Question 1

Which of the following bonds has the greatest interest rate 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. 
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. B

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)  All else equal, secured debt is more risky than unsecured debt. 
B)  The expected return on a corporate bond must be greater than its promised return if the probability of default is greater than zero. 
C)  All else equal, senior debt has more default risk than subordinated debt. 
D)  A company's bond rating is affected by its financial ratios but not by provisions in its indenture. 
E)  Under 
A)  All else equal, secured debt is more risky than unsecured debt. 
B)  The expected return on a corporate bond must be greater than its promised return if the probability of default is greater than zero. 
C)  All else equal, senior debt has more default risk than subordinated debt. 
D)  A company's bond rating is affected by its financial ratios but not by provisions in its indenture. 
E)  Under E

Question 3

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. 
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. E

Question 4

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. 
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.

Question 5

Ryngaert Inc. recently issued noncallable bonds that mature in 15 years. They have a par value of $1,000 and an annual coupon of 5.7%. If the current market interest rate is 7.0%, at what price should the bonds sell?

Accepted Answer

A)  $817.12 
B)  $838.07 
C)  $859.56 
D)  $881.60 
E)  $903.64 
A)  $817.12 
B)  $838.07 
C)  $859.56 
D)  $881.60 
E)  $903.64

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)  The higher the maturity risk premium, the higher the probability that the yield curve will be inverted. 
B)  The most likely explanation for an inverted yield curve is that investors expect inflation to increase. 
C)  The most likely explanation for an inverted yield curve is that investors expect inflation to decrease. 
D)  If the yield curve is inverted, short-term bonds have lower yields than long-term bonds. 
E)  Inverted yield curves can exist for Treasury bonds, but because of default premiums, the corporate yield curve can never be inverted. 
A)  The higher the maturity risk premium, the higher the probability that the yield curve will be inverted. 
B)  The most likely explanation for an inverted yield curve is that investors expect inflation to increase. 
C)  The most likely explanation for an inverted yield curve is that investors expect inflation to decrease. 
D)  If the yield curve is inverted, short-term bonds have lower yields than long-term bonds. 
E)  Inverted yield curves can exist for Treasury bonds, but because of default premiums, the corporate yield curve can never be inverted.

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. 
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 8

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 9

The price sensitivity of a bond to a given change in interest rates is generally greater the longer the bond's remaining maturity.

Accepted Answer

A) True 
 B)False

Question 10

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 11

Which of the following statements is CORRECT?

Accepted Answer

A)  If a 10-year, $1,000 par, zero coupon bond were issued at a price that gave investors a 10% yield to maturity, and if interest rates then dropped to the point where rd = YTM = 5%, the bond would sell at a premium over its $1,000 par value. 
B)  If a 10-year, $1,000 par, 10% coupon bond were issued at par, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond would sell at a premium above its $1,000 par value. 
C)  Other things held constant, including the coupon rate, a corporation would rather issue noncallable bonds than callable bonds. 
D)  Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond because it would have a shorter expected life. 
E)  Bonds are exposed to both reinvestment rate and interest rate price risk. Longer-term low-coupon bonds, relative to shorter-term high-coupon bonds, are generally more exposed to reinvestment rate risk than interest rate price risk. 
A)  If a 10-year, $1,000 par, zero coupon bond were issued at a price that gave investors a 10% yield to maturity, and if interest rates then dropped to the point where rd = YTM = 5%, the bond would sell at a premium over its $1,000 par value. 
B)  If a 10-year, $1,000 par, 10% coupon bond were issued at par, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond would sell at a premium above its $1,000 par value. 
C)  Other things held constant, including the coupon rate, a corporation would rather issue noncallable bonds than callable bonds. 
D)  Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond because it would have a shorter expected life. 
E)  Bonds are exposed to both reinvestment rate and interest rate price risk. Longer-term low-coupon bonds, relative to shorter-term high-coupon bonds, are generally more exposed to reinvestment rate risk than interest rate price risk.

Question 12

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 interest rate price risk but more reinvestment rate 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 interest rate risk. 
D)  Relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more interest rate price risk but less reinvestment rate risk. 
E)  Long-term bonds have less interest rate price risk and also less reinvestment rate 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 interest rate price risk but more reinvestment rate 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 interest rate risk. 
D)  Relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more interest rate price risk but less reinvestment rate risk. 
E)  Long-term bonds have less interest rate price risk and also less reinvestment rate risk than short-term bonds.

Question 13

An investor is considering buying one of two 10-year, $1,000 face value, noncallable bonds: Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon. Both bonds have a yield to maturity of 8%, and the YTM is expected to remain constant for the next 10 years. Which of the following statements is CORRECT?

