Question 1

If a firm raises capital by selling new bonds, it could be 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 2

A 25-year, $1,000 par value bond has an 8.5% annual payment coupon. The bond currently sells for $925. If the yield to maturity remains at its current rate, what will the price be 5 years from now?

Accepted Answer

A)   $884.19
B)   $906.86
C)   $930.11
D)   $953.36
E)   $977.20F) A) and E)
G) B) and D)

Question 3

Malko Enterprises' bonds currently sell for $1,050. They have a 6-year maturity, an annual coupon of $75, and a par value of $1,000. What is their current yield?

Accepted Answer

A)   7.14%
B)   7.50%
C)   7.88%
D)   8.27%
E)   8.68%F) None of the above
G) A) and D)

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)   You hold two bonds, a 10-year, zero coupon, issue and a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from its current level, the zero coupon bond will experience the larger percentage decline.
B)   The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.
C)   You hold two bonds. One is a 10-year, zero coupon, bond and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline.
D)   The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates, other things held constant.
E)   The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates.F) C) and D)
G) A) and D)

Question 5

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% 
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) C) and D)
G) A) and B)

Question 6

If the required rate of return on a bond (rd) is greater than its coupon interest rate and will remain above that rate, then the market value of the bond will always be below its par value until the bond matures, at which time its market value will equal its par value. (Accrued interest between interest payment dates should not be considered when answering this question.)

Accepted Answer

A) True 
 B)False

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)   A zero coupon bond's current yield is equal to its yield to maturity.
B)   If a bond's yield to maturity exceeds its coupon rate, the bond will sell at par.
C)   All else equal, if a bond's yield to maturity increases, its price will fall.
D)   If a bond's yield to maturity exceeds its coupon rate, the bond will sell at a premium over par.
E)   All else equal, if a bond's yield to maturity increases, its current yield will fall.F) A) and B)
G) A) and C)

Question 8

Under normal conditions, which of the following would be most likely to increase the coupon rate required for a bond to be issued at par?

Accepted Answer

A)   Adding additional restrictive covenants that limit management's actions.
B)   Adding a call provision.
C)   The rating agencies change the bond's rating from Baa to Aaa.
D)   Making the bond a first mortgage bond rather than a debenture.
E)   Adding a sinking fund.F) B) and D)
G) B) and C)

Question 9

Junk bonds are high-risk, high-yield debt instruments. They are often used to finance leveraged buyouts and mergers, and to provide financing to companies of questionable financial strength.

Accepted Answer

A) True 
 B)False

Question 10

Morin Company's bonds mature in 8 years, have a par value of $1,000, and make an annual coupon interest payment of $65. The market requires an interest rate of 8.2% on these bonds. What is the bond's price?

Accepted Answer

A)   $903.04
B)   $925.62
C)   $948.76
D)   $972.48
E)   $996.79F) D) and E)
G) C) and E)

Question 11

Income bonds pay interest only if the issuing company actually earns the indicated interest. Thus, these securities cannot bankrupt a company, and this makes them safer from an investor's perspective than regular bonds.

Accepted Answer

A) True 
 B)False

Question 12

A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT?

Accepted Answer

A)   The bond's current yield is less than 8%.
B)   If the yield to maturity remains at 8%, then the bond's price will decline over the next year.
C)   The bond's coupon rate is less than 8%.
D)   If the yield to maturity increases, then the bond's price will increase.
E)   If the yield to maturity remains at 8%, then the bond's price will remain constant over the next year.F) B) and C)
G) A) and B)

Question 13

A bond that had a 20-year original maturity with 1 year left to maturity has more price risk than a 10-year original maturity bond with 1 year left to maturity. (Assume that the bonds have equal default risk and equal coupon rates, and they cannot be called.)

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A)   Other things held constant, a 20-year zero coupon bond has more reinvestment risk than a 20-year coupon bond.
B)   Other things held constant, 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.
C)   From a corporate borrower's point of view, interest paid on bonds is not tax-deductible.
D)   Other things held constant, 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.
E)   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.F) A) and C)
G) A) and B)

Question 15

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) D) and E)
G) C) and E)

Question 16

Taussig Corp.'s bonds currently sell for $1,150. They have a 6.35% annual coupon rate and a 20-year maturity, but they can be called in 5 years at $1,067.50. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. Under these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds?

Accepted Answer

A)   3.42%
B)   3.60%
C)   3.79%
D)   3.99%
E)   4.20%F) None of the above
G) C) and D)

Question 17

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) 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)   $ 7,898,650F) C) and D)
G) A) and D)

Question 18

Adams Enterprises' noncallable bonds currently sell for $1,120. They have a 15-year maturity, an annual coupon of $85, and a par value of $1,000. What is their yield to maturity?

