Class Exercise 1-Bond Valuation

A type of long-term financing used by both corporations and government entities is

• common stock

• bonds

• preferred stock

• retained earnings

Bonds are

• a series of short-term debt instruments.

• a form of equity financing that pays interest.

• long-term debt instruments.

• a hybrid form of financing used to raise large sums of money from a diverse group of lenders.

4. The ________ value of a bond is also called its face value. Bonds which sell at less than face value are priced at a ________, while bonds which sell at greater than face value sell at a ________.

• premium; discount; par

• discount; par; premium

• par; discount; premium

• coupon; premium; discount

The value of a bond is the present value of the

• dividends and maturity value.

• interest and dividend payments.

• maturity value

• interest payments and maturity value.

A firm has an issue of $1,000 par value bonds with a 12 percent stated interest rate outstanding. The issue pays interest annually and has 10 years remaining to its maturity date. If bonds of similar risk are currently earning 8 percent, the firm's bond will sell for ________ today.

• $1,000

• $805.20

• $851.50

• $1,268.20

A firm has an issue of $1,000 par value bonds with a 9 percent stated interest rate outstanding. The issue pays interest annually and has 20 years remaining to its maturity date. If bonds of similar risk are currently earning 11 percent, the firm's bond will sell for ________ today.

• $1,000

• $716.67

• $840.67

• $1,123.33

Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent annual coupon interest rate. The issue has ten years remaining to the maturity date. Bonds of similar risk are currently selling to yield a 12 percent rate of return. The current value of each Hewitt bond is ________.

• $791.00

• $1,000

• $1,052.24

• $1,113.00

Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent coupon interest rate outstanding. The issue pays interest semiannually and has 10 years remaining to its maturity date. Bonds of similar risk are currently selling to yield a 12 percent rate of return. What is the value of these Hewitt Packing Company bonds?

To expand its business, the Kingston Outlet factory would like to issue a bond with par value of $1,000, coupon rate of 10 percent, and maturity of 10 years from now. What is the value of the bond if the required rate of return is 10 percent?

To finance a new line of product, the Tangshan Toys has issued $1,000,000 bond with a par value of $1,000, coupon rate of 8 percent, and maturity of 30 years. Compute the price of the bond if the opportunity cost is 11 percent.