CHAPTER 07 14BONDS AND THEIR VALUATION
Chapter 7: Bonds and Their Valuation
1. If a firm raises capital by selling new bonds, it could be called the “issuing firm,” and the coupon rate is generally set equal to the required rate on bonds of equal risk.
a. True
b. False
ANSWER: True
2. A call provision gives bondholders the right to demand, or “call for,” repayment of a bond. Typically, companies call bonds if interest rates rise and do not call them if interest rates decline.
a. True
b. False
ANSWER: False
3. Sinking funds are provisions included in bond indentures that require companies to retire bonds on a scheduled basis prior to their final 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.
a. True
b. False
ANSWER: True
4. A zero coupon bond is a bond that pays no interest and is offered (and initially sells) at par. These bonds provide compensation to investors in the form of capital appreciation.
a. True
b. False
ANSWER: False
5. The desire for floating-rate bonds, and consequently their increased usage, arose out of the experience of the early 1980s, when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.
a. True
b. False
ANSWER: True
6. The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.
a. True
b. False
ANSWER: True
7. The price sensitivity of a bond to a given change in interest rates is generally greater the longer the bond’s remaining maturity.
a. True
b. False
ANSWER: True
8. A bond that had a 20-year original maturity with 1 year left to maturity has more price risk than a
1. If a firm raises capital by selling new bonds, it could be called the “issuing firm,” and the coupon rate is generally set equal to the required rate on bonds of equal risk.
a. True
b. False
ANSWER: True
2. A call provision gives bondholders the right to demand, or “call for,” repayment of a bond. Typically, companies call bonds if interest rates rise and do not call them if interest rates decline.
a. True
b. False
ANSWER: False
3. Sinking funds are provisions included in bond indentures that require companies to retire bonds on a scheduled basis prior to their final 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.
a. True
b. False
ANSWER: True
4. A zero coupon bond is a bond that pays no interest and is offered (and initially sells) at par. These bonds provide compensation to investors in the form of capital appreciation.
a. True
b. False
ANSWER: False
5. The desire for floating-rate bonds, and consequently their increased usage, arose out of the experience of the early 1980s, when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.
a. True
b. False
ANSWER: True
6. The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.
a. True
b. False
ANSWER: True
7. The price sensitivity of a bond to a given change in interest rates is generally greater the longer the bond’s remaining maturity.
a. True
b. False
ANSWER: True
8. A bond that had a 20-year original maturity with 1 year left to maturity has more price risk than a