Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)  If inflation is expected to increase in the future, and if the maturity risk premium (MRP) is greater than zero, then the Treasury yield curve will have an upward slope. 
B)  If the maturity risk premium (MRP) is greater than zero, then the yield curve must have an upward slope. 
C)  Because long-term bonds are riskier than short-term bonds, yields on long-term Treasury bonds will always be higher than yields on short-term T-bonds. 
D)  If the maturity risk premium (MRP) equals zero, the yield curve must be flat. 
E)  The yield curve can never be downward sloping. 
A)  If inflation is expected to increase in the future, and if the maturity risk premium (MRP) is greater than zero, then the Treasury yield curve will have an upward slope. 
B)  If the maturity risk premium (MRP) is greater than zero, then the yield curve must have an upward slope. 
C)  Because long-term bonds are riskier than short-term bonds, yields on long-term Treasury bonds will always be higher than yields on short-term T-bonds. 
D)  If the maturity risk premium (MRP) equals zero, the yield curve must be flat. 
E)  The yield curve can never be downward sloping.

Question 2

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 3

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 4

Which of the following statements is CORRECT?

Accepted Answer

A)  All else equal, senior debt generally has a lower yield to maturity than subordinated debt. 
B)  An indenture is a bond that is less risky than a mortgage bond. 
C)  The expected return on a corporate bond will generally exceed the bond's yield to maturity. 
D)  If a bond's coupon rate exceeds its yield to maturity, then its expected return to investors will also exceed its yield to maturity. 
E)  Under our bankruptcy laws, any firm that is in financial distress will be forced to declare bankruptcy and then be liquidated. 
A)  All else equal, senior debt generally has a lower yield to maturity than subordinated debt. 
B)  An indenture is a bond that is less risky than a mortgage bond. 
C)  The expected return on a corporate bond will generally exceed the bond's yield to maturity. 
D)  If a bond's coupon rate exceeds its yield to maturity, then its expected return to investors will also exceed its yield to maturity. 
E)  Under our bankruptcy laws, any firm that is in financial distress will be forced to declare bankruptcy and then be liquidated.

Question 5

Which of the following statements is CORRECT?

Accepted Answer

A)  One disadvantage of zero coupon bonds is that the issuing firm cannot realize any tax savings from the use of debt until the bonds mature. 
B)  Other things held constant, a callable bond should have a lower yield to maturity than a noncallable bond. 
C)  Once a firm declares bankruptcy, it must be liquidated by the trustee, who uses the proceeds to pay bondholders, unpaid wages, taxes, and legal fees. 
D)  Income bonds must pay interest only if the company earns the interest. Thus, these securities cannot bankrupt a company prior to their maturity, and this makes them safer to the issuing corporation than "regular" bonds. 
E)  A firm with a sinking fund that gives it the choice of calling the required bonds at par or buying the bonds in the open market would generally choose the open market purchase if the coupon rate exceeded the going interest rate. 
A)  One disadvantage of zero coupon bonds is that the issuing firm cannot realize any tax savings from the use of debt until the bonds mature. 
B)  Other things held constant, a callable bond should have a lower yield to maturity than a noncallable bond. 
C)  Once a firm declares bankruptcy, it must be liquidated by the trustee, who uses the proceeds to pay bondholders, unpaid wages, taxes, and legal fees. 
D)  Income bonds must pay interest only if the company earns the interest. Thus, these securities cannot bankrupt a company prior to their maturity, and this makes them safer to the issuing corporation than "regular" bonds. 
E)  A firm with a sinking fund that gives it the choice of calling the required bonds at par or buying the bonds in the open market would generally choose the open market purchase if the coupon rate exceeded the going interest rate.

Question 6

Junk bonds are high-risk, high-yield debt instruments. They are often used to finance leveraged buyouts and mergers, and to provide financing to companies of questionable financial strength.

Accepted Answer

A) True 
 B)False

Question 7

Dyl Inc.'s bonds currently sell for $1,040 and have a par value of $1,000. They pay a $65 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to maturity (YTM)?

Accepted Answer

A)  5.78% 
B)  6.09% 
C)  6.39% 
D)  6.71% 
E)  7.05% 
A)  5.78% 
B)  6.09% 
C)  6.39% 
D)  6.71% 
E)  7.05%

Question 8

The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds, other things held constant.

Accepted Answer

A) True 
 B)False

Question 9

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 rate 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 rate 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 10

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

Question 11

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 12

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 13

There is an inverse relationship between bonds' quality ratings and their required rates of return. Thus, the required return is lowest for AAA-rated bonds, and required returns increase as the ratings get lower.

Accepted Answer

A) True 
 B)False

Question 14

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 15

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 16

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 17

You are considering 2 bonds that will be issued tomorrow. Both are rated triple B (BBB, the lowest investment-grade rating), both mature in 20 years, both have a 10% coupon, neither can be called except for sinking fund purposes, and both are offered to you at their $1,000 par values. However, Bond SF has a sinking fund while Bond NSF does not. Under the sinking fund, the company must call and pay off 5% of the bonds at par each year. The yield curve at the time is upward sloping. The bond's prices, being equal, are probably not in equilibrium, as Bond SF, which has the sinking fund, would generally be expected to have a higher yield than Bond NSF.

Accepted Answer

A) True 
 B)False

Question 18

Other things equal, a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

Accepted Answer

A) True 
 B)False

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

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

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Junk bonds are high-risk, high-yield debt instruments. They are often used to finance leveraged buyouts and mergers, and to provide financing to companies of questionable financial strength.

Dyl Inc.'s bonds currently sell for $1,040 and have a par value of $1,000. They pay a $65 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to maturity (YTM)?

The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds, other things held constant.

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?

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.

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

There is an inverse relationship between bonds' quality ratings and their required rates of return. Thus, the required return is lowest for AAA-rated bonds, and required returns increase as the ratings get lower.

Which of the following statements is CORRECT?

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?

Other things equal, a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

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%.

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?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Junk bonds are high-risk, high-yield debt instruments. They are often used to finance leveraged buyouts and mergers, and to provide financing to companies of questionable financial strength.

Dyl Inc.'s bonds currently sell for $1,040 and have a par value of $1,000. They pay a $65 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to maturity (YTM)?

The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds, other things held constant.

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?

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.

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

There is an inverse relationship between bonds' quality ratings and their required rates of return. Thus, the required return is lowest for AAA-rated bonds, and required returns increase as the ratings get lower.

Which of the following statements is CORRECT?

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?

Other things equal, a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

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%.

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