Time Value of Money/Bonds

Multiple Choice. Identify the letter of the choice that best completes the statement or answers the question.

1. In a general sense, the value of any asset is the [A] Value of the dividends received from the asset. [B] Present value
of the cash flows received from the asset. [C] Value of past dividends and price increases for the asset. [D] Future
value of the expected earnings discounted by the asset's cost of capital.
2. The concept of time value of money is important to financial decision making because [A] It emphasizes earning a
return on invested capital. [B] It recognizes that earning a return makes P1 worth more today than P1 received in the
future. [C] It can be applied to future cash flows in order to compare different streams of income. [D] All of the above.
3. Why is the present value of an amount to be received (paid) in the future less than the future amount? [A] Deflation
causes investors to lose purchasing power when their dollars are invested for greater than one year. [B] Investors have
the opportunity to earn positive rates of return, so any amount invested today should grow to a larger amount in the
future. [C] Investments generally are not as good as those who sell them suggest, so investors usually are not willing
to pay full face value for such investments, thus the price is discounted. [D] Because investors are taxed on the income
received from investment they never will buy with the amount expected to be received in the future.
4. A peso today is worth more than a peso to be received in the future because [A] risk of nonpayment in the future. [B]
the peso can be invested today and earn interest. [C] inflation will reduce purchasing power of a future peso. [D] None
of these.
5. An annuity may be defined as [A] A payment at a fixed interest rate. [B] A series of payments of unequal amount. [C]
A series of yearly payments. [D] A series of consecutive payments of equal amounts.
6. As the interest rate increases, the present value of an amount to be received at the end of a fixed period [A] increases.
[B] decreases. [C] remains the same. [D] not enough information to tell.
7. The higher the rate used in determining the future value of a P1 annuity, [A] the smaller the future value at the end
of the period. [B] the greater the future value at the end of a period. [C] the greater the present value at the beginning
of a period. [D] none of these - the interest has no effect on the future value of an annuity.
8. All else equal, if you expect to receive a certain amount in the future, say, P1,000 in ten (10) years, the present value
of that future amount will be lowest if the interest earned on such investments is compounded [A] Daily. [B] Weekly.
[C] Semi-annually. [D] Annually.
9. As the time period until receipt increases, the present value of an amount at a fixed interest rate [A] decreases. [B]
remains the same. [C] increases. [D] not enough information to tell.
10. Increasing the number of periods will increase all of the following except [A] the present value of an annuity. [B] the
present value of P1. [C] the future value of P1. [D] the future value of an annuity.
11. The amount that someone is willing to pay today, for a single cash flow in the future is [A] the future value of the cash
flow. [B] the future value of the stream of cash flows. [C] the present value of the cash flow. [D] the present value of
the annuity of cash flows.
12. Which of the statements is correct? Statement 1. If a firm raises capital by selling new bonds, it is called the "issuing
firm," and the coupon rate is generally set equal to the required rate on bonds of equal risk. Statement 2. A zero-
coupon bond is a bond that pays no interest and is offered and initially sold at face value. [A] Statement 1 only. [B]
Statement 2 only. [C] Both statements. [D] None of the above.
13. Bonds are identified by all of the following except [A] Issuer. [B] Maturity. [C] Coupon. [D] Rating.
14. The details of a bond issue are contained in the [A] Debenture. [B] Indenture. [C] Confirmation statement. [D] Call
agreement.
15. Which of the following statements is correct? Statement 1. A bond's price is determined by the issue's coupon rate,
length to maturity, and the prevailing yield in the market. Statement 2. The coupon of a bond indicates the income
that the bond investor will receive over the life of the bond. [A] Statement 1 only. [B] Statement 2 only. [C] Both
statements. [D] None of the above.
16. Typical bond cash flows include all of the following except [A] Annuity plus lump sum. [B] Growing annuity plus lump
sum. [C] Perpetuity. [D] Lump sum only.
17. Which of the statements is correct? Statement 1. The value/price of a bond is equal to the present value of all future
interest payments added to the present value of the principal. Statement 2. When the interest rate on a bond and its
yield to maturity are equal, the bond will trade at face value. [A] Statement 1 only. [B] Statement 2 only. [C] Both
statements. [D] None of the above.
18. Which set of conditions will result in a bond with the greatest volatility? [A] A high coupon and a short maturity. [B] A
high coupon and a long maturity. [C] A low coupon and a short maturity. [D] A low coupon and a long maturity.
19. A bond that only pays a principal payment at maturity date is known as a [A] Maturity bond. [B] Interest free bond.
[C] Mini-coupon bond. [D] Zero-coupon bond.
20. The annual interest paid on a bond relative to its prevailing market price is called its [A] Yield to maturity. [B] Coupon
rate. [C] Effective yield. [D] Current yield.
21. If a bond sells for par [A] current yield equals yield to maturity. [B] current yield exceeds the yield to maturity. [C]
current yield is less than the yield to maturity. [D] none of the above.

