Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)  If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price regardless of their coupon rates. 
B)  All else equal, an increase in interest rates will have a greater effect on the prices of short-term than long-term bonds. 
C)  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. 
D)  If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value. 
E)  If a bond's yield to maturity exceeds its coupon rate, the bond's current yield must be less than its coupon rate. 
A)  If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price regardless of their coupon rates. 
B)  All else equal, an increase in interest rates will have a greater effect on the prices of short-term than long-term bonds. 
C)  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. 
D)  If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value. 
E)  If a bond's yield to maturity exceeds its coupon rate, the bond's current yield must be less than its coupon rate.

Question 2

You are considering two bonds. Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT?

Accepted Answer

A)  The price of Bond B will decrease over time, but the price of Bond A will increase over time. 
B)  The prices of both bonds will remain unchanged. 
C)  The price of Bond A will decrease over time, but the price of Bond B will increase over time. 
D)  The prices of both bonds will increase by 7% per year. 
E)  The prices of both bonds will increase over time, but the price of Bond A will increase at a faster rate. 
A)  The price of Bond B will decrease over time, but the price of Bond A will increase over time. 
B)  The prices of both bonds will remain unchanged. 
C)  The price of Bond A will decrease over time, but the price of Bond B will increase over time. 
D)  The prices of both bonds will increase by 7% per year. 
E)  The prices of both bonds will increase over time, but the price of Bond A will increase at a faster rate.

Question 3

Bond X has an 8% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a 12% annual coupon. Each of the bonds is noncallable, has a maturity of 10 years, and has a yield to maturity of 10%. Which of the following statements is CORRECT?

Accepted Answer

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. 
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.

Question 4

Which of the following statements is CORRECT?

Accepted Answer

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%. 
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%.

Question 5

Three $1,000 face value, 10-year, noncallable, bonds have the same amount of risk, hence their YTMs are equal. Bond 8 has an 8% annual coupon, Bond 10 has a 10% annual coupon, and Bond 12 has a 12% annual coupon. Bond 10 sells at par. Assuming that interest rates remain constant for the next 10 years, which of the following statements is CORRECT?

Accepted Answer

A)  Bond 8's current yield will increase each year. 
B)  Since the bonds have the same YTM, they should all have the same price, and since interest rates are not expected to change, their prices should all remain at their current levels until maturity. 
C)  Bond 12 sells at a premium (its price is greater than par), and its price is expected to increase over the next year. 
D)  Bond 8 sells at a discount (its price is less than par), and its price is expected to increase over the next year. 
E)  Over the next year, Bond 8's price is expected to decrease, Bond 10's price is expected to stay the same, and Bond 12's price is expected to increase. 
A)  Bond 8's current yield will increase each year. 
B)  Since the bonds have the same YTM, they should all have the same price, and since interest rates are not expected to change, their prices should all remain at their current levels until maturity. 
C)  Bond 12 sells at a premium (its price is greater than par), and its price is expected to increase over the next year. 
D)  Bond 8 sells at a discount (its price is less than par), and its price is expected to increase over the next year. 
E)  Over the next year, Bond 8's price is expected to decrease, Bond 10's price is expected to stay the same, and Bond 12's price is expected to increase.

Question 6

Which of the following statements is CORRECT?

Accepted Answer

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. 
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.

Question 7

Morin Company's bonds mature in 8 years, have a par value of $1,000, and make an annual coupon interest payment of $65. The market requires an interest rate of 8.2% on these bonds. What is the bond's price?

