Question 1

A 12-year bond has an annual coupon of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which of the following statements is CORRECT?

Accepted Answer

A)  If market interest rates decline, the price of the bond will also decline. 
B)  The bond is currently selling at a price below its par value. 
C)  If market interest rates remain unchanged, the bond's price one year from now will be lower than it is today. 
D)  The bond should currently be selling at its par value. 
E)  If market interest rates remain unchanged, the bond's price one year from now will be higher than it is today. 
A)  If market interest rates decline, the price of the bond will also decline. 
B)  The bond is currently selling at a price below its par value. 
C)  If market interest rates remain unchanged, the bond's price one year from now will be lower than it is today. 
D)  The bond should currently be selling at its par value. 
E)  If market interest rates remain unchanged, the bond's price one year from now will be higher than it is today. C

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)  A zero coupon bond of any maturity will have more price risk than any coupon bond, even a perpetuity. 
B)  If their maturities and other characteristics were the same, a 5% coupon bond would have more price risk than a 10% coupon bond. 
C)  A 10-year coupon bond would have more reinvestment risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of reinvestment risk. 
D)  A 10-year coupon bond would have more price risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of price risk. 
E)  If their maturities and other characteristics were the same, a 5% coupon bond would have less price risk than a 10% coupon bond. 
A)  A zero coupon bond of any maturity will have more price risk than any coupon bond, even a perpetuity. 
B)  If their maturities and other characteristics were the same, a 5% coupon bond would have more price risk than a 10% coupon bond. 
C)  A 10-year coupon bond would have more reinvestment risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of reinvestment risk. 
D)  A 10-year coupon bond would have more price risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of price risk. 
E)  If their maturities and other characteristics were the same, a 5% coupon bond would have less price risk than a 10% coupon bond. B

Question 3

A 25-year, $1,000 par value bond has an 8.5% annual payment coupon. The bond currently sells for $925. If the yield to maturity remains at its current rate, what will the price be 5 years from now?

Accepted Answer

A)  $884.19 
B)  $906.86 
C)  $930.11 
D)  $953.36 
E)  $977.20 
A)  $884.19 
B)  $906.86 
C)  $930.11 
D)  $953.36 
E)  $977.20 C

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)  Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest rates decline after the bond was issued. 
B)  Most sinking funds require the issuer to provide funds to a trustee, who holds the money so that it will be available to pay off bondholders when the bonds mature. 
C)  A sinking fund provision makes a bond more risky to investors at the time of issuance. 
D)  Sinking fund provisions never require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time. 
E)  If interest rates increase after a company has issued bonds with a sinking fund, the company will be less likely to buy bonds on the open market to meet its sinking fund obligation and more likely to call them in at the sinking fund call price. 
A)  Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest rates decline after the bond was issued. 
B)  Most sinking funds require the issuer to provide funds to a trustee, who holds the money so that it will be available to pay off bondholders when the bonds mature. 
C)  A sinking fund provision makes a bond more risky to investors at the time of issuance. 
D)  Sinking fund provisions never require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time. 
E)  If interest rates increase after a company has issued bonds with a sinking fund, the company will be less likely to buy bonds on the open market to meet its sinking fund obligation and more likely to call them in at the sinking fund call price.

Question 5

Income bonds pay interest only if the issuing company actually earns the indicated interest. Thus, these securities cannot bankrupt a company, and this makes them safer from an investor's perspective than regular bonds.

Accepted Answer

A) True 
 B)False

Question 6

Amram Inc. can issue a 20-year bond with a 6% annual coupon at par. This bond is not convertible, not callable, and has no sinking fund. Alternatively, Amram could issue a 20-year bond that is convertible into common equity, may be called, and has a sinking fund. Which of the following most accurately describes the coupon rate that Amram would have to pay on the second bond, the convertible, callable bond with the sinking fund, to have it sell initially at par?

Accepted Answer

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%. 
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%.

Question 7

Under normal conditions, which of the following would be most likely to increase the coupon rate required for a bond to be issued at par?

Accepted Answer

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. 
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.

