Question 1

Which of the following has the greatest price risk?

Accepted Answer

A)  A 10-year, $1,000 face value, 10 percent coupon bond with semiannual interest payments. 
B)  A 10-year, $1,000 face value, 10 percent coupon bond with annual interest payments. 
C)  A 10-year, $1,000 face value, zero coupon bond. 
D)  A 10-year $100 annuity. 
E)  All of the above have the same price risk since they all mature in 10 years. 
A)  A 10-year, $1,000 face value, 10 percent coupon bond with semiannual interest payments. 
B)  A 10-year, $1,000 face value, 10 percent coupon bond with annual interest payments. 
C)  A 10-year, $1,000 face value, zero coupon bond. 
D)  A 10-year $100 annuity. 
E)  All of the above have the same price risk since they all mature in 10 years.

Question 2

All treasury securities have a yield to maturity of 7 percent--so the yield curve is flat. If the yield to maturity on all Treasuries were to decline to 6 percent, which of the following bonds would have the largest percentage increase in price?

Accepted Answer

A)  15-year zero coupon Treasury bond. 
B)  12-year Treasury bond with a 10 percent annual coupon. 
C)  15-year Treasury bond with a 12 percent annual coupon. 
D)  2-year zero coupon Treasury bond. 
E)  2-year Treasury bond with a 15 percent annual coupon. 
A)  15-year zero coupon Treasury bond. 
B)  12-year Treasury bond with a 10 percent annual coupon. 
C)  15-year Treasury bond with a 12 percent annual coupon. 
D)  2-year zero coupon Treasury bond. 
E)  2-year Treasury bond with a 15 percent annual coupon.

Question 3

There is an inverse relationship between bond ratings and the required return on a bond. 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 4

Income bonds pay interest only when the amount of the interest is actually earned by the company. Thus, these securities cannot bankrupt a company and this makes them safer than regular bonds.

Accepted Answer

A) True 
 B)False

Question 5

Cold Boxes Ltd. has 100 bonds outstanding (maturity value = $1,000). The nominal required rate of return on these bonds is currently 10 percent, and interest is paid semiannually. The bonds mature in 5 years, and their current market value is $768 per bond. What is the annual coupon interest rate?

Accepted Answer

A)  8% 
B)  6% 
C)  4% 
D)  2% 
E)  0% 
A)  8% 
B)  6% 
C)  4% 
D)  2% 
E)  0%

Question 6

Which of the following statements is most correct?

Accepted Answer

A)  Retiring bonds under a sinking fund provision is similar to calling bonds under a call provision in the sense that bonds are repurchased by the issuer prior to maturity. 
B)  Under a sinking fund, bonds will be purchased on the open market by the issuer when the bonds are selling at a premium and bonds will be called in for redemption when the bonds are selling at a discount. 
C)  The sinking fund provision makes a debt issue less risky to the investor. 
D)  Both statements a and c are correct. 
E)  All of the statements above are correct. 
A)  Retiring bonds under a sinking fund provision is similar to calling bonds under a call provision in the sense that bonds are repurchased by the issuer prior to maturity. 
B)  Under a sinking fund, bonds will be purchased on the open market by the issuer when the bonds are selling at a premium and bonds will be called in for redemption when the bonds are selling at a discount. 
C)  The sinking fund provision makes a debt issue less risky to the investor. 
D)  Both statements a and c are correct. 
E)  All of the statements above are correct.

Question 7

Which of the following statements is most correct?

Accepted Answer

A)  All else equal, an increase in interest rates will have a greater effect on the prices of long-term bonds than it will on the prices of short-term bonds. 
B)  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. 
C)  An increase in interest rates will have a greater effect on a zero coupon bond with 10 years maturity than it will have on a 9-year bond with a 10 percent annual coupon. 
D)  All of the statements above are correct. 
E)  Answers a and c are correct. 
A)  All else equal, an increase in interest rates will have a greater effect on the prices of long-term bonds than it will on the prices of short-term bonds. 
B)  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. 
C)  An increase in interest rates will have a greater effect on a zero coupon bond with 10 years maturity than it will have on a 9-year bond with a 10 percent annual coupon. 
D)  All of the statements above are correct. 
E)  Answers a and c are correct.

Question 8

All of the following may serve to reduce the coupon rate that would otherwise be required on a bond issued at par, except a

Accepted Answer

A)  Sinking fund. 
B)  Restrictive covenant. 
C)  Call provision. 
D)  Change in rating from Aa to Aaa. 
E)  None of the answers above (all may reduce the required coupon rate). 
A)  Sinking fund. 
B)  Restrictive covenant. 
C)  Call provision. 
D)  Change in rating from Aa to Aaa. 
E)  None of the answers above (all may reduce the required coupon rate).

Question 9

A bond that is callable has a chance of being retired earlier than its stated term to maturity. Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following statements is most correct?

Accepted Answer

A)  If a bond is selling for a premium, this implies that the bond's yield to maturity exceeds its coupon rate. 
B)  If a coupon bond is selling at par, its current yield equals its yield to maturity. 
C)  If rates fall after its issue, a zero coupon bond could trade for an amount above its par value. 
D)  Statements b and c are correct. 
E)  None of the statements above is correct. 
A)  If a bond is selling for a premium, this implies that the bond's yield to maturity exceeds its coupon rate. 
B)  If a coupon bond is selling at par, its current yield equals its yield to maturity. 
C)  If rates fall after its issue, a zero coupon bond could trade for an amount above its par value. 
D)  Statements b and c are correct. 
E)  None of the statements above is correct.

