Exam 5: Bonds, Bond Valuation, and Interest Rates

A) If the Treasury yield curve is upward sloping and Short has less default risk than Long, then Short's bonds must under all conditions have the lower yield.
B) If the Treasury yield curve is downward sloping, Long's bonds must
Under all conditions have the lower yield.
C) If the yield curve for Treasury securities is upward sloping, Long's bonds must under all conditions have a higher yield than
Short's bonds.
D) If the yield curve for Treasury securities is flat, Short's bond
Must under all conditions have the same yield as Long's bonds.
E) If Long's and Short's bonds have the same default risk, their
Yields must under all conditions be equal.

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A) Junior debt is debt that has been more recently issued, and in bankruptcy it is paid off after senior debt because the senior debt
Was issued first.
B) Subordinated debt has less default risk than senior debt.
C) Convertible bonds have lower coupon rates than non-convertible bonds of similar default risk because they offer the possibility of
Capital gains.
D) Junk bonds typically provide a lower yield to maturity than
Investment-grade bonds.
E) A debenture is a secured bond that is backed by some or all of the
Firm's fixed assets.

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A) Adding additional restrictive covenants that limit management's actions.
B) Adding a call provision.
C) The rating agencies change the bond's rating from Baa to Aaa.
D) Making the bond a first mortgage bond rather than a debenture.
E) Adding a sinking fund.

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A) The higher the maturity risk premium, the higher the probability that the yield curve will be inverted.
B) The most likely explanation for an inverted yield curve is that
Investors expect inflation to increase.
C) The most likely explanation for an inverted yield curve is that
Investors expect inflation to decrease.
D) If the yield curve is inverted, short-term bonds have lower yields
Than long-term bonds.
E) Inverted yield curves can exist for Treasury bonds, but because of default premiums, the corporate yield curve can never be inverted.

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A) The higher the percentage of debt represented by mortgage bonds, the riskier both types of bonds will be and, consequently, the
Higher the firm's total dollar interest charges will be.
B) If the debt were raised by issuing $50 million of debentures and
$50 million of first mortgage bonds, we could be certain that the firm's total interest expense would be lower than if the debt were
Raised by issuing $100 million of debentures.
C) In this situation, we cannot tell for sure how, or whether, the firm's total interest expense on the $100 million of debt would be affected by the mix of debentures versus first mortgage bonds. The interest rate on each of the two types of bonds would increase as the percentage of mortgage bonds used was increased, but the result might well be such that the firm's total interest charges would not
Be affected materially by the mix between the two.
D) The higher the percentage of debentures, the greater the risk borne by each debenture, and thus the higher the required rate of return
On the debentures.
E) If the debt were raised by issuing $50 million of debentures and
$50 million of first mortgage bonds, we could be certain that the firm's total interest expense would be lower than if the debt were
Raised by issuing $100 million of first mortgage bonds.

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A) All else equal, high-coupon bonds have less reinvestment rate risk than low-coupon bonds.
B) All else equal, long-term bonds have less interest rate price risk
Than short-term bonds.
C) All else equal, low-coupon bonds have less interest rate price risk
Than high-coupon bonds.
D) All else equal, short-term bonds have less reinvestment rate risk
Than long-term bonds.
E) All else equal, long-term bonds have less reinvestment rate risk
Than short-term bonds.

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A) $1,077.01
B) $1,104.62
C) $1,132.95
D) $1,162.00
E) $1,191.79

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A) 0.99%
B) 1.10%
C) 1.21%
D) 1.33%
E) 1.46%

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A) 2.11%
B) 2.32%
C) 2.55%
D) 2.80%
E) 3.09%

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A) One disadvantage of zero coupon bonds is that the issuing firm cannot realize any tax savings from the debt until the bonds
Mature.
B) Other things held constant, a callable bond should have a lower
Yield to maturity than a noncallable bond.
C) Once a firm declares bankruptcy, it must then be liquidated by the trustee, who uses the proceeds to pay bondholders, unpaid wages,
Taxes, and lawyer fees.
D) Income bonds must pay interest only if the company earns the interest. Thus, these securities cannot bankrupt a company prior to their maturity, and this makes them safer to the issuing
Corporation than "regular" bonds.
E) A firm with a sinking fund that gave it the choice of calling the required bonds at par or buying the bonds in the open market would generally choose the open market purchase if the coupon rate exceeded the going interest rate.

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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 the bond's 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) 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) 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.

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A) The bond's coupon rate exceeds its current yield.
B) The bond's current yield exceeds its yield to maturity.
C) The bond's yield to maturity is greater than its coupon rate.
D) The bond's current yield is equal to its coupon rate.
E) If the yield to maturity stays constant until the bond matures, the bond's price will remain at $850.

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A) If the bonds' market interest rate remain at 10%, Bond Z's price will be lower one year from now than it is today.
B) Bond X has the greatest reinvestment rate risk.
C) If market interest rates decline, all of the bonds will have an increase in price, and Bond Z will have the largest percentage
Increase in price.
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) 8.56%
B) 9.01%
C) 9.46%
D) 9.93%
E) 10.43%

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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.

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