Question 8

Listed below are some provisions that are often contained in bond indentures. Which of these provisions, viewed alone, would tend to reduce the yield to maturity that investors would otherwise require on a newly issued bond?
1) Fixed assets are used as security for a bond.
2) A given bond is subordinated to other classes of debt.
3) The bond can be converted into the firm's common stock.
4) The bond has a sinking fund.
5) The bond has a call provision.
6) The indenture contains covenants that restrict the use of additional debt.

Accepted Answer

A)  1, 3, 4, 6 
B)  1, 4, 6 
C)  1, 2, 3, 4, 6 
D)  1, 2, 3, 4, 5, 6 
E)  1, 3, 4, 5, 6 
A)  1, 3, 4, 6 
B)  1, 4, 6 
C)  1, 2, 3, 4, 6 
D)  1, 2, 3, 4, 5, 6 
E)  1, 3, 4, 5, 6

Question 9

Moon Software Inc. is planning to issue two types of 25-year, noncallable bonds to raise a total of $6 million, $3 million from each type of bond. First, 3,000 bonds with a 10% semiannual coupon will be sold at their $1,000 par value to raise $3,000,000. These are called "par" bonds. Second, Original Issue Discount (OID) bonds, also with a 25-year maturity and a $1,000 par value, will be sold, but these bonds will have a semiannual coupon of only 6.25%. The OID bonds must be offered at below par in order to provide investors with the same effective yield as the par bonds. How many OID bonds must the firm issue to raise $3,000,000? Disregard flotation costs, and round your final answer up to a whole number of bonds.

Accepted Answer

A)  4,228 
B)  4,337 
C)  4,448 
D)  4,562 
E)  4,676 
A)  4,228 
B)  4,337 
C)  4,448 
D)  4,562 
E)  4,676

Question 10

Which of the following statements is CORRECT?

Accepted Answer

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)  The expected capital gains yield on a bond will always be zero or positive because no investor would purchase a bond with an expected capital loss. 
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)  The expected capital gains yield on a bond will always be zero or positive because no investor would purchase a bond with an expected capital loss.

Question 11

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

Accepted Answer

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. 
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.

Question 12

If a firm raises capital by selling new bonds, it could be called the "issuing firm," and the coupon rate is generally set equal to the required rate on bonds of equal risk.

Accepted Answer

A) True 
 B)False

Question 13

Tucker Corporation is planning to issue new 20-year bonds. The current plan is to make the bonds non-callable, but this may be changed. If the bonds are made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

Accepted Answer

A)  Because of the call premium, the required rate of return would decline. 
B)  There is no reason to expect a change in the required rate of return. 
C)  The required rate of return would decline because the bond would then be less risky to a bondholder. 
D)  The required rate of return would increase because the bond would then be more risky to a bondholder. 
E)  It is impossible to say without more information. 
A)  Because of the call premium, the required rate of return would decline. 
B)  There is no reason to expect a change in the required rate of return. 
C)  The required rate of return would decline because the bond would then be less risky to a bondholder. 
D)  The required rate of return would increase because the bond would then be more risky to a bondholder. 
E)  It is impossible to say without more information.

Question 14

Which of the following statements is CORRECT?

Accepted Answer

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. 
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.

Question 15

Radoski Corporation's bonds make an annual coupon interest payment of 7.35%. The bonds have a par value of $1,000, a current price of $1,130, and mature in 12 years. What is the yield to maturity on these bonds?

Accepted Answer

A)  5.52% 
B)  5.82% 
C)  6.11% 
D)  6.41% 
E)  6.73% 
A)  5.52% 
B)  5.82% 
C)  6.11% 
D)  6.41% 
E)  6.73%

Question 16

A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, companies call bonds if interest rates rise and do not call them if interest rates decline.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements is CORRECT?

Accepted Answer

A)  Senior debt is debt that has been more recently issued, and in bankruptcy it is paid off after junior debt because the junior debt was issued first. 
B)  A company's subordinated debt has less default risk than its senior debt. 
C)  Convertible bonds generally 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. 
A)  Senior debt is debt that has been more recently issued, and in bankruptcy it is paid off after junior debt because the junior debt was issued first. 
B)  A company's subordinated debt has less default risk than its senior debt. 
C)  Convertible bonds generally 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.

