Question 1

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 2

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 3

Grossnickle Corporation issued 20-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 19 years to maturity?

Accepted Answer

A)  $1,113.48 
B)  $1,142.03 
C)  $1,171.32 
D)  $1,201.35 
E)  $1,232.15 
A)  $1,113.48 
B)  $1,142.03 
C)  $1,171.32 
D)  $1,201.35 
E)  $1,232.15

Question 4

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.

Question 5

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 6

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 7

McCue Inc.'s bonds currently sell for $1,250. They pay a $90 annual coupon, have a 25-year maturity, and a $1,000 par value, but they can be called in 5 years at $1,050. 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. What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM; it is possible to get a negative answer.)

Accepted Answer

A)  2.62% 
B)  2.88% 
C)  3.17% 
D)  3.48% 
E)  3.83% 
A)  2.62% 
B)  2.88% 
C)  3.17% 
D)  3.48% 
E)  3.83%

Question 8

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 9

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 10

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 11

Which of the following statements is CORRECT?

Accepted Answer

A)  All else equal, high-coupon bonds have less reinvestment rate risk than low-coupon bonds. 
B)  All else equal, long-term bonds have less interest rate price risk than short-term bonds. 
C)  All else equal, low-coupon bonds have less interest rate price risk than high-coupon bonds. 
D)  All else equal, short-term bonds have less reinvestment rate risk than long-term bonds. 
E)  All else equal, long-term bonds have less reinvestment rate risk than short-term bonds. 
A)  All else equal, high-coupon bonds have less reinvestment rate risk than low-coupon bonds. 
B)  All else equal, long-term bonds have less interest rate price risk than short-term bonds. 
C)  All else equal, low-coupon bonds have less interest rate price risk than high-coupon bonds. 
D)  All else equal, short-term bonds have less reinvestment rate risk than long-term bonds. 
E)  All else equal, long-term bonds have less reinvestment rate risk than short-term bonds.

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

Which of the following statements is CORRECT?

Accepted Answer

A)  10-year, zero coupon bonds have more reinvestment rate risk than 10-year, 10% coupon bonds. 
B)  A 10-year, 10% coupon bond has less reinvestment rate 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 rate risk than 10-year, 10% coupon bonds. 
B)  A 10-year, 10% coupon bond has less reinvestment rate 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 14

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

Question 15

A bond that had a 20-year original maturity with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity. (Assume that the bonds have equal default risk and equal coupon rates, and they cannot be called.)

Accepted Answer

A) True 
 B)False

Question 16

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 17

Short Corp. just issued bonds that will mature in 10 years, and Long Corp. issued bonds that will mature in 20 years. Both bonds promise to pay a semiannual coupon, they are not callable or convertible, and they are equally liquid. Further, assume that the Treasury yield curve is based only on expectations about future inflation, i.e., that the maturity risk premium is zero for T-bonds but not necessarily for corporate bonds. Under these conditions, which of the following statements is correct?

Accepted Answer

A)  If the Treasury yield curve is upward sloping and Short has less default risk than Long, then Short's bonds must under all conditions have the lower yield. 
B)  If the Treasury yield curve is downward sloping, Long's bonds must under all conditions have the lower yield. 
C)  If the yield curve for Treasury securities is upward sloping, Long's bonds must under all conditions have a higher yield than Short's bonds. 
D)  If the yield curve for Treasury securities is flat, Short's bond must under all conditions have the same yield as Long's bonds. 
E)  If Long's and Short's bonds have the same default risk, their yields must under all conditions be equal. 
A)  If the Treasury yield curve is upward sloping and Short has less default risk than Long, then Short's bonds must under all conditions have the lower yield. 
B)  If the Treasury yield curve is downward sloping, Long's bonds must under all conditions have the lower yield. 
C)  If the yield curve for Treasury securities is upward sloping, Long's bonds must under all conditions have a higher yield than Short's bonds. 
D)  If the yield curve for Treasury securities is flat, Short's bond must under all conditions have the same yield as Long's bonds. 
E)  If Long's and Short's bonds have the same default risk, their yields must under all conditions be equal.

Question 18

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 rates fall after its issue, a zero coupon bond could trade at a price above its maturity (or par) value. 
C)  If rates fall rapidly, a zero coupon bond's expected appreciation could become negative. 
D)  If a firm moves from a position of strength toward financial distress, its bonds' yield to maturity would probably decline. 
E)  If a bond is selling at a premium, this implies that its yield to maturity exceeds its coupon rate. 
A)  If a coupon bond is selling at par, its current yield equals its yield to maturity. 
B)  If rates fall after its issue, a zero coupon bond could trade at a price above its maturity (or par) value. 
C)  If rates fall rapidly, a zero coupon bond's expected appreciation could become negative. 
D)  If a firm moves from a position of strength toward financial distress, its bonds' yield to maturity would probably decline. 
E)  If a bond is selling at a premium, this implies that its yield to maturity exceeds its coupon rate.

Question 19

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 20

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 rate 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 rate risk is lower, other things held constant, on long-term than on short-term bonds.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Grossnickle Corporation issued 20-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 19 years to maturity?

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?

Which of the following statements is CORRECT?

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?

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.

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:

A bond that had a 20-year original maturity with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity. (Assume that the bonds have equal default risk and equal coupon rates, and they cannot be called.)

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?

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?

Which of the following statements is CORRECT?

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

Exam 7: Bonds and Their Valuation

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Grossnickle Corporation issued 20-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 19 years to maturity?

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?

Which of the following statements is CORRECT?

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?

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.

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:

A bond that had a 20-year original maturity with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity. (Assume that the bonds have equal default risk and equal coupon rates, and they cannot be called.)

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?

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?

Which of the following statements is CORRECT?

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