Question 1

A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT?

Accepted Answer

A)  The bond's current yield is less than 8%. 
B)  If the yield to maturity remains at 8%, then the bond's price will decline over the next year. 
C)  The bond's coupon rate is less than 8%. 
D)  If the yield to maturity increases, then the bond's price will increase. 
E)  If the yield to maturity remains at 8%, then the bond's price will remain constant over the next year. 
A)  The bond's current yield is less than 8%. 
B)  If the yield to maturity remains at 8%, then the bond's price will decline over the next year. 
C)  The bond's coupon rate is less than 8%. 
D)  If the yield to maturity increases, then the bond's price will increase. 
E)  If the yield to maturity remains at 8%, then the bond's price will remain constant over the next year.

Question 2

Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows:
T-bond = 7.72% A = 9.64%
AAA = 8.72% BBB = 10.18%
The differences in rates among these issues were most probably caused primarily by:

Accepted Answer

A)  Real risk-free rate differences. 
B)  Tax effects. 
C)  Default and liquidity risk differences. 
D)  Maturity risk differences. 
E)  Inflation differences. 
A)  Real risk-free rate differences. 
B)  Tax effects. 
C)  Default and liquidity risk differences. 
D)  Maturity risk differences. 
E)  Inflation differences.

Question 3

Which of the following statements is CORRECT?

Accepted Answer

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. 
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.

Question 4

As a general rule, a company's debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured.

Accepted Answer

A) True 
 B)False

Question 5

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. 
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.

Question 6

Assume that a noncallable 10-year T-bond has a 12% annual coupon, while a 15-year noncallable T-bond has an 8% annual coupon. Assume also that the yield curve is flat, and all Treasury securities have a 10% yield to maturity. Which of the following statements is CORRECT?

Accepted Answer

A)  If interest rates decline, the prices of both bonds would increase, but the 15-year bond would have a larger percentage increase in price. 
B)  If interest rates decline, the prices of both bonds would increase, but the 10-year bond would have a larger percentage increase in price. 
C)  The 10-year bond would sell at a discount, while the 15-year bond would sell at a premium. 
D)  The 10-year bond would sell at a premium, while the 15-year bond would sell at par. 
E)  If the yield to maturity on both bonds remains at 10% over the next year, the price of the 10-year bond would increase, but the price of the 15-year bond would fall. 
A)  If interest rates decline, the prices of both bonds would increase, but the 15-year bond would have a larger percentage increase in price. 
B)  If interest rates decline, the prices of both bonds would increase, but the 10-year bond would have a larger percentage increase in price. 
C)  The 10-year bond would sell at a discount, while the 15-year bond would sell at a premium. 
D)  The 10-year bond would sell at a premium, while the 15-year bond would sell at par. 
E)  If the yield to maturity on both bonds remains at 10% over the next year, the price of the 10-year bond would increase, but the price of the 15-year bond would fall.

Question 7

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?

Accepted Answer

A)  If the yield to maturity remains constant, the bond's price one year from now will be higher than its current price. 
B)  The bond is selling below its par value. 
C)  The bond is selling at a discount. 
D)  If the yield to maturity remains constant, the bond's price one year from now will be lower than its current price. 
E)  The bond's current yield is greater than 9%. 
A)  If the yield to maturity remains constant, the bond's price one year from now will be higher than its current price. 
B)  The bond is selling below its par value. 
C)  The bond is selling at a discount. 
D)  If the yield to maturity remains constant, the bond's price one year from now will be lower than its current price. 
E)  The bond's current yield is greater than 9%.

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)  If a bond is selling at a discount to par, its current yield will be greater than its yield to maturity. 
B)  All else equal, bonds with longer maturities have less price risk than bonds with shorter maturities. 
C)  If a bond is selling at its par value, its current yield equals its capital gains yield. 
D)  If a bond is selling at a premium, its current yield will be less than its capital gains yield. 
E)  All else equal, bonds with larger coupons have less price risk than bonds with smaller coupons. 
A)  If a bond is selling at a discount to par, its current yield will be greater than its yield to maturity. 
B)  All else equal, bonds with longer maturities have less price risk than bonds with shorter maturities. 
C)  If a bond is selling at its par value, its current yield equals its capital gains yield. 
D)  If a bond is selling at a premium, its current yield will be less than its capital gains yield. 
E)  All else equal, bonds with larger coupons have less price risk than bonds with smaller coupons.

