Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)   If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price regardless of their coupon rates.
B)   All else equal, an increase in interest rates will have a greater effect on the prices of short-term than long- term bonds.
C)   All else equal, an increase in interest rates will have a greater effect on higher-coupon bonds than it will have on lower-coupon bonds.
D)   If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value.
E)   If a bond's yield to maturity exceeds its coupon rate, the bond's current yield must be less than its coupon rate.F) A) and E)
G) A) and D)

Question 2

O'Brien Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 25 years. Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $975. What is the bond's nominal coupon interest rate?

Accepted Answer

A)   7.32%
B)   7.71%
C)   8.12%
D)   8.54%
E)   8.99%F) B) and E)
G) A) and B)

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)   If the maturity risk premium were zero and interest rates were expected to decrease in the future, then the yield curve for U.S. Treasury securities would, other things held constant, have an upward slope.
B)   Liquidity premiums are generally higher on Treasury than corporate bonds.
C)   The maturity premiums embedded in the interest rates on U.S. Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-term bonds.
D)   Default risk premiums are generally lower on corporate than on Treasury bonds.
E)   Reinvestment risk is lower, other things held constant, on long-term than on short-term bonds.F) B) and E)
G) B) and C)

Question 4

An investor is considering buying one of two 10-year, $1,000 face value, noncallable bonds: Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon. Both bonds have a yield to maturity of 8%, and the YTM is expected to remain constant for the next 10 years. Which of the following statements is CORRECT?

Accepted Answer

A)   Bond B has a higher price than Bond A today, but one year from now the bonds will have the same price.
B)   One year from now, Bond A's price will be higher than it is today.
C)   Bond A's current yield is greater than 8%.
D)   Bond A has a higher price than Bond B today, but one year from now the bonds will have the same price.
E)   Both bonds have the same price today, and the price of each bond is expected to remain constant until the bonds mature.F) A) and C)
G) A) and D)

Question 5

As a general rule, a company's debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)   All else equal, high-coupon bonds have less reinvestment risk than low-coupon bonds.
B)   All else equal, long-term bonds have less price risk than short-term bonds.
C)   All else equal, low-coupon bonds have less price risk than high-coupon bonds.
D)   All else equal, short-term bonds have less reinvestment risk than long-term bonds.
E)   All else equal, long-term bonds have less reinvestment risk than short-term bonds.F) C) and D)
G) B) and D)

Question 7

A 12-year bond has an annual coupon of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which of the following statements is CORRECT?

Accepted Answer

A)   If market interest rates decline, the price of the bond will also decline.
B)   The bond is currently selling at a price below its par value.
C)   If market interest rates remain unchanged, the bond's price one year from now will be lower than it is today.
D)   The bond should currently be selling at its par value.
E)   If market interest rates remain unchanged, the bond's price one year from now will be higher than it is today.F) C) and D)
G) All of the above

Question 8

Bond X has an 8% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a 12% annual coupon. Each of the bonds is noncallable, has a maturity of 10 years, and has a yield to maturity of 10%. Which of the following statements is CORRECT?

Accepted Answer

A)   If the bonds' market interest rate remains at 10%, Bond Z's price will be lower one year from now than it is today.
B)   Bond X has the greatest reinvestment risk.
C)   If market interest rates decline, the prices of all three bonds will increase, but Z's price will have the largest percentage increase.
D)   If market interest rates remain at 10%, Bond Z's price will be 10% higher one year from today.
E)   If market interest rates increase, Bond X's price will increase, Bond Z's price will decline, and Bond Y's price will remain the same.F) A) and C)
G) A) and D)

Question 9

Amram Inc. can issue a 20-year bond with a 6% annual coupon at par. This bond is not convertible, not callable, and has no sinking fund. Alternatively, Amram could issue a 20-year bond that is convertible into common equity, may be called, and has a sinking fund. Which of the following most accurately describes the coupon rate that Amram would have to pay on the second bond, the convertible, callable bond with the sinking fund, to have it sell initially at par?

Accepted Answer

A)   The coupon rate should be exactly equal to 6%.
B)   The coupon rate could be less than, equal to, or greater than 6%, depending on the specific terms set, but in the real world the convertible feature would probably cause the coupon rate to be less than 6%.
C)   The rate should be slightly greater than 6%.
D)   The rate should be over 7%.
E)   The rate should be over 8%.F) A) and E)
G) A) and D)

Question 10

In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures from historical book values to market values. KJM Corporation's balance sheet (book values)  as of today is as follows:   Long-term debt (bonds, at par)  $23,500,000 Preferred stock 2,000,000 Common stock ( $10 par)  10,000,000 Retained earnings 4,000,000‾ Total debt and equity $39,500,000‾‾\begin{array} { l r } 	ext { Long-term debt (bonds, at par)  } & \$ 23,500,000 \	ext { Preferred stock } & 2,000,000 \	ext { Common stock ( } \$ 10 	ext { par)  } & 10,000,000 \	ext { Retained earnings } &\underline{ 4,000,000} \	ext { Total debt and equity } &\underline{\underline{ \$ 39,500,000 }}\\end{array} Long-term debt (bonds, at par)   Preferred stock  Common stock ( $10 par)   Retained earnings  Total debt and equity ​$23,500,0002,000,00010,000,0004,000,000​$39,500,000​​​  The bonds have a 7.0% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 11%, so the bonds now sell below par. What is the current market value of the firm's debt?

