Exam 7: Bonds

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.

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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.

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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.

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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 generally regarded as being riskier than common stocks, and therefore bonds have higher required returns.
D) Bonds issued by larger companies always have lower yields to maturity (due to less risk) than bonds issued by smaller companies.
E) The market price of a bond will always approach its par value as its maturity date approaches, provided the bond's required return remains constant.

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A) If a bond is selling at a discount, the yield to call is a better measure of return than is 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) On an expected yield basis, the expected current yield will always be positive because an investor would not purchase a bond that is not expected to pay any cash coupon interest.
D) If a coupon bond is selling at par, its current yield equals its yield to maturity, and its expected capital gains yield is zero.
E) 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.

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A) $903.04
B) $925.62
C) $948.76
D) $972.48
E) $996.79

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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.

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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.

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