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Fin2601 study unit 5 exam questions

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Study Unit 5 Interest Rates and Bond Valuation Exam Questions
1. The theory suggesting that for any given issuer, long-term interest rates tend to be higher than
short-term rates is called …
1. The expectation hypothesis.
2. The liquidity preference theory.
3. The market segmentation theory.
4. None of the above.
2. In the valuation process, the … is used to incorporate risk in the analysis.
1. standard deviation (σ)
2. coefficient of variation (CV)
3. discount rate
4. interest rate
3. The ____ value of a bond is also called its face value____. Bonds which sell at less than the face
value are priced at a ___ while bonds which sell at greater than face value sell at a
1. Discount, par, premium
2. Premium, discount, par
3. Par, discount, premium
4. Coupon, premium, discount
4. A 12-year bond has an annual coupon rate of 9 percent. The coupon rate will remain fixed until
the bond matures. The bond has a yield to maturity of 7 percent. Which one of the following
statements is correct?
1. If the market interest rates decline, the price of the bond will also decline
2. The bond is currently selling at a price below its par value
3. If market interest rates remain unchanged, the bond’s price one year from now will
be lower than it is today
4. If market interest rates remain unchanged, the bond’s price one year from now will
be higher than it is today
5.
If a bond is issued with a coupon rate that vanes directly with the required
return, the price of the bond will be
1.
less than the face value
2.
greater than the face value
3.
equal to the face value
4.
greater or less than the face value depending on how interests vary

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6. The Mopani Company has two debentures outstanding which differ in their maturity date
Debenture A matures in four years while Debenture B matures in seven years. If the required
return changes to 15%, then (Nov 2005) (Nov 2006) (May 2009)
1. Debenture A will have a greater change in price
2. Debenture B will have a greater change in price
3. The price of the debentures will be constant
4. The price change for the debentures will be equal
7. The yield to maturity on a bond with a price equal to its value will… (Nov 2005)
1. Be less than the coupon rate
2. Be more than the coupon rate
3. Always be equal to the coupon rate
4. Be more or less than the coupon rate, depending on the required return
8. A Telkom bond is issued at a par value of R1 000 each. Interest is paid annually and the
required rate is the bond’s coupon interest rate of 12 percent. If the maturity of the bond is 10
years, what is its present value? (Nov 2005)
1. R 1 000,00
2. R 708,40
3. R 678,00
4. R 322,00
9. Renaissance Investments has a required rate of return of 15%. It is considering investing in
Orange Cell debentures, which will be issued at a par value of R1 000 with a coupon interest
rate of 12% (paid annually) and a maturity period of ten years. The value of the debentures is
approximately …
1. R247,00.
2. R602,28.
3. R849,28.
4. R1 000,00.
10.
You have just purchased a 10-year, R1 000 par value 8% debentures with
interest paid
every 6 months. If you expect to earn a 10% return on this
debenture, how much did
you pay for it?
1.
R
812 15
2.
R
875 38
3.
R1 003 42
4.
R1 122 87

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Study Unit 5 Interest Rates and Bond Valuation Exam Questions 1. The theory suggesting that for any given issuer, long-term interest rates tend to be higher than short-term rates is called … 1. 2. 3. 4. The expectation hypothesis. The liquidity preference theory. The market segmentation theory. None of the above. 2. In the valuation process, the … is used to incorporate risk in the analysis. 1. 2. 3. 4. standard deviation (σ) coefficient of variation (CV) discount rate interest rate 3. The ____ value of a bond is also called its face value____. Bonds which sell at less than the face value are priced at a ___ while bonds which sell at greater than face value sell at a 1. 2. 3. 4. Discount, par, premium Premium, discount, par Par, discount, premium Coupon, premium, discount 4. A 12-year bond has an annual coupon rate of 9 percent. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7 percent. Which one of the following statements is correct? 1. If the market interest rates decline, the price of the bond will also decline 2. The bond is currently selling at a price below its par value 3. If market interest rates remain unchanged, the bond’s price one year from now will be lower than it is today 4. If market interest rates remain unchanged, the bond’s price one year from now will be higher than it is today 5. If a bond is issued with a coupon rate that vanes directly with the required return, the price of the bond will be ...
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