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Bonds A, B, and C all have a maturity of 10 years and a yield to maturity of 7%. Bond A's price exceeds its par value, Bond B's price equals its par value, and Bond C's price is less than its par value. None of the bonds can be called. Which of the following statements is CORRECT?


A) If the yield to maturity on each bond decreases to 6%, Bond A will have the largest percentage increase in its price.
B) Bond A has the most price risk.
C) If the yield to maturity on the three bonds remains constant, the prices of the three bonds will remain the same over the next year.
D) If the yield to maturity on each bond increases to 8%, the prices of all three bonds will decline.
E) Bond C sells at a premium over its par value.

F) B) and D)
G) A) and D)

Correct Answer

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Which of the following statements is CORRECT?


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

F) A) and E)
G) B) and E)

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


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

Correct Answer

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Sinking funds are provisions included in bond indentures that require companies to retire bonds on a scheduled basis prior to their final maturity. Many indentures allow the company to acquire bonds for sinking fund purposes by either (1) purchasing bonds on the open market at the going market price or (2) selecting the bonds to be called by a lottery administered by the trustee, in which case the price paid is the bond's face value.

A) True
B) False

Correct Answer

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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.

A) True
B) False

Correct Answer

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Which of the following statements is CORRECT?


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) All of the above
G) A) and B)

Correct Answer

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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.

A) True
B) False

Correct Answer

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Which of the following bonds has the greatest price risk?


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) All of the above
G) B) and D)

Correct Answer

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Which of the following statements is CORRECT?


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.

F) A) and E)
G) A) and B)

Correct Answer

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A Treasury bond has an 8% annual coupon and a 7.5% yield to maturity. Which of the following statements is CORRECT?


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.

F) B) and D)
G) A) and B)

Correct Answer

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The desire for floating-rate bonds, and consequently their increased usage, arose out of the experience of the early 1980s, when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.

A) True
B) False

Correct Answer

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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.

A) True
B) False

Correct Answer

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Which of the following statements is CORRECT?


A) If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price regardless of their coupon rates.
B) All else equal, an increase in interest rates will have a greater effect on the prices of short-term than long-term bonds.
C) All else equal, an increase in interest rates will have a greater effect on higher-coupon bonds than it will have on lower-coupon bonds.
D) If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value.
E) If a bond's yield to maturity exceeds its coupon rate, the bond's current yield must be less than its coupon rate.

F) D) and E)
G) A) and D)

Correct Answer

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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?


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) A) and E)
G) A) and B)

Correct Answer

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Radoski Corporation's bonds make an annual coupon interest payment of 7.35%. The bonds have a par value of $1,000, a current price of $1,130, and mature in 12 years. What is the yield to maturity on these bonds?


A) 5.52%
B) 5.82%
C) 6.11%
D) 6.41%
E) 6.73%

F) C) and D)
G) A) and C)

Correct Answer

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Dyl Inc.'s bonds currently sell for $1,040 and have a par value of $1,000. They pay a $65 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to maturity (YTM) ?


A) 5.78%
B) 6.09%
C) 6.39%
D) 6.71%
E) 7.05%

F) A) and D)
G) A) and B)

Correct Answer

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Sadik Inc.'s bonds currently sell for $1,180 and have a par value of $1,000. They pay a $105 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to call (YTC) ?


A) 6.63%
B) 6.98%
C) 7.35%
D) 7.74%
E) 8.12%

F) A) and B)
G) All of the above

Correct Answer

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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.


A) 4,228
B) 4,337
C) 4,448
D) 4,562
E) 4,676

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

Correct Answer

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Which of the following statements is CORRECT?


A) If a bond is selling at a discount to par, its current yield will be greater than its yield to maturity.
B) All else equal, bonds with longer maturities have less price risk than bonds with shorter maturities.
C) If a bond is selling at its par value, its current yield equals its capital gains yield.
D) If a bond is selling at a premium, its current yield will be less than its capital gains yield.
E) All else equal, bonds with larger coupons have less price risk than bonds with smaller coupons.

F) A) and B)
G) A) and C)

Correct Answer

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You have funds that you want to invest in bonds, and you just noticed in the financial pages of the local newspaper that you can buy a $1,000 par value bond for $800. The coupon rate is 10% (with annual payments), and there are 10 years before the bond will mature and pay off its $1,000 par value. You should buy the bond if your required return on bonds with this risk is 12%.

A) True
B) False

Correct Answer

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