Chapter 7 The Valuation and Characteristics of Bonds

25) Market efficiency implies which of the following?

A) book value = intrinsic value

B) market value = intrinsic value

C) book value = market value

D) liquidation value = book value

26) When the intrinsic value of an asset exceeds the market value

A) the asset is undervalued to the investor.

B) the asset is overvalued to the investor.

C) market value and intrinsic value are always the same; therefore, this could not happen.

D) liquidation value must be higher than book value.

27) Which of the following is FALSE concerning bonds?

A) The indenture spells out the obligations of the bond issuer.

B) Mortgage bonds are secured by assets such as real estate.

C) Debentures are secured by specific assets other than real estate.

D) Subordinated debentures are riskier than unsubordinated debentures.

28) The present value of the expected future cash flows of an asset represents the asset's

A) liquidation value.

B) book value.

C) intrinsic value.

D) par value.

29) Speculative, or non-investment-grade, bonds have an S&P bond rating of

A) C or less.

B) CCC or less.

C) BB or less.

D) BBB or less.

30) If a corporation were to choose between issuing a debenture, a mortgage bond, or a subordinated debenture, everything else equal (such as coupon rate, maturity, etc.) which would sell for the greatest price?

A) the debenture

B) the mortgage bond

C) the subordinated debenture

D) All of the above types of bonds would sell for the same price.

31) A company with a bond rating of BBB is more likely to have which of the following qualities compared to a company with a bond rating of B?

A) greater reliance on equity financing

B) high variability in past earnings

C) little use of subordinated debt

D) small firm size

32) A Johnson corporation bond is currently selling for $850. The bond matures in 20 years, has a face value of $1,000, and a yield to maturity of 10.55%. The bond's coupon rate is

A) 10%.

B) 11%.

C) 12%.

D) 13%.

33) FYI bonds have a par value of $1,000. The bonds pay $40 in interest every six months and will mature in 10 years.

a. Calculate the price if the yield to maturity on the bonds is 7, 8, and 9 percent, respectively.

b. Explain the impact on price if the required rate of return decreases.

c. Compute the coupon rate on the bonds. How does the relationship between the coupon rate and the yield to maturity determine how a bond's price will compare to it par value?

34) You want to invest in bonds. Explain whether or not each provision listed will make the bonds more or less desirable as an investment: call provision, convertible bond provision, subordinated debt