. smithii. It is found attached to shells at a depth of
about thirty fathoms near the Eddystone Lighthouse and in other
localities in the English Channel. It also occurs between tide marks
in the Scilly Islands, and is found off the Shetlands, on the west
coast of Scotland, and the south-west of Ireland. The genus is widely
distributed and extends from shallow water to depths of 1500
fathoms. Caryophyllia sometimes occurs in clusters which have the
appearance of an incipient colony. This may be due to the embryos
fixing themselves upon the epitheca of existing individuals and
developing there. It is doubtful whether the species ever reproduce
asexually either by gemmation or by fission. When the zooid is fully
expanded it projects some distance above the corallum and shows a
very transparent body-wall with a crown of some fifty tentacles. Each
tentacle terminates in a globose head (Fig. 169) charged with
nematocysts. The general colour is pale pink, and there is a broad
brown circle round the mouth. Large specimens may be three-
quarters of an inch in diameter.
Turbinolia is a common Eocene fossil genus found in England and

France, and is stated to occur in the Caribbean Sea. The columella
stands up like a stylet and the septa are "exsert," i.e. project above
the rim of the theca.
Trochocyathus is a genus with well-marked "costae" occurring in

tropical shallow water (Fig. 174).

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Fundamentals of Corporate Finance

Australasian 2nd Edition Parrino Test

© John Wiley & Sons Australia, Ltd 2013

Chapter 8 - Bond valuation and the structure of interest rates

© John Wiley & Sons Australia, Ltd 2013 8.2

10. Corporate bonds have a thin market relative to shares.

© John Wiley & Sons Australia, Ltd 2013 8.3

© John Wiley & Sons Australia, Ltd 2013 8.4

18. As interest rates fall, the prices of bonds decline.

19. Higher coupon bonds have greater interest rate risk.

© John Wiley & Sons Australia, Ltd 2013 8.5

© John Wiley & Sons Australia, Ltd 2013 8.6

© John Wiley & Sons Australia, Ltd 2013 8.7

27. In an efficient capital market,

28. Which one of the following statements is NOT true?

a. The overall efficiency of a capital market depends on its operational efficiency

29. Which one of the following statements is NOT true?

a. Competition among investors is an important driver of informational efficiency.

© John Wiley & Sons Australia, Ltd 2013 8.8

30. With strong-form market efficiency:

31. With semi-strong form market efficiency:

32. Which one of the following statements is NOT true?

© John Wiley & Sons Australia, Ltd 2013 8.9

33. Which ONE of the following statements is true?

34. Which one of the following statements is NOT true?

a. the corporate bond market is considered to be very transparent.

© John Wiley & Sons Australia, Ltd 2013 8.10

a. They have no special provisions.

37. Which ONE of the following statements is true?

38. Which ONE of the following statements is true?

a. To secure the conversion option on a bond, bondholders would be willing to pay a

© John Wiley & Sons Australia, Ltd 2013 8.11

a. less than the bond's coupon rate.

a. use double the number of payments.

© John Wiley & Sons Australia, Ltd 2013 8.12

© John Wiley & Sons Australia, Ltd 2013 8.13

© John Wiley & Sons Australia, Ltd 2013 8.14

a. Yes, the bond is worth more at $1,015.

© John Wiley & Sons Australia, Ltd 2013 8.15

© John Wiley & Sons Australia, Ltd 2013 8.16

*a. at a price equal to its face value.

© John Wiley & Sons Australia, Ltd 2013 8.17

57. Which one of the following statements is NOT true?

a. exceed the price of the bond.

59. Which one of the following statements is NOT true?

© John Wiley & Sons Australia, Ltd 2013 8.18

© John Wiley & Sons Australia, Ltd 2013 8.19

© John Wiley & Sons Australia, Ltd 2013 8.20

© John Wiley & Sons Australia, Ltd 2013 8.21

© John Wiley & Sons Australia, Ltd 2013 8.22

72. Which one of the following statements is NOT true?

73. Which ONE of the following statements is true?

a. Long-term bonds have lower price volatility than short-term bonds.

74. Marketability is the ability of an investor

75. Which ONE of the following statements is true?

© John Wiley & Sons Australia, Ltd 2013 8.23

76. Which ONE of the following statements is true?

77. Which one of the following statements is NOT true?

78. Inverted yield curves are observed when

a. the economy is growing.

© John Wiley & Sons Australia, Ltd 2013 8.24

79. Which one of the following statements is NOT true?

© John Wiley & Sons Australia, Ltd 2013 8.25