Chapter 8—Bond Valuation and Risk

1. The appropriate discount rate for valuing any bond is the

a. bond's coupon rate.

b. bond's coupon rate adjusted for the expected inflation rate over the life of the bond.

c. Treasury bill rate with an adjustment to include a risk premium if one exists.

d. yield that could be earned on alternative investments with similar risk and maturity.

ANS: D PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.08.01

NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.01

KEY: Bloom's: Comprehension

2. The valuation of bonds is generally perceived to be ____ the valuation of equity securities.

a. more difficult than

b. easier than

c. just as difficult as

d. none of the above

ANS: B PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.08.01

NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.01

KEY: Bloom's: Knowledge

3. A bond with a $1,000 par value has an 8 percent annual coupon rate. It will mature in 4 years, and

annual coupon payments are made at the end of each year. Present annual yields on similar bonds are 6

percent. What should be the current price?

a. $1,069.31

b. $1,000.00

c. $9712

d. $927.66

e. none of the above

ANS: A PTS: 1 DIF: Challenging OBJ: FMAI.MADU.15.08.01

NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.01

KEY: Bloom's: Application

4. A bond with a ten percent coupon rate bond pays interest semi-annually. Par value is $1,000. The bond

has three years to maturity. The investors' required rate of return is 12 percent. What is the present

value of the bond?

a. $1,021

b. $1,000

c. $981

d. $951

e. none of the above

ANS: D PTS: 1 DIF: Challenging OBJ: FMAI.MADU.15.08.01

NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.01

KEY: Bloom's: Application

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