Question 1

Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise.Since floating-rate debt shifts price risk to companies,it offers no advantages to corporate issuers.

Accepted Answer

A) True 
 B)False

Question 2

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) D) and E)

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)   One disadvantage of zero coupon bonds is that the issuing firm cannot realize any tax savings from the use of 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 be liquidated by the trustee,who uses the proceeds to pay bondholders,unpaid wages,taxes,and legal 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 gives 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.F) B) and C)
G) A) and E)

Question 4

If its yield to maturity declined by 1%,which of the following bonds would have the largest percentage increase in value?

Accepted Answer

A)   A 1-year zero coupon bond.
B)   A 1-year bond with an 8% coupon.
C)   A 10-year bond with an 8% coupon.
D)   A 10-year bond with a 12% coupon.
E)   A 10-year zero coupon bond.F) B) and D)
G) A) and B)

Question 5

There is an inverse relationship between bonds' quality ratings and their required rates of return.Thus,the required return is lowest for AAA-rated bonds,and required returns increase as the ratings get lower.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following bonds has the greatest price risk?

Accepted Answer

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) C) and D)
G) A) and B)

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)   Two bonds have the same maturity and the same coupon rate.However,one is callable and the other is not.The difference in prices between the bonds will be greater if the current market interest rate is below the coupon rate than if it is above the coupon rate.
B)   A callable 10-year,10% bond should sell at a higher price than an otherwise similar noncallable bond.
C)   Corporate treasurers dislike issuing callable bonds because these bonds may require the company to raise additional funds earlier than would be true if noncallable bonds with the same maturity were used.
D)   Two bonds have the same maturity and the same coupon rate.However,one is callable and the other is not.The difference in prices between the bonds will be greater if the current market interest rate is above the coupon rate than if it is below the coupon rate.
E)   The actual life of a callable bond will always be equal to or less than the actual life of a noncallable bond with the same maturity.Therefore,if the yield curve is upward sloping,the required rate of return will be lower on the callable bond.F) A) and D)
G) B) and D)

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)   A bond is likely to be called if its coupon rate is below its YTM.
B)   A bond is likely to be called if its market price is below its par value.
C)   Even if a bond's YTC exceeds its YTM,an investor with an investment horizon longer than the bond's maturity would be worse off if the bond were called.
D)   A bond is likely to be called if its market price is equal to its par value.
E)   A bond is likely to be called if it sells at a discount below par.F) A) and B)
G) A) and C)

Question 9

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 10

Other things equal,a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements is CORRECT?

Accepted Answer

A)   A zero coupon bond's current yield is equal to its yield to maturity.
B)   If a bond's yield to maturity exceeds its coupon rate,the bond will sell at par.
C)   All else equal,if a bond's yield to maturity increases,its price will fall.
D)   If a bond's yield to maturity exceeds its coupon rate,the bond will sell at a premium over par.
E)   All else equal,if a bond's yield to maturity increases,its current yield will fall.F) C) and D)
G) None of the above

Exam 7: Bonds and Their Valuation

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
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There is an inverse relationship between bonds' quality ratings and their required rates of return.Thus,the required return is lowest for AAA-rated bonds,and required returns increase as the ratings get lower.

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Which of the following bonds has the greatest price risk?

Correct Answer
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If its yield to maturity declined by 1%,which of the following bonds would have the largest percentage increase in value?

Correct Answer
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Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise.Since floating-rate debt shifts price risk to companies,it offers no advantages to corporate issuers.

Correct Answer
verified

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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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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Other things equal,a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

Correct Answer
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Exam 7: Bonds and Their Valuation

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

There is an inverse relationship between bonds' quality ratings and their required rates of return.Thus,the required return is lowest for AAA-rated bonds,and required returns increase as the ratings get lower.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following bonds has the greatest price risk?

Correct AnswerverifiedShow Answer

If its yield to maturity declined by 1%,which of the following bonds would have the largest percentage increase in value?

Correct AnswerverifiedShow Answer

Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise.Since floating-rate debt shifts price risk to companies,it offers no advantages to corporate issuers.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Other things equal,a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

Correct AnswerverifiedShow Answer

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