Accepted Answer

A)  Bond B has a higher price than Bond A today, but one year from now the bonds will have the same price. 
B)  One year from now, Bond A's price will be higher than it is today. 
C)  Bond A's current yield is greater than 8%. 
D)  Bond A has a higher price than Bond B today, but one year from now the bonds will have the same price. 
E)  Both bonds have the same price today, and the price of each bond is expected to remain constant until the bonds mature. 
A)  Bond B has a higher price than Bond A today, but one year from now the bonds will have the same price. 
B)  One year from now, Bond A's price will be higher than it is today. 
C)  Bond A's current yield is greater than 8%. 
D)  Bond A has a higher price than Bond B today, but one year from now the bonds will have the same price. 
E)  Both bonds have the same price today, and the price of each bond is expected to remain constant until the bonds mature.

Question 14

Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price?

Accepted Answer

A)  An 8-year bond with a 9% coupon. 
B)  A 1-year bond with a 15% coupon. 
C)  A 3-year bond with a 10% coupon. 
D)  A 10-year zero coupon bond. 
E)  A 10-year bond with a 10% coupon. 
A)  An 8-year bond with a 9% coupon. 
B)  A 1-year bond with a 15% coupon. 
C)  A 3-year bond with a 10% coupon. 
D)  A 10-year zero coupon bond. 
E)  A 10-year bond with a 10% coupon.

Question 15

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

Question 16

Which of the following events would make it more likely that a company would call its outstanding callable bonds?

Accepted Answer

A)  The company's bonds are downgraded. 
B)  Market interest rates rise sharply. 
C)  Market interest rates decline sharply. 
D)  The company's financial situation deteriorates significantly. 
E)  Inflation increases significantly. 
A)  The company's bonds are downgraded. 
B)  Market interest rates rise sharply. 
C)  Market interest rates decline sharply. 
D)  The company's financial situation deteriorates significantly. 
E)  Inflation increases significantly.

Question 17

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 interest rate (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 interest rate (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 interest rate (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 interest rate (price) risk than bonds with smaller coupons.

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

Which of the following bonds would have the greatest percentage increase in value if all interest rates in the economy fall by 1%?

Accepted Answer

A)  10-year, zero coupon bond. 
B)  20-year, 10% coupon bond. 
C)  20-year, 5% coupon bond. 
D)  1-year, 10% coupon bond. 
E)  20-year, zero coupon bond. 
A)  10-year, zero coupon bond. 
B)  20-year, 10% coupon bond. 
C)  20-year, 5% coupon bond. 
D)  1-year, 10% coupon bond. 
E)  20-year, zero coupon bond.

Question 20

A zero coupon bond is a bond that pays no interest and is offered (and initially sells) at par. These bonds provide compensation to investors in the form of capital appreciation.

Accepted Answer

A) True 
 B)False

Which of the following bonds has the greatest interest rate price risk?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Ryngaert Inc. recently issued noncallable bonds that mature in 15 years. They have a par value of $1,000 and an annual coupon of 5.7%. If the current market interest rate is 7.0%, at what price should the bonds sell?

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?

The price sensitivity of a bond to a given change in interest rates is generally greater the longer the bond's remaining maturity.

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?

Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price?

Which of the following events would make it more likely that a company would call its outstanding callable bonds?

Which of the following statements is CORRECT?

Which of the following bonds would have the greatest percentage increase in value if all interest rates in the economy fall by 1%?

A zero coupon bond is a bond that pays no interest and is offered (and initially sells) at par. These bonds provide compensation to investors in the form of capital appreciation.

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Real Options and Other Topics in Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and

Working Capital Management

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Hybrid Financing: Preferred Stock, Leasing, Warrants, and Convertibles

Mergers and Acquisitions

Financial Management and Stock Equilibrium

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Exam 7: Bonds and Their Valuation

Which of the following bonds has the greatest interest rate price risk?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Ryngaert Inc. recently issued noncallable bonds that mature in 15 years. They have a par value of $1,000 and an annual coupon of 5.7%. If the current market interest rate is 7.0%, at what price should the bonds sell?

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?

The price sensitivity of a bond to a given change in interest rates is generally greater the longer the bond's remaining maturity.

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?

Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price?

Which of the following events would make it more likely that a company would call its outstanding callable bonds?

Which of the following statements is CORRECT?

Which of the following bonds would have the greatest percentage increase in value if all interest rates in the economy fall by 1%?

A zero coupon bond is a bond that pays no interest and is offered (and initially sells) at par. These bonds provide compensation to investors in the form of capital appreciation.

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Real Options and Other Topics in Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and

Working Capital Management

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Hybrid Financing: Preferred Stock, Leasing, Warrants, and Convertibles

Mergers and Acquisitions

Financial Management and Stock Equilibrium

Filters