Question 1

Assume that the current corporate bond yield curve is upward sloping. Under this condition, then we could be sure that

Accepted Answer

A)   the economy is not in a recession.
B)   long-term bonds are a better buy than short-term bonds.
C)   maturity risk premiums could help to explain the yield curve's upward slope.
D)   long-term interest rates are more volatile than short-term rates.
E)   inflation is expected to decline in the future.F) A) and B)
G) B) and D)

Question 2

A bond that is callable has a chance of being retired earlier than its stated term to maturity. Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

Accepted Answer

A) True 
 B)False

Question 3

Nicholas Industries can issue a 20-year bond with a 6% annual coupon. This bond is not convertible, is not callable, and has no sinking fund. Alternatively, Nicholas 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 Nicholas would have to pay on the convertible, callable bond?

Accepted Answer

A)   it could be less than, equal to, or greater than 6%.
B)   greater than 6%.
C)   exactly equal to 8%.
D)   less than 6%.
E)   exactly equal to 6%.F) A) and B)
G) A) and E)

Question 4

Bonds A and B are 15-year, $1,000 face value 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%, which is expected to remain constant for the next 15 years. Which of the following statements is CORRECT?

Accepted Answer

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

Question 5

Assuming all else is constant, which of the following statements is CORRECT?

Accepted Answer

A)   for any given maturity, a 1.0 percentage point decrease in the market interest rate would cause a smaller dollar capital gain than the capital loss stemming from a 1.0 percentage point increase in the interest rate.
B)   from a corporate borrower's point of view, interest paid on bonds is not tax-deductible.
C)   price sensitivity as measured by the percentage change in price due to a given change in the required rate of return decreases as a bond's maturity increases.
D)   for a bond of any maturity, a 1.0 percentage point increase in the market interest rate (rd)  causes a larger dollar capital loss than the capital gain stemming from a 1.0 percentage point decrease in the interest rate.
E)   a 20-year zero coupon bond has more reinvestment rate risk than a 20-year coupon bond.F) B) and C)
G) All of the above

Question 6

Squire Inc.'s 5-year bonds yield 6.75%, and 5-year T-bonds yield 4.80%. The real risk-free rate is r* = 2.75%, the inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Squire's bonds is DRP = 1.20% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t σ 1)  × 0.1%, where t = number of years to maturity. What is the liquidity premium (LP)  on Squire's bonds?

Accepted Answer

A)   0.49%
B)   0.55%
C)   0.61%
D)   0.68%
E)   0.75%F) None of the above
G) A) and B)

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)   if a coupon bond is selling at a discount, then the bond's expected capital gains yield is negative.
B)   if a bond is selling at a discount, the yield to call is a better measure of the expected return than the yield to maturity.
C)   the current yield on bond a exceeds the current yield on bond b. therefore, bond a must have a higher yield to maturity than bond b.
D)   if a coupon bond is selling at par, its current yield equals its yield to maturity.
E)   if a coupon bond is selling at a premium, then the bond's current yield is zero.F) B) and D)
G) None of the above

Question 8

Reinegar Corporation is planning two new issues of 25-year bonds. Bond Par will be sold at its $1,000 par value, and it will have a 10% semiannual coupon. Bond OID will be an Original Issue Discount bond, and it will also have a 25-year maturity and a $1,000 par value, but its semiannual coupon will be only 6.25%. If both bonds are to provide investors with the same effective yield, how many of the OID bonds must Reinegar issue to raise $3,000,000? Disregard flotation costs, and round your final answer up to a whole number of bonds.

Accepted Answer

A)   4,228
B)   4,337
C)   4,448
D)   4,562
E)   4,676F) B) and D)
G) A) and C)

Question 9

Assume that a 10-year Treasury bond has a 12% annual coupon, while a 15-year T-bond has an 8% annual coupon. Assume also that the yield curve is flat, and all Treasury securities have a 10% yield to maturity. Which of the following statements is CORRECT?