Question 9

Restrictive covenants are designed primarily to protect bondholders by constraining the actions of managers. Such covenants are spelled out in bond indentures.

Accepted Answer

A) True 
 B)False

Question 10

If the required rate of return on a bond (rd) is greater than its coupon interest rate and will remain above that rate, then the market value of the bond will always be below its par value until the bond matures, at which time its market value will equal its par value. (Accrued interest between interest payment dates should not be considered when answering this question.)

Accepted Answer

A) True 
 B)False

Question 11

You have funds that you want to invest in bonds, and you just noticed in the financial pages of the local newspaper that you can buy a $1,000 par value bond for $800. The coupon rate is 10% (with annual payments), and there are 10 years before the bond will mature and pay off its $1,000 par value. You should buy the bond if your required return on bonds with this risk is 12%.

Accepted Answer

A) True 
 B)False

Question 12

Sinking funds are provisions included in bond indentures that require companies to retire bonds on a scheduled basis prior to their final maturity. Many indentures allow the company to acquire bonds for sinking fund purposes by either (1) purchasing bonds on the open market at the going market price or (2) selecting the bonds to be called by a lottery administered by the trustee, in which case the price paid is the bond's face value.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)  If a coupon bond is selling at par, its current yield equals its yield to maturity. 
B)  If a coupon bond is selling at a discount, its price will continue to decline until it reaches its par value at maturity. 
C)  If interest rates increase, the price of a 10-year coupon bond will decline by a greater percentage than the price of a 10-year zero coupon bond. 
D)  If a bond's yield to maturity exceeds its annual coupon, then the bond will trade at a premium. 
E)  If a coupon bond is selling at a premium, its current yield equals its yield to maturity. 
A)  If a coupon bond is selling at par, its current yield equals its yield to maturity. 
B)  If a coupon bond is selling at a discount, its price will continue to decline until it reaches its par value at maturity. 
C)  If interest rates increase, the price of a 10-year coupon bond will decline by a greater percentage than the price of a 10-year zero coupon bond. 
D)  If a bond's yield to maturity exceeds its annual coupon, then the bond will trade at a premium. 
E)  If a coupon bond is selling at a premium, its current yield equals its yield to maturity.

Question 14

A Treasury bond has an 8% annual coupon and a 7.5% yield to maturity. Which of the following statements is CORRECT?

Accepted Answer

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. 
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.

Question 15

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. 
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.

Question 16

Malko Enterprises' bonds currently sell for $1,050. They have a 6-year maturity, an annual coupon of $75, and a par value of $1,000. What is their current yield?

Accepted Answer

A)  7.14% 
B)  7.50% 
C)  7.88% 
D)  8.27% 
E)  8.68% 
A)  7.14% 
B)  7.50% 
C)  7.88% 
D)  8.27% 
E)  8.68%

Question 17

Bond A has a 9% annual coupon, while Bond B has a 7% annual coupon. Both bonds have the same maturity, a face value of $1,000, an 8% yield to maturity, and are noncallable. Which of the following statements is CORRECT?

Accepted Answer

A)  Bond A's capital gains yield is greater than Bond B's capital gains yield. 
B)  Bond A trades at a discount, whereas Bond B trades at a premium. 
C)  If the yield to maturity for both bonds remains at 8%, Bond A's price one year from now will be higher than it is today, but Bond B's price one year from now will be lower than it is today. 
D)  If the yield to maturity for both bonds immediately decreases to 6%, Bond A's bond will have a larger percentage increase in value. 
E)  Bond A's current yield is greater than that of Bond B. 
A)  Bond A's capital gains yield is greater than Bond B's capital gains yield. 
B)  Bond A trades at a discount, whereas Bond B trades at a premium. 
C)  If the yield to maturity for both bonds remains at 8%, Bond A's price one year from now will be higher than it is today, but Bond B's price one year from now will be lower than it is today. 
D)  If the yield to maturity for both bonds immediately decreases to 6%, Bond A's bond will have a larger percentage increase in value. 
E)  Bond A's current yield is greater than that of Bond B.

