Fundamentals Of Corporate Finance, 9th Edition
9th Edition
ISBN: 9781260052220
Author: Richard Brealey; Stewart Myers; Alan Marcus
Publisher: McGraw-Hill Education
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Chapter 14, Problem 15QP
a.
Summary Introduction
To estimate: Whether the callable or non callable bonds will increase with the declining interest rates.
b.
Summary Introduction
To estimate: If the zero coupon bond or other coupon bonds are callable before maturity.
c.
Summary Introduction
To estimate: Whether the callable or non callable bonds will give higher yield to maturity.
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Which of the following statements is TRUE regarding bonds?
O A. At maturity, lenders repay a bond's par value to borrowers.
O B. Ceteris paribus, bonds with higher YTMS would have higher prices.
c. Borrowers purchase bonds.
O D. If you anticipate a decline in market interest rates, you should purchase long-term zero-coupon bonds.
According to the expectations theory of the term structure,
O a when the yield curve is steeply upward-sloping, short-term interest rates are expected to rise in the future.
O b. when the yield curve is downward-sloping, short-term interest rates are expected to decline in the future.
O c. buyers of bonds prefer short-term to long-term bonds.
O d. all of the above.
O e. only A and B of the above.
3. Bond prices and yields (S3.1) Construct some simple examples to illustrate your answers to the following:
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Fundamentals Of Corporate Finance, 9th Edition
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- Interest rate risk; a.is lesser for bonds with a longer term as compared to bonds with a shorter term b.is the risk that the market interest rate may remain constant c.is the risk that a bond's coupon rate may change over time d.is zero on the date of maturity of a bondarrow_forward1. Which of the following is correct? Group of answer choices 1. The lower the price you pay for a bond, the greater is your return. 2. A bond is overpriced when its value is greater than its price. 3. A fairly priced bond has a price equal to its face. 4. The value of a bond can be determined by the present value of all coupon payments and the present value of principal payment at maturity date.arrow_forwardExplain how does a bond par value differs from its market value? Are variable rate bonds attractive to investors who expect the interest rates to decrease? Explain. Would a firm that needs to borrow funds consider issuing variable rate bonds if it expects interest rates to decrease in the future? Explain.arrow_forward
- Which of the following is an advantage of floating rate bonds to investors? Group of answer choices A. Their market value tend to be highly stable regardless of interest rate changes. B. All of these options are correct. C. They are sold at a deep discount. D. They allow for locking in a multiplier of the initial investment.arrow_forwardWhich of the following statements is false? A. Other things being equal, an increase in a bond’s maturity will increase its interest rate risk. B. Other things being equal, an increase in the coupon rate of a bond will decrease its interest rate risk. C. Other things being equal, an increase in a bond’s YTM will decrease its interest rate risk. D. Effective duration is calculated as Macaulay duration divided by one plus the bond’s yield to maturity.arrow_forwardWhat does "bond price elasticity" mean? How does the price elasticity of bonds compare to the yield to maturity of zero-coupon bonds? Why? Which means that zero-coupon Treasury bonds are more volatile than high-coupon Treasury bonds in terms of market value.arrow_forward
- Under what situation might a bond discount arise when issuing bonds? Select one: a. The coupon rate is less than the effective or yield rate. b. The effective or yield rate is less than the coupon rate. c. The coupon rate is less than the cash rate of interest. d. The effective or yield rate is less than the market rate of interest.arrow_forward1)Which of the following is NOT true regarding bonds? Group of answer choices A)If a bond is selling at a discount, then the current yield is greater than the yield-to-maturity. B)An increase in market interest rates leads to a decrease in bond prices. C)If the coupon rate on a bond is lower than the yield-to-maturity, the bond sells at a discount. D)If the coupon rate on a bond equals the yield-to-maturity, then the bond sells at par. 2)When calculating free cash flows, which of the following statements is NOT true regarding the depreciation? Group of answer choices A)As an accrual, depreciation does not factor into free cash flow calculations. B)Depreciation is an accrual, not a cash flow. C)Depreciation create a tax shield. D)Depreciation is first removed and the subsequently added back in when calculating free cash flows.arrow_forwardWhich of the following bonds has the least reinvestment risk?A. A bond that has a higher coupon rate than the yield-to-maturityB. A bond that has a lower coupon rate than the yield-to-maturityC. A zero-coupon bondarrow_forward
- Which of the following is NOT true regarding bonds? O If a bond is selling at a discount, then the current yield is greater than the yield-to-maturity. An increase in market interest rates leads to a decrease in bond prices. O If the coupon rate on a bond is lower than the yield-to-maturity, the bond sells at a discount. O If the coupon rate on a bond equals the yield-to-maturity, then the bond sells at par.arrow_forwardi. How would you expect the price of the callable bond to compare to that of the non-callable bond? Give an explanation for your answer, using a maximum of two sentences ii. If interest rates were to rise dramatically, how would you expect this to impact the price differences between the two bonds; increase, decrease or stay constant? Justify your response in a single sentence iii. Explain the advantage of issuing a callable bond compared to a non-callable?arrow_forwardhow will the modified duretion of a floating coupon bond be compared to the modified duration of a fixed rate coupon bond? (same, higher or lower?) (floating coupon adjust coupon accotding to interest rate level, ie higher interest rate results in higher coupon payment)arrow_forward
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Bond Valuation - A Quick Review; Author: Pat Obi;https://www.youtube.com/watch?v=xDWTPmqcWW4;License: Standard Youtube License