Q18. Assume a city issues a $5 million bond to build a new arena. The bond pays 8 percent semiannual interest and will mature in 10 years. Current interest rates are 9%. Interest expense in the second semiannual period is closest to:

A)   $106,550.

B)   $210,830.

C)   $80,000.

Q19. A bond is issued with the following data:

• $10 million face value.

• 9% coupon rate.

• 8% market rate.

• 3-year bond with semiannual payments.

Assuming market rates do not change, what will the bond's market value be one year from now and what is the total interest expense over the life of the bond?

Value in 1-Year      Total Interest Expense

A) 10,181,495              2,962,107

B) 10,181,495            2,437,893

C) 11,099,495             2,437,893

Q20. A bond is issued with an 8 percent semiannual coupon rate, 5 years to maturity, and a par value of $1000. What is the liability at the beginning of the third period if market interest rates are 10%?

A)   929.

B)   935.

C)   923.

Q21. When the market rate is greater than the coupon rate, the bond is called a:

A)   discount bond.

B)   par bond.

C)   premium bond.

Q22. The real estate group of a manufacturing company needs to finance a large construction project. The CEO wants to use zero coupon bonds, because “they are easy to understand.” The Executive Vice President (EVP) recommends a bond issued with a coupon rate greater than the current market rate of interest. A consultant recommends a bond issued at par. Regarding the financial and cash flow impact, which of the following statements is least accurate? All else equal, if the company follows the:

A)   CEO's recommendation, there will be no impact on cash flow from operations.

B)   EVP's suggestion, both the cash flow from financing and cash flow from operations will be understated compared to that of the par value bond recommended by the consultant.

C)   EVP's suggestion, interest expense will decrease over time.

答案和详解如下：

Q18. Assume a city issues a $5 million bond to build a new arena. The bond pays 8 percent semiannual interest and will mature in 10 years. Current interest rates are 9%. Interest expense in the second semiannual period is closest to:

A)   $106,550.

B)   $210,830.

C)   $80,000.

Correct answer is B)

Step 1: Compute the present value of the bond: Since the current interest rate is above the coupon rate the bond will be issued at a discount.

FV = $5,000,000; N = 20; PMT = (0.04)(5 million) = $200,000; I/Y = 4.5; CPT → PV = -$4,674,802

Step 2: Compute the interest expense at the end of the first period.

= (0.045)(4,674,802) = $210,366

Step 3: Compute the interest expense at the end of the second period.

= (new balance sheet liability)(current interest rate)

= $4,674,802 + $10,366 = $4,685,168 new balance sheet liability

(0.045)(4,685,168) = $210,833

Q19. A bond is issued with the following data:

• $10 million face value.

• 9% coupon rate.

• 8% market rate.

• 3-year bond with semiannual payments.

Assuming market rates do not change, what will the bond's market value be one year from now and what is the total interest expense over the life of the bond?

Value in 1-Year      Total Interest Expense

A) 10,181,495              2,962,107

B) 10,181,495            2,437,893

C) 11,099,495             2,437,893

Correct answer is B)

To determine the bond's market value one year from now: FV = 10,000,000; N = 4; I = 4; PMT = 450,000; CPT → PV = $10,181,495.

To determine the total interest expense:

1. FV = 10,000,000; N = 6; I = 4; PMT = 450,000; CPT → PV = $10,262,107. This is the price the purchaser of the bond will pay to the issuer of the bond. From the issuer's point of view this is the amount the issuer will receive from the bondholder.

2. Total interest expense over the life of the bond is equal to the difference between the amount paid by the issuer and the amount received from the bondholder.

[(6)(450,000) + 10,000,000] – 10,262,107 = 2,437,893

Q20. A bond is issued with an 8 percent semiannual coupon rate, 5 years to maturity, and a par value of $1000. What is the liability at the beginning of the third period if market interest rates are 10%?

A)   929.

B)   935.

C)   923.

Correct answer is B)

Beginning liability of the third period = liability of the second period + difference in the cash payment and the interest expense for the third period.

Liability for the first period = present value of the bond present value of the bond is computed as follows: FV = 1000 PMT = [(1000)(0.08)]/2 = 40 I/Y = 5 N = 10 Compute PV = -923

Liability for the second period = 923 + [(0.05)(923) – 40] = 923 + 6 = 929

Liability for the third period = 929 + [(0.05)(929) – 40] = 929 + 6 = 935

Q21. When the market rate is greater than the coupon rate, the bond is called a:

A)   discount bond.

B)   par bond.

C)   premium bond.

Correct answer is A)

When the market rate is greater than the coupon rate, the bond will sell at a discount as investors will only buy the bond at a price which is less than fair value due to the coupon being lower than the market rate.

Q22. The real estate group of a manufacturing company needs to finance a large construction project. The CEO wants to use zero coupon bonds, because “they are easy to understand.” The Executive Vice President (EVP) recommends a bond issued with a coupon rate greater than the current market rate of interest. A consultant recommends a bond issued at par. Regarding the financial and cash flow impact, which of the following statements is least accurate? All else equal, if the company follows the:

A)   CEO's recommendation, there will be no impact on cash flow from operations.

B)   EVP's suggestion, both the cash flow from financing and cash flow from operations will be understated compared to that of the par value bond recommended by the consultant.

C)   EVP's suggestion, interest expense will decrease over time.

Correct answer is B)

If the company issues a premium bond (defined as coupon rate greater than the current market rate), the cash flow from financing will be overstated and cash flow from operations will be understated compared to the par value bond recommended by the consultant.

The other statements are true. With the premium bond, interest expense decreases over time because the carrying value of the bond decreases as the unamortized premium decreases by the difference between the coupon payment and the interest expense (market rate times carrying value.) All cash flows for a zero-coupon bond are financing cash flows, but the bond still has interest expense (used to amortize the unamortized discount account).

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