Accepted Answer

A)   5.84%
B)   6.15%
C)   6.47%
D)   6.81%
E)   7.17%F) All of the above
G) A) and C)

Question 19

Listed below are some provisions that are often contained in bond indentures. Which of these provisions, viewed alone, would tend to reduce the yield to maturity that investors would otherwise require on a newly issued bond? 
1. Fixed assets are used as security for a bond. 
2. A given bond is subordinated to other classes of debt. 
3. The bond can be converted into the firm's common stock. 
4. The bond has a sinking fund. 
5. The bond has a call provision. 
6. The indenture contains covenants that restrict the use of additional debt.

Accepted Answer

A)   1, 3, 4, 6
B)   1, 4, 6
C)   1, 2, 3, 4, 6
D)   1, 2, 3, 4, 5, 6
E)   1, 3, 4, 5, 6F) C) and D)
G) A) and D)

Question 20

Which of the following statements is CORRECT?

Accepted Answer

A)   Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest rates decline after the bond was issued.
B)   Most sinking funds require the issuer to provide funds to a trustee, who holds the money so that it will be available to pay off bondholders when the bonds mature.
C)   A sinking fund provision makes a bond more risky to investors at the time of issuance.
D)   Sinking fund provisions never require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time.
E)   If interest rates increase after a company has issued bonds with a sinking fund, the company will be less likely to buy bonds on the open market to meet its sinking fund obligation and more likely to call them in at the sinking fund call price.F) B) and E)
G) A) and B)

Exam 9: Bonds

A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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Correct Answer
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Under normal conditions, which of the following would be most likely to increase the coupon rate required for a bond to be issued at par?

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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A bond that had a 20-year original maturity with 1 year left to maturity has more price risk than a 10-year original maturity bond with 1 year left to maturity. (Assume that the bonds have equal default risk and equal coupon rates, and they cannot be called.)

Correct Answer
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Correct Answer
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Junk bonds are high-risk, high-yield debt instruments. They are often used to finance leveraged buyouts and mergers, and to provide financing to companies of questionable financial strength.

Correct Answer
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Adams Enterprises' noncallable bonds currently sell for $1,120. They have a 15-year maturity, an annual coupon of $85, and a par value of $1,000. What is their yield to maturity?

Correct Answer
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Income bonds pay interest only if the issuing company actually earns the indicated interest. Thus, these securities cannot bankrupt a company, and this makes them safer from an investor's perspective than regular bonds.

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
verified

If a firm raises capital by selling new bonds, it could be called the "issuing firm," and the coupon rate is generally set equal to the required rate on bonds of equal risk.

Correct Answer
verified

Morin Company's bonds mature in 8 years, have a par value of $1,000, and make an annual coupon interest payment of $65. The market requires an interest rate of 8.2% on these bonds. What is the bond's price?

Correct Answer
verified

Malko Enterprises' bonds currently sell for $1,050. They have a 6-year maturity, an annual coupon of $75, and a par value of $1,000. What is their current yield?

Correct Answer
verified

Correct Answer
verified

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% The differences in rates among these issues were most probably caused primarily by:

Correct Answer
verified

A 25-year, $1,000 par value bond has an 8.5% annual payment coupon. The bond currently sells for $925. If the yield to maturity remains at its current rate, what will the price be 5 years from now?

Correct Answer
verified

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

Correct Answer
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Correct Answer
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Exam 9: Bonds

A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Under normal conditions, which of the following would be most likely to increase the coupon rate required for a bond to be issued at par?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

A bond that had a 20-year original maturity with 1 year left to maturity has more price risk than a 10-year original maturity bond with 1 year left to maturity. (Assume that the bonds have equal default risk and equal coupon rates, and they cannot be called.)

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Junk bonds are high-risk, high-yield debt instruments. They are often used to finance leveraged buyouts and mergers, and to provide financing to companies of questionable financial strength.

Correct AnswerverifiedShow Answer

Adams Enterprises' noncallable bonds currently sell for $1,120. They have a 15-year maturity, an annual coupon of $85, and a par value of $1,000. What is their yield to maturity?

Correct AnswerverifiedShow Answer

Income bonds pay interest only if the issuing company actually earns the indicated interest. Thus, these securities cannot bankrupt a company, and this makes them safer from an investor's perspective than regular bonds.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

If a firm raises capital by selling new bonds, it could be called the "issuing firm," and the coupon rate is generally set equal to the required rate on bonds of equal risk.

Correct AnswerverifiedShow Answer

Morin Company's bonds mature in 8 years, have a par value of $1,000, and make an annual coupon interest payment of $65. The market requires an interest rate of 8.2% on these bonds. What is the bond's price?

Correct AnswerverifiedShow Answer

Malko Enterprises' bonds currently sell for $1,050. They have a 6-year maturity, an annual coupon of $75, and a par value of $1,000. What is their current yield?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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% The differences in rates among these issues were most probably caused primarily by:

Correct AnswerverifiedShow Answer

A 25-year, $1,000 par value bond has an 8.5% annual payment coupon. The bond currently sells for $925. If the yield to maturity remains at its current rate, what will the price be 5 years from now?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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