Exam 7: Bonds and Their Valuation

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%.

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A) You hold two bonds,a 10-year,zero coupon,issue and a 10-year bond that pays a 6% annual coupon.The same market rate,6%,applies to both bonds.If the market rate rises from its current level,the zero coupon bond will experience the larger percentage decline.
B) The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.
C) You hold two bonds.One is a 10-year,zero coupon,bond and the other is a 10-year bond that pays a 6% annual coupon.The same market rate,6%,applies to both bonds.If the market rate rises from the current level,the zero coupon bond will experience the smaller percentage decline.
D) The shorter the time to maturity,the greater the change in the value of a bond in response to a given change in interest rates,other things held constant.
E) The longer the time to maturity,the smaller the change in the value of a bond in response to a given change in interest rates.

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A) $1,235.47
B) $976.02
C) $1,457.85
D) $1,050.15
E) $1,359.01

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A) The total return on a bond during a given year is based only on the coupon interest payments received.
B) All else equal,a bond that has a coupon rate of 10% will sell at a discount if the required return for bonds of similar risk is 8%.
C) The price of a discount bond will increase over time,assuming that the bond's yield to maturity remains constant.
D) For a given firm,its debentures are likely to have a lower yield to maturity than its mortgage bonds.
E) When large firms are in financial distress,they are almost always liquidated,whereas smaller firms are generally reorganized.

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A) Other things held constant,a 20-year zero coupon bond has more reinvestment risk than a 20-year coupon bond.
B) Other things held constant,for any given maturity,a 1.0 percentage point decrease in the market interest rate would cause a smaller dollar capital gain than the capital loss stemming from a 1.0 percentage point increase in the interest rate.
C) From a corporate borrower's point of view,interest paid on bonds is not tax-deductible.
D) Other things held constant,price sensitivity as measured by the percentage change in price due to a given change in the required rate of return decreases as a bond's maturity increases.
E) For a bond of any maturity,a 1.0 percentage point increase in the market interest rate (r_d) causes a larger dollar capital loss than the capital gain stemming from a 1.0 percentage point decrease in the interest rate.

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

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A) 7.34%
B) 9.66%
C) 8.60%
D) 9.95%
E) 11.21%

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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.

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A) The coupon rate should be exactly equal to 6%.
B) The coupon rate could be less than,equal to,or greater than 6%,depending on the specific terms set,but in the real world the convertible feature would probably cause the coupon rate to be less than 6%.
C) The rate should be slightly greater than 6%.
D) The rate should be over 7%.
E) The rate should be over 8%.

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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) The bond's expected capital gains yield is zero.
B) The bond's yield to maturity is above 9%.
C) The bond's current yield is above 9%.
D) If the bond's yield to maturity declines,the bond will sell at a discount.
E) The bond's current yield is less than its expected capital gains yield.

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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 million dollars,but $500,000 is raised as first mortgage bonds on the new plant and $500,000 as debentures,the interest rate on the first mortgage bonds would be lower than it would be if the entire $1 million were raised by selling first mortgage bonds.
C) If two classes of debt are used (with one senior and the other subordinated to all other debt) ,the subordinated debt will carry a lower interest rate.
D) If debt is used to raise the million dollars,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) If debt is used to raise the million dollars,the cost of the debt would be higher if the debt were in the form of a mortgage bond rather than an unsecured term loan.

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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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