Bond Valuation

Valuation of Bonds

MULTIPLE CHOICE

1. A security's value is equal to:

a.|the book value of the firm|

b.|the book value of the firm divided by number of shares|

c.|the future value of its expected cash flows|

d.|the present value of its expected cash flows|

ANS: D

2. When interest rates move up or down, bond prices move:

a.|in the opposite direction|

b.|in the same direction|

c.|in the opposite direction and further the longer is the term until maturity|

d.|a and c|

ANS: D

3. Holding all other variables constant, as market interest rates increase, bond prices ____.

a.|decrease|

b.|increase|

c.|remain unchanged|

d.|None of the above|

ANS: A

4. A bond with an annual coupon payment of $100 originally sold at par for $1,000. Market interest rates are currently 12%. This bond would be selling at a ____ in order to compensate ____.

a.|premium; the purchaser for the below market coupon rate|

b.|discount; the purchaser for the below market coupon rate|

c.|premium; the seller for the below market coupon rate|

d.|discount; the seller for the below market coupon rate|

ANS: B

5. If current interest rates are lower than the coupon rate, investors owning a bond can:

a.|sell the bond at a premium, because lower interest rates will cause investors to bid price up to the point where their investment yields the market's return|

b.|only sell the bond at a discount (below face value), recognizing that the lower the price of the bond, the closer the yield becomes to the market's return|

c.|be wise to hold the bond until maturity, at which point the market value will greater than the face value of the bond|

d.|none of the above|

ANS: A

6. Which of the following describes the relationship between changes in market interest rates and the market value of bonds?

a.|When interest rates increase, bond prices increase.|

b.|When interest rates decrease, bond prices decrease.|

c.|When interest rates...