Test Bank for Financial accounting 5th edition by David Spiceland and Thomas Chapters 1-12 Covered

GBUS502
FinalbExambpreparatorybquestions

Chapterb7

1.
Onebofbthebbasicbrelationshipsbinbinterestbratebtheorybisbthat,botherbthingsbheldbco
nstant,bforbabgivenbchangebinbthebrequiredbratebofbreturn,bthebbbbbbbbbbbthebtimebtobmaturit
y,bthebbbbbbbbbbbthebchangebinbprice.
a. longer;bsmaller.
b. longer;bgreater.
c. shorter;bsmaller.
d. Statementsbbbandbcbarebcorrect.bb*

2. Whichbofbthebfollowingbstatementsbisbmostbcorrect?
a. Allbelsebequal,blong-termbbondsbhavebmorebinterestbratebriskbthanbshort-
termbbonds.
b. Allbelsebequal,bhigh-couponbbondsbhavebmorebreinvestmentbratebriskbthanblow-
couponbbonds.
c. Allbelsebequal,bshort-termbbondsbhavebmorebreinvestmentbratebriskbthanbdoblong-
termbbonds.
d. Allbofbthebstatementsbabovebarebcorrect.bbbb*



3.
Whichbofbthebfollowingbbondsbwillbhavebthebgreatestbpercentagebincreasebinb
valuebifballbinterestbratesbdecreasebbyb1bpercent?

a. 20-year,bzerobcouponbbond.bbb*
b. 10-year,bzerobcouponbbond.
c. 20-year,b10bpercentbcouponbbond.
d. 20-year,b5bpercentbcouponbbond.
Theblongerbthebmaturitybofbabbond,bthebmorebofbanbeffectbabchangebinbinteres
tbratesbwillbhavebonbit.bbThebreasonbforbthisbisbthatbthebpricebchangebisbcom
poundedbintobthebbondbpricebforbmorebperiods.bbTherefore,byoubcanbruleboutb
statementsbbbandbe.bbAbbondbthatbpaysbcouponsbwillbbeblessbaffectedbbybinter
estbratebchangesbthanbonebthatbdoesn’tbpaybcoupons.bbThebbondbpricebisbthebN
PVbofballbthebfuturebcashbflows,bbothbthebcouponbpaymentsbandbthebparbvalueb
paidbatbmaturity.bbThebfirstbcouponbpaymentbisbonlybdiscountedbonebperiod.
bbThebsecondbcouponbisbdiscountedbtwobperiods,bandbsobon.bbThebparbvaluebisbd

iscountedbforbthebfullblifebofbthebbond.bThus,bstatementsbcbandbdbcanbbebeli
minated.bbSincebabzerobcouponbbond’sbpricebtodaybisbdeterminedbjustbbybtheb
NPVbofbitsbparbvalue,ballbofbitsbpaymentbisbdiscountedbforbthebmaximumbamou
ntbofbtime,bwhereasbabcouponbbondbhasbmanybpaymentsbdiscountedbforblessbth
anbthebmaximumbamountbofbtime.bTherefore,babzerobcouponbbondbisbmostbaffect
edbbybinterestbratebchanges.bSo,btheblongestbzerobcouponbbondbisbthebcorrect
banswer,bwhichbisbstatementba.

,4.
Whichbofbthebfollowingbeventsbwouldbmakebitbmoreblikelybthatbabcompanybwoul
dbchoosebtobcallbitsboutstandingbcallablebbonds?
a. Abreductionbinbmarketbinterestbrates.bb*
b. Thebcompany’sbbondsbarebdowngraded.
c. Anbincreasebinbthebcallbpremium.
d. Statementsbabandbbbarebcorrect.
Statementbabisbcorrect;bthebotherbstatementsbarebfalse.bbAbbondbdown-
gradebgenerallybraisesbthebcostbofbissuingbnewbdebt.bbTherefore,bthebcalla
blebbondsbwouldbnotbbebcalled.bbIfbthebcallbpremiumb(thebcostbpaidbinbexcess
bofbpar)bincreases,bthebcostbofbcallingbdebtbincreases;btherefore,bcallab

lebbondsbwouldbnotbbebcalled.


5.
Allbofbthebfollowingbmaybservebtobreducebthebcouponbratebthatbwouldbotherwisebb
ebrequiredbonbabbondbissuedbatbpar,bexceptba

a. Sinkingbfund.
b. Restrictivebcovenant.
c. Callbprovision.bb*
d. ChangebinbratingbfrombAabtobAaa.

