Question 1

ABC Inc. issued at par value a 15-year 6% semiannual coupon bond with a par value of $1,000. At the end of 2 years the market interest increases to 7%. One year later, the market interest is 8%. If an investor purchases the bond at the end of year 2 and sold it 1 year later, how much is the capital gain or loss?

Accepted Answer

A)   +$10.00
B)   -$68.02
C)   -$84.75
D)   -$91.56E) All of the above
F) A) and B)

Question 2

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 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) A) and C)
F) B) and D)

Question 3

Sadik Inc.'s bonds currently sell for $1,280 and have a par value of $1,000. They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050. What is their yield to call (YTC) ?

Accepted Answer

A)   6.39%
B)   6.72%
C)   7.08%
D)   7.45%E) A) and B)
F) A) and C)

Question 4

You are considering two bonds. Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is correct?

Accepted Answer

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 over time, but the price of Bond A will increase by more.E) All of the above
F) None of the above

Question 5

McCue Inc.'s bonds currently sell for $1,250. They pay a $120 annual coupon, have a 15-year maturity, and a $1,000 par value, but they can be called in 5 years at $1,050. 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. What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM.)

Accepted Answer

A)   2.11%
B)   2.32%
C)   2.55%
D)   2.80%E) B) and C)
F) A) and D)

Question 6

When interest rates fall, investors have more incentive to sell their retractable bonds back to the issuer.

Accepted Answer

A) True 
 B)False

Question 7

What effect would a 100 basis point drop in yield have on bond prices?

Accepted Answer

A)   It would have a larger impact on bond prices when yields are high.
B)   It would have a larger impact on bond prices when yields are low.
C)   It would have the same impact on bond prices regardless of whether yields are high or low.
D)   It would cause bond prices to fall in general.E) A) and D)
F) B) and C)

Question 8

Which of the following statements is correct?

Accepted Answer

A)   All else being equal, secured debt is more risky than unsecured debt.
B)   The expected return on a corporate bond must be more than its promised return if the probability of default is greater than zero.
C)   All else being equal, senior debt has more default risk than subordinated debt.
D)   A company's bond rating is affected by its financial ratios and provisions in its indenture.E) A) and B)
F) B) and C)

Question 9

Consider some bonds with one annual coupon payment of 7.25%. The bonds have a par value of $1,000, a current price of $1,125, and they will mature in 13 years. What is the yield to maturity on these bonds?

Accepted Answer

A)   5.56%
B)   5.85%
C)   6.14%
D)   6.45%E) B) and C)
F) All of the above

Question 10

In corporate bonds, what is a "Canada call" used for calculating?

Accepted Answer

A)   the maturity date
B)   the default probability
C)   the market risk
D)   the buy-back priceE) A) and C)
F) B) and C)

Question 11

Issued by the government of Canada, real return bonds are free from default risk. However, they are still subject to interest rate risk.

Accepted Answer

A) True 
 B)False

Question 12

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 13

Which statement regarding rate risk is true?

Accepted Answer

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)   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.E) A) and B)
F) All of the above

Question 14

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 15

An investor is considering buying one of two 10-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 10 years. Which statement regarding these bonds 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) None of the above
F) All of the above

Question 16

A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements about bond yields is true?

Accepted Answer

A)   If a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity.
B)   On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss.
C)   If a coupon bond is selling at par, its current yield equals its 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) All of the above
F) C) and D)

Question 18

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 19

A company is planning to raise $1 million to finance a new plant. Which statement regarding the cost of debt is true?

Accepted Answer

A)   The company would be especially eager to have a call provision included in the indenture if its management thinks that interest rates are almost certain to rise in the foreseeable future.
B)   If debt is used to raise the $1 million, with $500,000 as first mortgage bonds on the new plant and $500,000 as debentures, the interest rate would be lower than it would be if the entire $1 million were raised by selling first mortgage bonds.
C)   If two tiers of debt are used (with one senior and one subordinated debt class) , the subordinated debt will carry a lower interest rate.
D)   If debt is used to raise the $1 million, the cost of the debt would be lower if the debt were in the form of a fixed-rate bond rather than a floating-rate bond.E) B) and C)
F) B) and D)

Question 20

Which statement regarding the yield curve is true?

Accepted Answer

A)   If inflation is expected to increase in the future, and if the maturity risk premium (MRP)  is greater than zero, then the yield curve will have an upward slope.
B)   If the maturity risk premium (MRP)  is greater than zero, then the yield curve must have an upward slope.
C)   If the maturity risk premium (MRP)  equals zero, the yield curve must be flat.
D)   The yield curve can never be downward sloping.E) A) and B)
F) All of the above

Exam 6: Bonds, Bond Valuation, and Interest Rates

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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You are considering two bonds. Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is correct?

Correct Answer
verified

A company is planning to raise $1 million to finance a new plant. Which statement regarding the cost of debt is true?

Correct Answer
verified

Which statement regarding the yield curve is true?

Correct Answer
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A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

Correct Answer
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Which statement regarding rate risk is true?

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
verified

An investor is considering buying one of two 10-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 10 years. Which statement regarding these bonds is correct?

Correct Answer
verified

Issued by the government of Canada, real return bonds are free from default risk. However, they are still subject to interest rate risk.

Correct Answer
verified

Correct Answer
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Sadik Inc.'s bonds currently sell for $1,280 and have a par value of $1,000. They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050. What is their yield to call (YTC) ?

Correct Answer
verified

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
verified

What effect would a 100 basis point drop in yield have on bond prices?

Correct Answer
verified

Consider some bonds with one annual coupon payment of 7.25%. The bonds have a par value of $1,000, a current price of $1,125, and they will mature in 13 years. What is the yield to maturity on these bonds?

Correct Answer
verified

Correct Answer
verified

Which of the following statements about bond yields is true?

Correct Answer
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Which of the following statements is correct?

Correct Answer
verified

In corporate bonds, what is a "Canada call" used for calculating?

Correct Answer
verified

When interest rates fall, investors have more incentive to sell their retractable bonds back to the issuer.

Correct Answer
verified

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
verified

Exam 6: Bonds, Bond Valuation, and Interest Rates

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

You are considering two bonds. Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is correct?

Correct AnswerverifiedShow Answer

A company is planning to raise $1 million to finance a new plant. Which statement regarding the cost of debt is true?

Correct AnswerverifiedShow Answer

Which statement regarding the yield curve is true?

Correct AnswerverifiedShow Answer

A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

Correct AnswerverifiedShow Answer

Which statement regarding rate risk is true?

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

An investor is considering buying one of two 10-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 10 years. Which statement regarding these bonds is correct?

Correct AnswerverifiedShow Answer

Issued by the government of Canada, real return bonds are free from default risk. However, they are still subject to interest rate risk.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Sadik Inc.'s bonds currently sell for $1,280 and have a par value of $1,000. They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050. What is their yield to call (YTC) ?

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

What effect would a 100 basis point drop in yield have on bond prices?

Correct AnswerverifiedShow Answer

Consider some bonds with one annual coupon payment of 7.25%. The bonds have a par value of $1,000, a current price of $1,125, and they will mature in 13 years. What is the yield to maturity on these bonds?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements about bond yields is true?

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

In corporate bonds, what is a "Canada call" used for calculating?

Correct AnswerverifiedShow Answer

When interest rates fall, investors have more incentive to sell their retractable bonds back to the issuer.

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

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