Acctg 106 Practice Drill

1.
a ____ is a complex and lengthy legal document stating the conditions under which a bond has
been issued. BOND INDENTURE
2. the value of a bond is the present value of the INTEREST PAYMENT AND MATURIRTY
VALUE.
3. If the required return is less than the coupon rate, a bond will set at PAR
4. When valuing a bond, the characteristics of the bond that remain fixed are all of the following
EXCEPT the PRICE
5. You intend to purchase a 10-year, php 1,000 face value bond that pays interest of php60 every 6
months. If you nominal annual required rate of return is 10 percent with semiannual
compounding, how much should you be willing to pay for this bond? 1,124,62
6. Bonds are LONG TERM DEBT INSTRUMENTS
7. Assume that you are considering the purchase of a php1,000 par value bond that pays interest of
php70 each six months and has 10 years to go before it matures. If you buy this bond, you expect
to hold it for 5 years and then sell It in the market. You (and other investors) currently require a
nominal annual rate of 16 percent, but you expect the market to require a nominal rate of only 12
percent when you sell the bond due to a general decline in interest rates. How much should you
be willing to pay for this bond? PHP 1,115.81
8. Assume that you wish to purchase a 20-year bond that has a maturity value of PHP 1,000 and
makes semiannual interest payments of PHP40. If you require a 10 percent nominal yield to
maturity on this investment, what is the maximum price you should be willing to pay for the
bond? PHP 828
9. Generally, an increase in risk will result in A HIGHER required return or interest rate.
10. The key inputs to the valuation process include RETURNS, TIMING AND RISK
11. A 10-year treasury bond has an 8 percent coupon. An 8-year treasury bond has a 10 percent
coupon. Both bonds have the same yield to maturity. If the yields to maturity of bonds increase
by the same amount, which of the following statements is most correct? BOTH BONDS WILL
DECLINE IN PRIC, BUT THE 10-YEAR BOND WILL HAVE A GREATER
PERCENTAGE DECLINE IN PRICE THAN THE 8-YEAR BOND.
12. Cold Boxes Ltd. Has 100 bonds outstanding (maturity value=php1,000). The nominal required
rate of return on these bonds is currently 10 percent, and interest is paid semiannually. The bonds
mature in 5 years, and their current market value is php768 per bond. What is the annual coupon
interest rate? 8%
13. A PHP1,000 par value bond pays interest of PHP35 each quarter and will mature in 10 years. If
your nominal annual required rate of return is 12 percent with quarterly compounding, how much
should you be willing to pay for this bond? PHP 1,115,57
14. THE PRESENT VALUE of all future cash flows an asset is expected to provide over a relevant
time period is the value of the asset.
15. Your client has been offered a 5-year, php1,000 par value bond with a 10 percent coupon.
Interest on this bond is paid quarterly. If your client is to earn a nominal rate of return of 12
percent, compounded quarterly, how much should she pay for the bond? Php 926
16. Which of the following statements is most correct? IF A BOND IS SELLING AT PAR
VALUE, ITS CURRENT YIELD EQUALS ITS YIELD TO MATURITY.
17. A 15-year bond with a face value of php1,000 currently sells for Php 850. Which of the following
statements is most correct? The bond’s current yield is equal to bond’s coupon rate.
18. Assume that you wish to purchase a bond with a 30-year maturity, an annual coupon rate of 10
percent, a face value of php 1,000, and semiannual interest payments. If you require a 9 percent
nominal yield to maturity on this investment, what is the maximum price you should be willing
to pay for the bond? Php 1,102.74
19. If a bond pays 1,000 plus interest at maturity, php 1,000 is called the PAR VALUE
20. The current price of a 10-year, php1,000 par value bond is PHP 1,158.9. Interest on this bond is
paid every six months, and the nominal annual yield is 14 percent. Given these facts, what is the
annual coupon rate on this bond? 17%
21. The REAL rate of interest creates equilibrium between the supply of savings and the demand for
investment funds.
22. The price of a bond with a fixed coupon rate and the market required return have a relationship
that is best described as CONSTANT
23. The NOMINAL rate of interest is the actual rate charged by the supplier and paid by the
demander of funds.
24. The PAR value of a bond is also called its face value. Bonds which sell at less than face value are
priced at a DISCOUNT, while bond which sell at greater than face value sell at a PREMIUM.
25. When the required return is constant and equal rate, the price of a bond as it approached its
maturity date will REMAIN CONSTANT.
26. 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. BOND E WILL HAVE GREATER CHANGE IN PRICE
27. The legal contract setting forth the terms and provisions of a corporate bond is an INDENTURE
28. A bond has an annual 8 percent coupon rate, a maturity of 10 years, a face value of PHP 1,000
and makes semiannual payments. If the price is PHP 934.96, what is the annual nominal yield to
maturity on the bond? 9%
29. A 10-year corporate bond has an annual coupon payment of 9 percent. The bond currently selling
at par PHP1,000. Which of the following statements is most correct? AL OF THE
STATEMENTS ABOVE ARE CORRECT.
30. Consider a PHP 1,000 par value bond with a 7 percent annual coupon. The bond pays interest
annually. There are 9 years remaining until maturity. What is the current yield on the bond
assuming that the required return on the bond is 10 percent? 8.46%

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