Question 1

Assume that a noncallable 10-year T-bond has a 12% annual coupon, while a 15-year noncallable 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 would increase, but the 15-year bond would have a larger percentage increase in price.
B)   If interest rates decline, the prices of both bonds would 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) B) and E)
G) A) and B)

Question 2

Which of the following statements is CORRECT?

Accepted Answer

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

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)   All else equal, secured debt is more risky than unsecured debt.
B)   The expected return on a corporate bond must be greater than its promised return if the probability of default is greater than zero.
C)   All else equal, senior debt has more default risk than subordinated debt.
D)   A company's bond rating is affected by its financial ratios but not by provisions in its indenture.
E)   Under Chapter 11 of the Bankruptcy Act, the assets of a firm that declares bankruptcy must be liquidated, and the sale proceeds must be used to pay off claims against it according to the priority of the claims as spelled out in the Act.F) A) and E)
G) B) and E)

Question 4

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

Accepted Answer

A)   Bond 8'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 12 sells at a premium (its price is greater than par) , and its price is expected to increase over the next year.
D)   Bond 8 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 8's price is expected to decrease, Bond 10's price is expected to stay the same, and Bond 12's price is expected to increase.F) C) and E)
G) C) and D)

Question 5

Which of the following statements is CORRECT?

Accepted Answer

A)   If the maturity risk premium were zero and interest rates were expected to decrease in the future, then the yield curve for U.S. Treasury securities would, other things held constant, have an upward slope.
B)   Liquidity premiums are generally higher on Treasury than corporate bonds.
C)   The maturity premiums embedded in the interest rates on U.S. Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-term bonds.
D)   Default risk premiums are generally lower on corporate than on Treasury bonds.
E)   Reinvestment risk is lower, other things held constant, on long-term than on short-term bonds.F) B) and C)
G) A) and D)

Question 6

Moon Software Inc. is planning to issue two types of 25-year, noncallable bonds to raise a total of $6 million, $3 million from each type of bond. First, 3,000 bonds with a 10% semiannual coupon will be sold at their $1,000 par value to raise $3,000,000. These are called "par" bonds. Second, Original Issue Discount (OID)  bonds, also with a 25-year maturity and a $1,000 par value, will be sold, but these bonds will have a semiannual coupon of only 6.25%. The OID bonds must be offered at below par in order to provide investors with the same effective yield as the par bonds. How many OID bonds must the firm 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) C) and D)
G) A) and D)

Question 7

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?

Accepted Answer

A)   If the yield to maturity remains constant, the bond's price one year from now will be higher than its current price.
B)   The bond is selling below its par value.
C)   The bond is selling at a discount.
D)   If the yield to maturity remains constant, the bond's price one year from now will be lower than its current price.
E)   The bond's current yield is greater than 9%.F) None of the above
G) A) and C)

Question 8

Grossnickle Corporation issued 20-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 19 years to maturity?

Accepted Answer

A)   $1,113.48
B)   $1,142.03
C)   $1,171.32
D)   $1,201.35
E)   $1,232.15F) B) and E)
G) C) and D)

Question 9

A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if market interest rates are below 10% and at a discount if interest rates are greater than 10%.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)   10-year, zero coupon bonds have more reinvestment risk than 10-year, 10% coupon bonds.
B)   A 10-year, 10% coupon bond has less reinvestment risk than a 10-year, 5% coupon bond (assuming all else equal) .
C)   The total (rate of)  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, divided by the bond's price at the beginning of the year.
D)   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.
E)   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%.F) B) and C)
G) B) and D)

Question 11

Tucker Corporation is planning to issue new 20-year bonds. The current plan is to make the bonds non-callable, but this may be changed. If the bonds are made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

Accepted Answer

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.F) B) and D)
G) D) and E)

