A) 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.
B) 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.
C) If a bond sells at par, then its current yield will be less than
Its yield to maturity.
D) If a bond sells for less than par, then its yield to maturity is
Less than its coupon rate.
E) A discount bond's price declines each year until it matures, when its value equals its par value.
G) A) and C)
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A) You hold two bonds. One is a 10-year, zero coupon, issue 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 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.
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.
G) A) and E)
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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.
G) D) and E)
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A) $943.98
B) $968.18
C) $993.01
D) $1,017.83
E) $1,043.28
G) A) and D)
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A) The price of Bond B will decrease over time, but the price of Bond A will increase over time.
B) The prices of both bonds will remain unchanged.
C) The price of Bond A will decrease over time, but the price of Bond
B will increase over time.
D) The prices of both bonds will increase by 7% per year.
E) The prices of both bonds will increase over time, but the price of Bond A will increase by more.
G) B) and C)
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B) False
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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.
G) C) and E)
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A) If a bond is selling at a discount to par, its current yield will be less than its yield to maturity.
B) All else equal, bonds with longer maturities have more interest
Rate (price) risk than bonds with shorter maturities.
C) If a bond is selling at its par value, its current yield equals its
Yield to maturity.
D) If a bond is selling at a premium, its current yield will be
Greater than its yield to maturity.
E) All else equal, bonds with larger coupons have greater interest
Rate (price) risk than bonds with smaller coupons.
G) B) and E)
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A) A zero coupon bond of any maturity will have more interest rate 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 interest rate price risk than a 10%
Coupon bond.
C) A 10-year coupon bond would have more reinvestment rate risk than a 5-year coupon bond, but all 10-year coupon bonds have the same
Amount of reinvestment rate risk.
D) A 10-year coupon bond would have more interest rate price risk than a 5-year coupon bond, but all 10-year coupon bonds have the same
Amount of interest rate price risk.
E) If their maturities and other characteristics were the same, a 5% coupon bond would have less interest rate price risk than a 10% coupon bond.
G) D) and E)
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A) $923.22
B) $946.30
C) $969.96
D) $994.21
E) $1,019.06
G) A) and D)
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A) Because of the call premium, the required rate of return would decline.
B) There is no reason to expect a change in the required rate of
Return.
C) The required rate of return would decline because the bond would
Then be less risky to a bondholder.
D) The required rate of return would increase because the bond would
Then be more risky to a bondholder.
E) It is impossible to say without more information.
G) D) and E)
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B) False
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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 has been issued.
B) Most sinking funds require the issuer to provide funds to a trustee, who saves 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 have increased since a company issued bonds with a sinking fund, the company is less likely to retire the bonds by buying them back in the open market, as opposed to calling them in at the sinking fund call price.
G) A) and D)
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A) 6.27%
B) 6.60%
C) 6.95%
D) 7.32%
E) 7.70%
G) None of the above
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A) If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate
Increase in bond prices.
B) The total yield on a bond is derived from dividends plus changes in
The price of the bond.
C) Bonds are riskier than common stocks and therefore have higher
Required returns.
D) Bonds issued by larger companies always have lower yields to
Maturity (less risk) than bonds issued by smaller companies.
E) The market value of a bond will always approach its par value as its maturity date approaches, provided the bond's required return remains constant.
G) A) and C)
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A) The company's bonds are downgraded.
B) Market interest rates rise sharply.
C) Market interest rates decline sharply.
D) The company's financial situation deteriorates significantly.
E) Inflation increases significantly.
G) All of the above
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A) The prices of both bonds will decrease by the same amount.
B) Both bonds would decline in price, but the 10-year bond would have
The greater percentage decline in price.
C) The prices of both bonds would increase by the same amount.
D) One bond's price would increase, while the other bond's price would
Decrease.
E) The prices of the two bonds would remain constant.
G) A) and C)
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A) The bond sells at a price below par.
B) The bond has a current yield greater than 8%.
C) The bond sells at a discount.
D) The bond's required rate of return is less than 7.5%.
E) If the yield to maturity remains constant, the price of the bond will decline over time.
G) B) and E)
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A) $891.00
B) $913.27
C) $936.10
D) $959.51
E) $983.49
G) A) and C)
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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.
G) None of the above
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