Question 1

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 has a maturity of 10 years and a yield to maturity of 10%. Which of the following statements is CORRECT?

Accepted Answer

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

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)   The total return on a bond during a given year consists only of the coupon interest payments received.
B)   All else equal, a bond that has a coupon rate of 10% will sell at a discount if the required return for bonds of similar risk is 8%.
C)   The price of a discount bond will increase over time, assuming that the bond's yield to maturity remains constant.
D)   For a given firm, its debentures are likely to have a lower yield to maturity than its mortgage bonds.
E)   When large firms are in financial distress, they are almost always liquidated, whereas smaller firms are generally reorganized.F) A) and B)
G) A) and C)

Question 3

Sinking funds are devices used to force companies to retire bonds on a scheduled basis prior to their maturity. Many bond indentures allow the company to acquire bonds for a sinking fund by either purchasing bonds in the market or selecting the bonds to be acquired by a lottery administered by the trustee through a call at face value.

Accepted Answer

A) True 
 B)False

Question 4

Assume that you are considering the purchase of a 15-year bond with an annual coupon rate of 9.5%. The bond has face value of $1,000 and makes semiannual interest payments. If you require an 11.0% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

Accepted Answer

A)   $891.00
B)   $913.27
C)   $936.10
D)   $959.51
E)   $983.49F) B) and E)
G) C) and D)

Question 5

Wachowicz Corporation issued 15-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 14 years to maturity?

Accepted Answer

A)   $1,077.01
B)   $1,104.62
C)   $1,132.95
D)   $1,162.00
E)   $1,191.79F) All of the above
G) B) and D)

Question 6

Which of the following statements is CORRECT?

Accepted Answer

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

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)   If a coupon bond is selling at a premium, then the bond's current yield is zero.
B)   If a coupon bond is selling at a discount, then the bond's expected capital gains yield is negative.
C)   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.
D)   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.
E)   If a coupon bond is selling at par, its current yield equals its yield to maturity.F) B) and D)
G) B) and C)

Question 8

Which of the following bonds has the greatest interest rate price risk?

Accepted Answer

A)   A 10-year $100 annuity.
B)   A 10-year, $1,000 face value, zero coupon bond.
C)   A 10-year, $1,000 face value, 10% coupon bond with annual interest payments.
D)   All 10-year bonds have the same price risk since they have the same maturity.
E)   A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments.F) A) and E)
G) C) and E)

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 15-year bond would have a larger percentage increase in price.
B)   If interest rates decline, the prices of both bonds will increase, but the 10-year bond would have a larger percentage increase in price.
C)   The 10-year bond would sell at a discount, while the 15-year bond would sell at a premium.
D)   The 10-year bond would sell at a premium, while the 15-year bond would sell at par.
E)   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.F) A) and B)
G) B) and C)

Question 10

Three $1,000 face value bonds that mature in 10 years have the same level of risk, hence their YTMs are equal. Bond A has an 8% annual coupon, Bond B has a 10% annual coupon, and Bond C has a 12% annual coupon. Bond B sells at par. Assuming interest rates remain constant for the next 10 years, which of the following statements is CORRECT?

Accepted Answer

A)   Bond A's current yield will increase each year.
B)   Since the bonds have the same YTM, they should all have the same price, and since interest rates are not expected to change, their prices should all remain at their current levels until maturity.
C)   Bond C sells at a premium (its price is greater than par) , and its price is expected to increase over the next year.
D)   Bond A sells at a discount (its price is less than par) , and its price is expected to increase over the next year.
E)   Over the next year, Bond A's price is expected to decrease, Bond B's price is expected to stay the same, and Bond C's price is expected to increase.F) A) and B)
G) C) and D)

Question 11

Moerdyk Corporation's bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd)  is 4.75%, based on semiannual compounding. What is the bond's price?

Accepted Answer

A)   1,063.09
B)   1,090.35
C)   1,118.31
D)   1,146.27
E)   1,174.93F) C) and E)
G) B) and D)

Question 12

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

Accepted Answer

A)   A 20-year zero coupon bond has more reinvestment rate risk than a 20-year coupon bond.
B)   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)   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 D)
G) B) and E) E

Question 13

You are considering 2 bonds that will be issued tomorrow. Both are rated triple B (BBB, the lowest investment-grade rating), both mature in 20 years, both have a 10% coupon, neither can be called except for sinking fund purposes, and both are offered to you at their $1,000 par values. However, Bond SF has a sinking fund while Bond NSF does not. Under the sinking fund, the company must call and pay off 5% of the bonds at par each year. The yield curve at the time is upward sloping. The bond's prices, being equal, are probably not in equilibrium, as Bond SF, which has the sinking fund, would generally be expected to have a higher yield than Bond NSF.

Accepted Answer

A) True 
 B)False  False

Question 14

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's capital gains yield is greater than Bond B's capital gains yield.
B)   Bond A trades at a discount, whereas Bond B trades at a premium.
C)   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.
D)   If the yield to maturity for both bonds immediately decreases to 6%, Bond A's bond will have a larger percentage increase in value.
E)   Bond A's current yield is greater than that of Bond B.F) B) and C)
G) B) and D)

Question 15

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 16

Amram Inc. 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, 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 convertible, callable bond?

Accepted Answer

A)   Exactly equal to 6%.
B)   It could be less than, equal to, or greater than 6%.
C)   Greater than 6%.
D)   Exactly equal to 8%.
E)   Less than 6%.F) All of the above
G) A) and B) B

Question 17

Other things equal, a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

Accepted Answer

A) True 
 B)False

Question 18

A bond that had a 20-year original maturity with 1 year left to maturity has more interest rate 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 19

"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 20

Which of the following statements is CORRECT?

Accepted Answer

A)   All else equal, senior debt generally has a lower yield to maturity than subordinated debt.
B)   An indenture is a bond that is less risky than a mortgage bond.
C)   The expected return on a corporate bond will generally exceed the bond's yield to maturity.
D)   If a bond's coupon rate exceeds its yield to maturity, then its expected return to investors exceeds the yield to maturity.
E)   Under our bankruptcy laws, any firm that is in financial distress will be forced to declare bankruptcy and then be liquidated.F) B) and E)
G) A) and D)

Exam 5: Bonds, Bond Valuation, and Interest Rates

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 has a maturity of 10 years and a yield to maturity of 10%. Which of the following statements is CORRECT?

Correct Answer
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Which of the following statements is CORRECT?

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Wachowicz Corporation issued 15-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 14 years to maturity?

Correct Answer
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Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

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Which of the following bonds has the greatest interest rate price risk?

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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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Moerdyk Corporation's bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 4.75%, based on semiannual compounding. What is the bond's price?

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

Correct Answer
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E

Correct Answer
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False

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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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
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B

Other things equal, a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

Correct Answer
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A bond that had a 20-year original maturity with 1 year left to maturity has more interest rate 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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"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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Exam 5: Bonds, Bond Valuation, and Interest Rates

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 has a maturity of 10 years and a yield to maturity of 10%. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Wachowicz Corporation issued 15-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 14 years to maturity?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following bonds has the greatest interest rate price risk?

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

Moerdyk Corporation's bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 4.75%, based on semiannual compounding. What is the bond's price?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedE

Correct AnswerverifiedFalse

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

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 AnswerverifiedB

Other things equal, a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

Correct AnswerverifiedShow Answer

A bond that had a 20-year original maturity with 1 year left to maturity has more interest rate 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

"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

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E

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False

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B

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