Accepted Answer

A)  $903.04 
B)  $925.62 
C)  $948.76 
D)  $972.48 
E)  $996.79 
A)  $903.04 
B)  $925.62 
C)  $948.76 
D)  $972.48 
E)  $996.79

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)  One advantage of a zero coupon Treasury bond is that no one who owns the bond has to pay any taxes on it until it matures or is sold. 
B)  Long-term bonds have less price risk but more reinvestment risk than short-term bonds. 
C)  If interest rates increase, all bond prices will increase, but the increase will be greater for bonds that have less price risk. 
D)  Relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more price risk but less reinvestment risk. 
E)  Long-term bonds have less price risk and also less reinvestment risk than short-term bonds. 
A)  One advantage of a zero coupon Treasury bond is that no one who owns the bond has to pay any taxes on it until it matures or is sold. 
B)  Long-term bonds have less price risk but more reinvestment risk than short-term bonds. 
C)  If interest rates increase, all bond prices will increase, but the increase will be greater for bonds that have less price risk. 
D)  Relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more price risk but less reinvestment risk. 
E)  Long-term bonds have less price risk and also less reinvestment risk than short-term bonds.

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)  If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices. 
B)  The total yield on a bond is derived from dividends plus changes in the price of the bond. 
C)  Bonds are generally regarded as being riskier than common stocks, and therefore bonds have higher required returns. 
D)  Bonds issued by larger companies always have lower yields to maturity (due to less risk) than bonds issued by smaller companies. 
E)  The market price of a bond will always approach its par value as its maturity date approaches, provided the bond's required return remains constant. 
A)  If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices. 
B)  The total yield on a bond is derived from dividends plus changes in the price of the bond. 
C)  Bonds are generally regarded as being riskier than common stocks, and therefore bonds have higher required returns. 
D)  Bonds issued by larger companies always have lower yields to maturity (due to less risk) than bonds issued by smaller companies. 
E)  The market price of a bond will always approach its par value as its maturity date approaches, provided the bond's required return remains constant.

Question 10

Bonds A, B, and C all have a maturity of 10 years and a yield to maturity of 7%. Bond A's price exceeds its par value, Bond B's price equals its par value, and Bond C's price is less than its par value. None of the bonds can be called. Which of the following statements is CORRECT?

Accepted Answer

A)  If the yield to maturity on each bond decreases to 6%, Bond A will have the largest percentage increase in its price. 
B)  Bond A has the most price risk. 
C)  If the yield to maturity on the three bonds remains constant, the prices of the three bonds will remain the same over the next year. 
D)  If the yield to maturity on each bond increases to 8%, the prices of all three bonds will decline. 
E)  Bond C sells at a premium over its par value. 
A)  If the yield to maturity on each bond decreases to 6%, Bond A will have the largest percentage increase in its price. 
B)  Bond A has the most price risk. 
C)  If the yield to maturity on the three bonds remains constant, the prices of the three bonds will remain the same over the next year. 
D)  If the yield to maturity on each bond increases to 8%, the prices of all three bonds will decline. 
E)  Bond C sells at a premium over its par value.

Question 11

The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.

Accepted Answer

A) True 
 B)False

Which of the following statements is CORRECT?

You are considering two bonds. Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT?

Bond X has an 8% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a 12% annual coupon. Each of the bonds is noncallable, has a maturity of 10 years, and has a yield to maturity of 10%. Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Morin Company's bonds mature in 8 years, have a par value of $1,000, and make an annual coupon interest payment of $65. The market requires an interest rate of 8.2% on these bonds. What is the bond's price?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Bonds A, B, and C all have a maturity of 10 years and a yield to maturity of 7%. Bond A's price exceeds its par value, Bond B's price equals its par value, and Bond C's price is less than its par value. None of the bonds can be called. Which of the following statements is CORRECT?

The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.

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

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Multinational

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Exam 7: Bonds

Which of the following statements is CORRECT?

You are considering two bonds. Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT?

Bond X has an 8% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a 12% annual coupon. Each of the bonds is noncallable, has a maturity of 10 years, and has a yield to maturity of 10%. Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Morin Company's bonds mature in 8 years, have a par value of $1,000, and make an annual coupon interest payment of $65. The market requires an interest rate of 8.2% on these bonds. What is the bond's price?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Bonds A, B, and C all have a maturity of 10 years and a yield to maturity of 7%. Bond A's price exceeds its par value, Bond B's price equals its par value, and Bond C's price is less than its par value. None of the bonds can be called. Which of the following statements is CORRECT?

The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.

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