Question 12

Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, generally be subject to much more price risk if you purchased a 30-day bond than if you bought a 30-year bond.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)   The yield to maturity for a coupon bond that sells at a premium consists entirely of a positive capital gains yield; it has a zero current interest yield.
B)   The market value of a bond will always approach its par value as its maturity date approaches. This holds true even if the firm has filed for bankruptcy.
C)   Rising inflation makes the actual yield to maturity on a bond greater than a quoted yield to maturity that is based on market prices.
D)   The yield to maturity on a coupon bond that sells at its par value consists entirely of a current interest yield; it has a zero expected capital gains yield.
E)   The expected capital gains yield on a bond will always be zero or positive because no investor would purchase a bond with an expected capital loss.F) B) and D)
G) B) and C)

Question 14

Assume that you are considering the purchase of a 20-year, noncallable bond with an annual coupon rate of 9.5%. The bond has a face value of $1,000, and it makes semiannual interest payments. If you require an 8.4% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

Accepted Answer

A)   $1,105.69
B)   $1,133.34
C)   $1,161.67
D)   $1,190.71
E)   $1,220.48F) All of the above
G) B) and E)

Question 15

A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, companies call bonds if interest rates rise and do not call them if interest rates decline.

Accepted Answer

A) True 
 B)False

Question 16

The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.

Accepted Answer

A) True 
 B)False

Question 17

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

Question 18

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 19

Moerdyk Corporation's bonds have a 15-year maturity, a 7.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd)  is 6.20%, based on semiannual compounding. What is the bond's price?

Accepted Answer

A)   $1,047.19
B)   $1,074.05
C)   $1,101.58
D)   $1,129.12
E)   $1,157.35F) B) and D)
G) A) and B)

Question 20

The price sensitivity of a bond to a given change in interest rates is generally greater the longer the bond's remaining maturity.

Accepted Answer

A) True 
 B)False

Exam 9: Bonds

The price sensitivity of a bond to a given change in interest rates is generally greater the longer the bond's remaining maturity.

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 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?

Correct Answer
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Tucker Corporation is planning to issue new 20-year bonds. The current plan is to make the bonds non-callable, but this may be changed. If the bonds are made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

Correct Answer
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Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Grossnickle Corporation issued 20-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 19 years to maturity?

Correct Answer
verified

Moerdyk Corporation's bonds have a 15-year maturity, a 7.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 6.20%, based on semiannual compounding. What is the bond's price?

Correct Answer
verified

The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Assume that a noncallable 10-year T-bond has a 12% annual coupon, while a 15-year noncallable 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
verified

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, companies call bonds if interest rates rise and do not call them if interest rates decline.

Correct Answer
verified

A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if market interest rates are below 10% and at a discount if interest rates are greater than 10%.

Correct Answer
verified

Restrictive covenants are designed primarily to protect bondholders by constraining the actions of managers. Such covenants are spelled out in bond indentures.

Correct Answer
verified

Correct Answer
verified

Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, generally be subject to much more price risk if you purchased a 30-day bond than if you bought a 30-year bond.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Exam 9: Bonds

The price sensitivity of a bond to a given change in interest rates is generally greater the longer the bond's remaining maturity.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Tucker Corporation is planning to issue new 20-year bonds. The current plan is to make the bonds non-callable, but this may be changed. If the bonds are made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Grossnickle Corporation issued 20-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 19 years to maturity?

Correct AnswerverifiedShow Answer

Moerdyk Corporation's bonds have a 15-year maturity, a 7.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 6.20%, based on semiannual compounding. What is the bond's price?

Correct AnswerverifiedShow Answer

The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Assume that a noncallable 10-year T-bond has a 12% annual coupon, while a 15-year noncallable 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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, companies call bonds if interest rates rise and do not call them if interest rates decline.

Correct AnswerverifiedShow Answer

A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if market interest rates are below 10% and at a discount if interest rates are greater than 10%.

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

Correct AnswerverifiedShow Answer

Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, generally be subject to much more price risk if you purchased a 30-day bond than if you bought a 30-year bond.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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