Accepted Answer

A)   if interest rates decline, the prices of both bonds will increase, but the 10-year bond would have a larger percentage increase in price.
B)   the 10-year bond would sell at a discount, while the 15-year bond would sell at a premium.
C)   the 10-year bond would sell at a premium, while the 15-year bond would sell at par.
D)   if the yield to maturity on both bonds remains at 10% over the next year, the price of the 10-year bond would increase, but the price of the 15-year bond would fall.
E)   if interest rates decline, the prices of both bonds will increase, but the 15-year bond would have a larger percentage increase in price.F) A) and D)
G) All of the above

Question 10

Perry Inc.'s bonds currently sell for $1,150. They have a 6-year maturity, an annual coupon of $85, and a par value of $1,000. What is their current yield?

Accepted Answer

A)   7.39%
B)   7.76%
C)   8.15%
D)   8.56%
E)   8.98%F) A) and D)
G) D) and E)

Question 11

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.

Accepted Answer

A) True 
 B)False

Question 12

"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 13

Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?

Accepted Answer

A)   20-year, 10% coupon bond.
B)   20-year, 5% coupon bond.
C)   1-year, 10% coupon bond.
D)   20-year, zero coupon bond.
E)   10-year, zero coupon bond.F) C) and D)
G) None of the above

Question 14

Which of the following statements is CORRECT?

Accepted Answer

A)   long-term bonds have less interest rate price risk but more reinvestment rate risk than short-term bonds.
B)   if interest rates increase, all bond prices will increase, but the increase will be greater for bonds that have less interest rate risk.
C)   relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more interest rate price risk but less reinvestment rate risk.
D)   long-term bonds have less interest rate price risk and also less reinvestment rate risk than short-term bonds.
E)   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.F) A) and C)
G) B) and E)

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A)   a 10-year, 10% coupon bond has less reinvestment rate risk than a 10-year, 5% coupon bond (assuming all else equal) .
B)   the total return on a bond during a given year is the sum of the coupon interest payments received during the year and the change in the value of the bond from the beginning to the end of the year.
C)   the price of a 20-year, 10% bond is less sensitive to changes in interest rates than the price of a 5-year, 10% bond.
D)   a $1,000 bond with $100 annual interest payments that has 5 years to maturity and is not expected to default would sell at a discount if interest rates were below 9% and at a premium if interest rates were greater than 11%.
E)   10-year, zero coupon bonds have higher reinvestment rate risk than 10-year, 10% coupon bonds.F) B) and E)
G) A) and B)

Question 16

Bond A has a 9% annual coupon, while Bond B has a 7% annual coupon. Both bonds have the same maturity, a face value of $1,000, and an 8% yield to maturity. Which of the following statements is CORRECT?

Accepted Answer

A)   bond a trades at a discount, whereas bond b trades at a premium.
B)   if the yield to maturity for both bonds remains at 8%, bond a's price one year from now will be higher than it is today, but bond b's price one year from now will be lower than it is today.
C)   if the yield to maturity for both bonds immediately decreases to 6%, bond a's bond will have a larger percentage increase in value.
D)   bond a's current yield is greater than that of bond b.
E)   bond a's capital gains yield is greater than bond b's capital gains yield.F) A) and D)
G) C) and D)

Question 17

5-year Treasury bonds yield 5.5%. The inflation premium (IP)  is 1.9%, and the maturity risk premium (MRP)  on 5-year bonds is 0.4%. What is the real risk-free rate, r*?

Accepted Answer

A)   2.59%
B)   2.88%
C)   3.20%
D)   3.52%
E)   3.87%F) A) and B)
G) A) and C)

Question 18

Jerome Corporation's bonds have 15 years to maturity, an 8.75% coupon paid semiannually, and a $1,000 par value. The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,050. What is the bond's nominal yield to call?

Accepted Answer

A)   5.01%
B)   5.27%
C)   5.54%
D)   5.81%
E)   6.10%F) D) and E)
G) A) and D)

Question 19

Sommers Co.'s bonds currently sell for $1,080 and have a par value of $1,000. They pay a $100 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,125. What is their yield to maturity (YTM) ?