Question 11

A 12-year bond pays an annual coupon of 8.5 percent. The bond has a yield to maturity of 9.5 percent and a par value of $1,000. What is the bond's current yield?

Accepted Answer

A)  6.36% 
B)  2.15% 
C)  8.95% 
D)  9.14% 
E)  10.21% 
A)  6.36% 
B)  2.15% 
C)  8.95% 
D)  9.14% 
E)  10.21%

Question 12

A 10-year corporate bond has an annual coupon payment of 9 percent. The bond is currently selling at par ($1,000). Which of the following statements is most correct?

Accepted Answer

A)  The bond's yield to maturity is 9 percent. 
B)  The bond's current yield is 9 percent. 
C)  If the bond's yield to maturity remains constant, the bond's price will remain at par. 
D)  Both answers a and c are correct. 
E)  All of the answers above are correct. 
A)  The bond's yield to maturity is 9 percent. 
B)  The bond's current yield is 9 percent. 
C)  If the bond's yield to maturity remains constant, the bond's price will remain at par. 
D)  Both answers a and c are correct. 
E)  All of the answers above are correct.

Which of the following has the greatest price risk?

All treasury securities have a yield to maturity of 7 percent--so the yield curve is flat. If the yield to maturity on all Treasuries were to decline to 6 percent, which of the following bonds would have the largest percentage increase in price?

There is an inverse relationship between bond ratings and the required return on a bond. The required return is lowest for AAA-rated bonds, and required returns increase as the ratings get lower.

Income bonds pay interest only when the amount of the interest is actually earned by the company. Thus, these securities cannot bankrupt a company and this makes them safer than regular bonds.

Cold Boxes Ltd. has 100 bonds outstanding (maturity value = $1,000). The nominal required rate of return on these bonds is currently 10 percent, and interest is paid semiannually. The bonds mature in 5 years, and their current market value is $768 per bond. What is the annual coupon interest rate?

Which of the following statements is most correct?

Which of the following statements is most correct?

All of the following may serve to reduce the coupon rate that would otherwise be required on a bond issued at par, except a

A bond that is callable has a chance of being retired earlier than its stated term to maturity. Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

Which of the following statements is most correct?

A 12-year bond pays an annual coupon of 8.5 percent. The bond has a yield to maturity of 9.5 percent and a par value of $1,000. What is the bond's current yield?

A 10-year corporate bond has an annual coupon payment of 9 percent. The bond is currently selling at par ($1,000). Which of the following statements is most correct?

An Overview of Financial Management

Risk and Return: Part I

Risk and Return: Part II

Basic Stock Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Financial Planning and Forecasting Financial Statements

Determining the Cost of Capital

Corporate Valuation and Value-Based Management

Capital Budgeting: Decision Criteria

Capital Budgeting: Cash Flows and Risk

Real Options

Capital Structure Decisions: Part I

Capital Structure Decisions: Part II

Distributions to Shareholders

Ipos, Investment Banking, and Financial Restructuring

Lease Financing

Hybrid Financing

Working Capital Management

Providing and Obtaining Credit

Other Topics in Working Capital Management

Derivatives and Risk Management

Bankruptcy, Reorganization, and Liquidation

Mergers, Lbos, Divestitures, and Holding Companies

Multinational Financial Management

Filters

Exam 4: Bond Valuation

Which of the following has the greatest price risk?

All treasury securities have a yield to maturity of 7 percent--so the yield curve is flat. If the yield to maturity on all Treasuries were to decline to 6 percent, which of the following bonds would have the largest percentage increase in price?

There is an inverse relationship between bond ratings and the required return on a bond. The required return is lowest for AAA-rated bonds, and required returns increase as the ratings get lower.

Income bonds pay interest only when the amount of the interest is actually earned by the company. Thus, these securities cannot bankrupt a company and this makes them safer than regular bonds.

Cold Boxes Ltd. has 100 bonds outstanding (maturity value = $1,000). The nominal required rate of return on these bonds is currently 10 percent, and interest is paid semiannually. The bonds mature in 5 years, and their current market value is $768 per bond. What is the annual coupon interest rate?

Which of the following statements is most correct?

Which of the following statements is most correct?

All of the following may serve to reduce the coupon rate that would otherwise be required on a bond issued at par, except a

A bond that is callable has a chance of being retired earlier than its stated term to maturity. Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

Which of the following statements is most correct?

A 12-year bond pays an annual coupon of 8.5 percent. The bond has a yield to maturity of 9.5 percent and a par value of $1,000. What is the bond's current yield?

A 10-year corporate bond has an annual coupon payment of 9 percent. The bond is currently selling at par ($1,000). Which of the following statements is most correct?

An Overview of Financial Management

Risk and Return: Part I

Risk and Return: Part II

Basic Stock Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Financial Planning and Forecasting Financial Statements

Determining the Cost of Capital

Corporate Valuation and Value-Based Management

Capital Budgeting: Decision Criteria

Capital Budgeting: Cash Flows and Risk

Real Options

Capital Structure Decisions: Part I

Capital Structure Decisions: Part II

Distributions to Shareholders

Ipos, Investment Banking, and Financial Restructuring

Lease Financing

Hybrid Financing

Working Capital Management

Providing and Obtaining Credit

Other Topics in Working Capital Management

Derivatives and Risk Management

Bankruptcy, Reorganization, and Liquidation

Mergers, Lbos, Divestitures, and Holding Companies

Multinational Financial Management

Filters