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Returns and Yield for Corporate Bonds

1.Consider the following returns and yields: U.S. T-bill = 8%, 5-year U.S. T-note = 7%, IBM common stock = 15%, IBM AAA Corporate Bond = 12% and 10-year U.S. T-bond = 6%. Based on this information, the shape of the yield curve is

1. normal.
2. downward sloping.
3. upward sloping.
4. flat.

2.If a bond pays $1,000 plus interest at maturity, $1,000 is called the

1. stated value.
2. par value.
3. long-term value.
4. market value.

3.The purpose of the restrictive debt covenant that imposes fixed assets restrictions is to

1. limit the amount of fixed-payment obligations.
2. ensure a cash shortage does not cause an inability to meet current obligations.
3. prevent the firm from liquidation, acquisition, or encumbrance of capital assets.
4. protect the lender by controlling the risk and marketability of the borrower's security investment alternatives.

4.The size of the loan and its issuance costs (as a percentage of the amount borrowed) are

1. not related.
2. correlated.
3. independent.
4. inversely related.

5.A ________ gives purchasers inflation protection.

1. income bond
2. zero coupon bond
3. floating rate bond
4. junk bond

6.Convertible bonds are normally

1. subordinated debentures.
2. debentures.
3. mortgage bonds.
4. income bonds.

7.________ of all future cash flows an asset is expected to provide over a relevant time period is the value of the asset.

1. The future value
2. The stated value
3. The present value
4. The sum

8.The ABC company has two bonds outstanding that are the same except for the maturity date. Bond D matures in 4 years, while Bond E matures in 7 years. If the required return changes by 15 percent

1. Bond E will have a greater change in price.
2. the price of the bonds will be constant.
3. the price change for the bonds will be equal.
4. Bond D will have a greater change in price.

9. Jia Hua Enterprises wants to issue sixty 20-year, $1,000 par value, zero-coupon bonds. If each bond is priced to yield 7 percent, how much will Jia Hua receive (ignoring issuance costs) when the bonds are first sold?

1. $15,505
2. $18,880
3. $20,000
4. $12,393
5. $11,212

10.Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent annual coupon interest rate. The issue has ten years remaining to the maturity date. Bonds of similar risk are currently selling to yield a 12 percent rate of return. The current value of each Hewitt bond is ________.

1. $1,000
2. $1,052.24
3. $791.00
4. $1,113.00

Solution Preview

1. Because the US T-bill yields more than the 5 year bond, which in turn yields more than the 10 year bond, the yield curve is downward sloping (#2).

2. By definition, the face value of a bond (i.e., the amount paid at maturity with accrued interest) is also called its par value (#2).

3. In order to retain the integrity of the business and its cash flows, fixed asset restrictions prevent the firm from liquidation, acquisition, or encumbrance of capital assets (#3).

4. It generally costs just as much, if not a little more, to ...

Solution Summary

This solution answers questions regarding the yield curve, definitions of terms used in corporate finance, and how to compute the market value of bonds.