Accepted Answer

A)   8.56%
B)   9.01%
C)   9.46%
D)   9.93%
E)   10.43%F) A) and E)
G) None of the above

Question 20

Which of the following statements is CORRECT?

Accepted Answer

A)   a bond's current yield must always be either equal to its yield to maturity or between its yield to maturity and its coupon rate.
B)   if a bond sells at par, then its current yield will be less than its yield to maturity.
C)   if a bond sells for less than par, then its yield to maturity is less than its coupon rate.
D)   a discount bond's price declines each year until it matures, when its value equals its par value.
E)   assume that two bonds have equal maturities and are of equal risk, but one bond sells at par while the other sells at a premium above par. the premium bond must have a lower current yield and a higher capital gains yield than the par bond.F) B) and C)
G) D) and E)

Exam 4: Bond 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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Assume that a 10-year Treasury bond has a 12% annual coupon, while a 15-year T-bond has an 8% annual coupon. Assume also that the yield curve is flat, and all Treasury securities have a 10% yield to maturity. Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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Bond A has a 9% annual coupon, while Bond B has a 7% annual coupon. Both bonds have the same maturity, a face value of $1,000, and an 8% yield to maturity. Which of the following statements is CORRECT?

Correct Answer
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Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?

Correct Answer
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Assuming all else is constant, which of the following statements is CORRECT?

Correct Answer
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Jerome Corporation's bonds have 15 years to maturity, an 8.75% coupon paid semiannually, and a $1,000 par value. The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,050. What is the bond's nominal yield to call?

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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Which of the following statements is CORRECT?

Correct Answer
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5-year Treasury bonds yield 5.5%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year bonds is 0.4%. What is the real risk-free rate, r*?

Correct Answer
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Sommers Co.'s bonds currently sell for $1,080 and have a par value of $1,000. They pay a $100 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,125. What is their yield to maturity (YTM) ?

Correct Answer
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A bond that is callable has a chance of being retired earlier than its stated term to maturity. Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

Correct Answer
verified

Correct Answer
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Assume that the current corporate bond yield curve is upward sloping. Under this condition, then we could be sure that

Correct Answer
verified

Perry Inc.'s bonds currently sell for $1,150. They have a 6-year maturity, an annual coupon of $85, and a par value of $1,000. What is their current yield?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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Bonds A and B are 15-year, $1,000 face value 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%, which is expected to remain constant for the next 15 years. Which of the following statements is CORRECT?

Correct Answer
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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.

Correct Answer
verified

Exam 4: Bond Valuation

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Assume that a 10-year Treasury bond has a 12% annual coupon, while a 15-year T-bond has an 8% annual coupon. Assume also that the yield curve is flat, and all Treasury securities have a 10% yield to maturity. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Bond A has a 9% annual coupon, while Bond B has a 7% annual coupon. Both bonds have the same maturity, a face value of $1,000, and an 8% yield to maturity. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?

Correct AnswerverifiedShow Answer

Assuming all else is constant, which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Jerome Corporation's bonds have 15 years to maturity, an 8.75% coupon paid semiannually, and a $1,000 par value. The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,050. What is the bond's nominal yield to call?

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

5-year Treasury bonds yield 5.5%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year bonds is 0.4%. What is the real risk-free rate, r*?

Correct AnswerverifiedShow Answer

Sommers Co.'s bonds currently sell for $1,080 and have a par value of $1,000. They pay a $100 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,125. What is their yield to maturity (YTM) ?

Correct AnswerverifiedShow Answer

A bond that is callable has a chance of being retired earlier than its stated term to maturity. Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Assume that the current corporate bond yield curve is upward sloping. Under this condition, then we could be sure that

Correct AnswerverifiedShow Answer

Perry Inc.'s bonds currently sell for $1,150. They have a 6-year maturity, an annual coupon of $85, and a par value of $1,000. What is their current yield?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Bonds A and B are 15-year, $1,000 face value 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%, which is expected to remain constant for the next 15 years. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Correct Answer
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