Accepted Answer

A)   $17,436,237
B)   $17,883,320
C)   $18,330,403
D)   $ 7,706,000
E)   $ 7,898,650 F) A) and B)
G) B) and C)

Question 11

The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A)   A bond is likely to be called if its coupon rate is below its YTM.
B)   A bond is likely to be called if its market price is below its par value.
C)   Even if a bond's YTC exceeds its YTM, an investor with an investment horizon longer than the bond's maturity would be worse off if the bond were called.
D)   A bond is likely to be called if its market price is equal to its par value.
E)   A bond is likely to be called if it sells at a discount below par.F) A) and B)
G) A) and C)

Question 13

Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price?

Accepted Answer

A)   An 8-year bond with a 9% coupon.
B)   A 1-year bond with a 15% coupon.
C)   A 3-year bond with a 10% coupon.
D)   A 10-year zero coupon bond.
E)   A 10-year bond with a 10% coupon.F) A) and C)
G) D) and E)

Question 14

Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows:   T-bond =7.72% A=9.64%AAA=8.72%BBB=10.18%\begin{array} { l l } 	ext { T-bond } = 7.72 \% & \mathrm {~A} = 9.64 \% \\mathrm { AAA } = 8.72 \% & \mathrm { BBB } = 10.18 \%\end{array} T-bond =7.72%AAA=8.72%​ A=9.64%BBB=10.18%​  The differences in rates among these issues were most probably caused primarily by:

Accepted Answer

A)   Real risk-free rate differences.
B)   Tax effects.
C)   Default and liquidity risk differences.
D)   Maturity risk differences.
E)   Inflation differences. F) A) and D)
G) A) and C)

Question 15

Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise. Since floating-rate debt shifts price risk to companies, it offers no advantages to corporate issuers.

Accepted Answer

A) True 
 B)False

Question 16

You have funds that you want to invest in bonds, and you just noticed in the financial pages of the local newspaper that you can buy a $1,000 par value bond for $800. The coupon rate is 10% (with annual payments), and there are 10 years before the bond will mature and pay off its $1,000 par value. You should buy the bond if your required return on bonds with this risk is 12%.

Accepted Answer

A) True 
 B)False

Question 17

Restrictive covenants are designed primarily to protect bondholders by constraining the actions of managers. Such covenants are spelled out in bond indentures.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following statements is CORRECT?

Accepted Answer

A)   One advantage of a zero coupon Treasury bond is that no one who owns the bond has to pay any taxes on it until it matures or is sold.
B)   Long-term bonds have less price risk but more reinvestment risk than short-term bonds.
C)   If interest rates increase, all bond prices will increase, but the increase will be greater for bonds that have less price risk.
D)   Relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more price risk but less reinvestment risk.
E)   Long-term bonds have less price risk and also less reinvestment risk than short-term bonds.F) B) and E)
G) All of the above

Question 19

The desire for floating-rate bonds, and consequently their increased usage, arose out of the experience of the early 1980s, when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following statements is CORRECT?

Accepted Answer

A)   A zero coupon bond of any maturity will have more price risk than any coupon bond, even a perpetuity.
B)   If their maturities and other characteristics were the same, a 5% coupon bond would have more price risk than a 10% coupon bond.
C)   A 10-year coupon bond would have more reinvestment risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of reinvestment risk.
D)   A 10-year coupon bond would have more price risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of price risk.
E)   If their maturities and other characteristics were the same, a 5% coupon bond would have less price risk than a 10% coupon bond.F) C) and D)
G) A) and B)

Exam 7: Bonds and Their Valuation

Which of the following statements is CORRECT?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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As a general rule, a company's debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured.

Correct Answer
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Restrictive covenants are designed primarily to protect bondholders by constraining the actions of managers. Such covenants are spelled out in bond indentures.

Correct Answer
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A 12-year bond has an annual coupon of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which of the following statements is CORRECT?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Bond X has an 8% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a 12% annual coupon. Each of the bonds is noncallable, has a maturity of 10 years, and has a yield to maturity of 10%. Which of the following statements is CORRECT?

Correct Answer
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O'Brien Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 25 years. Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $975. What is the bond's nominal coupon interest rate?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise. Since floating-rate debt shifts price risk to companies, it offers no advantages to corporate issuers.

Correct Answer
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Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price?

Correct Answer
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The desire for floating-rate bonds, and consequently their increased usage, arose out of the experience of the early 1980s, when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.

Correct Answer
verified

Exam 7: Bonds and Their Valuation

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

As a general rule, a company's debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured.

Correct AnswerverifiedShow Answer

Restrictive covenants are designed primarily to protect bondholders by constraining the actions of managers. Such covenants are spelled out in bond indentures.

Correct AnswerverifiedShow Answer

A 12-year bond has an annual coupon of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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Which of the following statements is CORRECT?

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Bond X has an 8% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a 12% annual coupon. Each of the bonds is noncallable, has a maturity of 10 years, and has a yield to maturity of 10%. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

O'Brien Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 25 years. Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $975. What is the bond's nominal coupon interest rate?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise. Since floating-rate debt shifts price risk to companies, it offers no advantages to corporate issuers.

Correct AnswerverifiedShow Answer

Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price?

Correct AnswerverifiedShow Answer

The desire for floating-rate bonds, and consequently their increased usage, arose out of the experience of the early 1980s, when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.

Correct AnswerverifiedShow Answer

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