Question 18

Taussig Corp.'s bonds currently sell for $1,150. They have a 6.35% annual coupon rate and a 20-year maturity, but they can be called in 5 years at $1,067.50. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. Under these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds?

Accepted Answer

A)  3.42% 
B)  3.60% 
C)  3.79% 
D)  3.99% 
E)  4.20% 
A)  3.42% 
B)  3.60% 
C)  3.79% 
D)  3.99% 
E)  4.20%

Question 19

A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if market interest rates are below 10% and at a discount if interest rates are greater than 10%.

Accepted Answer

A) True 
 B)False

Question 20

Assume that you are considering the purchase of a 20-year, noncallable bond with an annual coupon rate of 9.5%. The bond has a face value of $1,000, and it makes semiannual interest payments. If you require an 8.4% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

Accepted Answer

A)  $1,105.69 
B)  $1,133.34 
C)  $1,161.67 
D)  $1,190.71 
E)  $1,220.48 
A)  $1,105.69 
B)  $1,133.34 
C)  $1,161.67 
D)  $1,190.71 
E)  $1,220.48

A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT?

Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows: T-bond = 7.72% A = 9.64% AAA = 8.72% BBB = 10.18% The differences in rates among these issues were most probably caused primarily by:

Which of the following statements is CORRECT?

As a general rule, a company's debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured.

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

Assume that a noncallable 10-year T-bond has a 12% annual coupon, while a 15-year noncallable T-bond has an 8% annual coupon. Assume also that the yield curve is flat, and all Treasury securities have a 10% yield to maturity. Which of the following statements is CORRECT?

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Restrictive covenants are designed primarily to protect bondholders by constraining the actions of managers. Such covenants are spelled out in bond indentures.

Which of the following statements is CORRECT?

A Treasury bond has an 8% annual coupon and a 7.5% yield to maturity. Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Malko Enterprises' bonds currently sell for $1,050. They have a 6-year maturity, an annual coupon of $75, and a par value of $1,000. What is their current yield?

Bond A has a 9% annual coupon, while Bond B has a 7% annual coupon. Both bonds have the same maturity, a face value of $1,000, an 8% yield to maturity, and are noncallable. Which of the following statements is CORRECT?

A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if market interest rates are below 10% and at a discount if interest rates are greater than 10%.

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Exam 7: Bonds

A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT?

Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows: T-bond = 7.72% A = 9.64% AAA = 8.72% BBB = 10.18% The differences in rates among these issues were most probably caused primarily by:

Which of the following statements is CORRECT?

As a general rule, a company's debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured.

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

Assume that a noncallable 10-year T-bond has a 12% annual coupon, while a 15-year noncallable T-bond has an 8% annual coupon. Assume also that the yield curve is flat, and all Treasury securities have a 10% yield to maturity. Which of the following statements is CORRECT?

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Restrictive covenants are designed primarily to protect bondholders by constraining the actions of managers. Such covenants are spelled out in bond indentures.

Which of the following statements is CORRECT?

A Treasury bond has an 8% annual coupon and a 7.5% yield to maturity. Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Malko Enterprises' bonds currently sell for $1,050. They have a 6-year maturity, an annual coupon of $75, and a par value of $1,000. What is their current yield?

Bond A has a 9% annual coupon, while Bond B has a 7% annual coupon. Both bonds have the same maturity, a face value of $1,000, an 8% yield to maturity, and are noncallable. Which of the following statements is CORRECT?

A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if market interest rates are below 10% and at a discount if interest rates are greater than 10%.

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