6. Ab10-
yearbcorporatebbondbhasbanbannualbcouponbpaymentbofb9bpercent.bbThebbond
bisbcurrentlybsellingbatbparb($1,000).bbWhichbofbthebfollowingbstatemen

tsbisbmostbcorrect?

a. Thebbond’sbyieldbtobmaturitybisb9bpercent.
b. Thebbond’sbcurrentbyieldbisb9bpercent.
c. Ifbthebbond’sbyieldbtobmaturitybremainsbconstant,bthebbond’sbpricebw
illbremainbatbpar.
d. Allbofbthebstatementsbabovebarebcorrect.bb*
Allbthebstatementsbarebtrue;btherefore,bthebcorrectbchoicebisbstatementbe
.bSincebthebbondbisbsellingbatbpar,bitsbYTMb=bcouponbrate.bbThebcurrentbyiel
dbisbcalculatedbasb$90/$1,000b=b9%.bbIfbYTMb=bcouponbrate,bthebbondbwillbsel
lbatbpar.bbSo,bifbthebbond’sbYTMbremainsbconstantbthebbond’sbpricebwillbrema
inbatbpar.

7. Whichbofbthebfollowingbstatementsbisbmostbcorrect?

a.
Junkbbondsbtypicallybhavebablowerbyieldbtobmaturitybrelativebtobi
nvestmentbgradebbonds.
b.
Abdebenturebisbabsecuredbbondbthatbisbbackedbbybsomeborballbofbtheb
firm’sbfixedbassets.
c. Subordinatedbdebtbhasblessbdefaultbriskbthanbseniorbdebt.

, d. bNonebofbthebstatementsbabovebisbcorrect.bb*
Statementbdbisbcorrect;bthebothersbarebfalse.bbJunkbbondsbhavebabhigherb
yieldbtobmaturitybrelativebtobinvestmentbgradebbonds.bbAbdebenturebisba
nbunsecuredbbond,bwhilebsubordinatedbdebtbhasbgreaterbdefaultbriskbtha
nbseniorbdebt.


8.
WhichbofbthebfollowingbTreasurybbondsbwillbhavebtheblargestbamountbofbinterestb
ratebriskb(pricebrisk)?
a. Ab7bpercentbcouponbbondbthatbmaturesbinb12byears.bb*
b. Ab9bpercentbcouponbbondbthatbmaturesbinb10byears.
c. Ab12bpercentbcouponbbondbthatbmaturesbinb7byears.
d. Ab7bpercentbcouponbbondbthatbmaturesbinb9byears.
Statementbabisbcorrect.bbTheblongerbthebmaturitybandbtheblowerbthebcoupo
nbofbabbond,bthebmorebsensitivebitbisbtobinterestbrateb(price)brisk.bbThe
bbondbinbanswerbabhasbabmaturitybgreaterbthanborbequalbtobandbabcouponble

ssbthanborbequalbtoballbthebotherbbonds.

9. Youbintendbtobpurchasebab10-
year,b$1,000bfacebvaluebbondbthatbpaysbinterestbofb$60beveryb6bmonths.bbIfbyourbnomi
nalbannualbrequiredbratebofbreturnbisb10bpercentbwithbsemiannualbcompounding,bhow
bmuchbshouldbyoubbebwillingbtobpaybforbthisbbond?



a. $bb826.31
b. $1,086.15
c. $bb957.50
d. $1,124.62bbb*
Financialbcalculatorbsolution:
Inputs:bNb=b20;bIb=b5;bPMTb=b60;bFVb=b1000.
Output:bPVb=b-$1,124.62;bVBb=b$1,124.62.

10.
Considerbab$1,000bparbvaluebbondbwithbab7bpercentbannualbcoupon.bbThebbondbpa
ysbinterestbannually.bbTherebareb9byearsbremainingbuntilbmaturity.bbWhatbisbthebcurren
tbyieldbonbthebbondbassumingbthatbthebrequiredbreturnbonbthebbondbisb10bpercent?
a. 10.00%
b. b8.46%bbb*

c. b7.00%

d. b8.52%

Currentbyieldb=bAnnualbcouponbpayment/Currentbprice.

Stepb1: Findbthebpricebofbthebbond:
Nb=b9;bI/YRb=b10;bPMTb=b70;bFVb=b1000;bandbthenbsolvebforbPVb=b-
$827.23.bbVBb=b$827.23.

Stepb2: Calculatebthebcurrentbyield:bbCYb=b$70/$827.23b=b8.46%.

Chapterb9

11.
StockbAbhasbabrequiredbreturnbofb10bpercent.bbItsbdividendbisbexpect