Question 18

Which of the following statements is CORRECT?

Accepted Answer

A)  If the maturity risk premium were zero and interest rates were expected to decrease in the future, then the yield curve for U.S. Treasury securities would, other things held constant, have an upward slope. 
B)  Liquidity premiums are generally higher on Treasury than corporate bonds. 
C)  The maturity premiums embedded in the interest rates on U.S. Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-term bonds. 
D)  Default risk premiums are generally lower on corporate than on Treasury bonds. 
E)  Reinvestment risk is lower, other things held constant, on long-term than on short-term bonds. 
A)  If the maturity risk premium were zero and interest rates were expected to decrease in the future, then the yield curve for U.S. Treasury securities would, other things held constant, have an upward slope. 
B)  Liquidity premiums are generally higher on Treasury than corporate bonds. 
C)  The maturity premiums embedded in the interest rates on U.S. Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-term bonds. 
D)  Default risk premiums are generally lower on corporate than on Treasury bonds. 
E)  Reinvestment risk is lower, other things held constant, on long-term than on short-term bonds.

Question 19

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 20

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

A 12-year bond has an annual coupon of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

A 25-year, $1,000 par value bond has an 8.5% annual payment coupon. The bond currently sells for $925. If the yield to maturity remains at its current rate, what will the price be 5 years from now?

Which of the following statements is CORRECT?

Income bonds pay interest only if the issuing company actually earns the indicated interest. Thus, these securities cannot bankrupt a company, and this makes them safer from an investor's perspective than regular bonds.

Under normal conditions, which of the following would be most likely to increase the coupon rate required for a bond to be issued at par?

Which of the following statements is CORRECT?

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

If a firm raises capital by selling new bonds, it could be called the "issuing firm," and the coupon rate is generally set equal to the required rate on bonds of equal risk.

Tucker Corporation is planning to issue new 20-year bonds. The current plan is to make the bonds non-callable, but this may be changed. If the bonds are made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

Which of the following statements is CORRECT?

Radoski Corporation's bonds make an annual coupon interest payment of 7.35%. The bonds have a par value of $1,000, a current price of $1,130, and mature in 12 years. What is the yield to maturity on these bonds?

A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, companies call bonds if interest rates rise and do not call them if interest rates decline.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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.

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.

Overview

Financial Markets

Financial Statements

Statement Analysis

Time Value of Money

Interest Rates

Risk and Return

Stocks

Cost of Capital

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Exam 7: Bonds

A 12-year bond has an annual coupon of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

A 25-year, $1,000 par value bond has an 8.5% annual payment coupon. The bond currently sells for $925. If the yield to maturity remains at its current rate, what will the price be 5 years from now?

Which of the following statements is CORRECT?

Income bonds pay interest only if the issuing company actually earns the indicated interest. Thus, these securities cannot bankrupt a company, and this makes them safer from an investor's perspective than regular bonds.

Under normal conditions, which of the following would be most likely to increase the coupon rate required for a bond to be issued at par?

Which of the following statements is CORRECT?

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

If a firm raises capital by selling new bonds, it could be called the "issuing firm," and the coupon rate is generally set equal to the required rate on bonds of equal risk.

Tucker Corporation is planning to issue new 20-year bonds. The current plan is to make the bonds non-callable, but this may be changed. If the bonds are made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

Which of the following statements is CORRECT?

Radoski Corporation's bonds make an annual coupon interest payment of 7.35%. The bonds have a par value of $1,000, a current price of $1,130, and mature in 12 years. What is the yield to maturity on these bonds?

A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, companies call bonds if interest rates rise and do not call them if interest rates decline.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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.

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.

Overview

Financial Markets

Financial Statements

Statement Analysis

Time Value of Money

Interest Rates

Risk and Return

Stocks

Cost of Capital

Capital Budgeting

Cash Flow and Risk

Real Options

Capital Structure

Dividends

Working Capital

Forecasting

Derivatives

Multinational

Hybrid Financing

Mergers

Filters