Submitted by: Submitted by timbadia
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Category: Business and Industry
Date Submitted: 04/06/2015 08:56 PM
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...