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 Time Value of Money/Bonds

22. If a bond sells at a premium [A] current yield exceeds the yield to maturity. [B] current yield is less than the yield to
maturity. [C] current yield equals yield to maturity. [D] none of the above.
23. If a bond sells at a discount [A] current yield is less than the yield to maturity. [B] current yield exceeds the yield to
maturity. [C] current yield equals yield to maturity. [D] none of the above.
24. Which of the statements is correct? Statement 1. The yield to maturity is always equal to the interest payment of a
bond. Statement 2. When the interest rate on a bond and its yield to maturity are equal, the bond will trade at par
value. [A] Statement 1 only. [B] Statement 2 only. [C] Both statements. [D] None of the above.
25. A bond which has a yield to maturity greater than its coupon rate will sell for a price [A] Below face value. [B] At face
value. [C] Above face value. [D] What is equal to the face value of the bond plus the value of all interest payments.
26. If the yield to maturity on a bond is greater than the coupon rate, you can assume [A] Interest rates have decreased.
[B] The price is below the face value. [C] The price is above the face value. [D] Risk premiums have decreased.
27. The longer the time to maturity [A] The greater the price increase from an increase in interest rates. [B] The less the
price increase from an increase in interest rates. [C] The greater the price increase from a decrease in interest rates.
[D] The less the price decrease from a decrease in interest rates.
28. The relationship between a bond's price and the yield to maturity [A] Changes at a constant level for each percentage
change of yield to maturity. [B] Is an inverse relationship. [C] Is a linear relationship. [D] Not at all related.
29. To solve for a bond's yield to maturity with semi-annual interest payments [A] Divide the discount rate by two and
double the number of periods. [B] Divide the discount rate by two and halve the number of periods. [C] Multiply the
discount rate by two and double the number of periods. [D] Multiply the discount rate by two and halve the number
of periods.
30. Which of the following events would make it more likely that a company would choose to call its outstanding callable
bonds? [A] Market interest rates rise sharply. [B] Market interest rates decline sharply. [C] The company's financial
situation deteriorates significantly. [D] The company’s bonds are downgraded.
31. A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is correct?
[A] The bond is selling below its par value. [B] The bond is selling at a discount. [C] If the yield to maturity remains
constant, the bond’s price one year from now will be lower than its current price. [D] If the yield to maturity remains
constant, the bond’s price one year from now will be higher than its current price.
32. Which of the following statements is correct? [A] If a coupon bond is selling at a discount, its price will continue to
decline until it reaches its par value at maturity. [B] If a bond’s yield to maturity exceeds its annual coupon, then the
bond will trade at a premium. [C] If a coupon bond is selling at a premium, its current yield equals its yield to maturity.
[D] If a coupon bond is selling at par, its current yield equals its yield to maturity.
33. The annual interest paid on a bond relative to its prevailing market price is called its [A] Yield to maturity. [B] Coupon
rate. [C] Effective yield. [D] Current yield.
34. When a fixed income security is being traded at the price above its face value it is trading [A] At a discount. [B] At par.
[C] At a premium. [D] Flat.
35. If a bond is called, the bondholder often receives [A] Less than the par value. [B] The par value minus the last coupon
payment. [C] The par value minus the last year's coupon payment. [D] The par value plus a call premium.
36. Which of the following types of debt protect a bondholder against an increase in interest rates? [A] Floating rate bond.
[B] Plain vanilla bond. [C] Bonds with call provisions. [D] All of the above.
37. A bond that can be redeemed for cash at the bondholder's option is called what? [A] Convertible bond. [B] Putable
bond. [C] Callable bond. [D] Debenture.
38. If the yield to maturity of a bond is less than its coupon rate, the bond should be [A] Selling at a discount. [B] Selling
at a premium. [C] Selling at face value. [D] Called because it is at a discount.
39. Bond prices move with market yields [A] Directly. [B] Inversely. [C] Exponentially. [D] Logarithmically.
40. A 10-year bond that has a 10% coupon rate is currently selling for P1,000, which equals the bond's face value. If interest
is paid semi-annually, the bond's yield to maturity is [A] Equal to 10%. [B] Greater than 10%. [C] Less than 10%. [D]
None of the above is correct.