Exam 4: Bonds

Sinking funds are devices used to force companies to retire bonds on a scheduled basis prior to their maturity Many bond indentures allow the company to acquire bonds for a sinking fund by either purchasing bonds in the market or selecting the bonds to be acquired by a lottery administered by the trustee through a call at face value.

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

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?

8-year Treasury bond has a 10% coupon, and a 10-year Treasury bond has an 8% couponBoth bonds have the same yield to maturity If the yield to maturity of both bonds increases by the same amount, which of the following statements would be CORRECT?

a firm raises capital by selling new bonds, it is 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?

desire for floating-rate bonds, and consequently their increased usage, arose out of the experience of the early 1980s, when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.

Ranger Incwould like to issue new 20-year bonds Initially, the plan was to make the bonds non-callable If the bonds were made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

Stephenson Co.'s 15-year bond with a face value of $1,000 currently sells for $850 Which of the following statements is CORRECT?

Under normal conditions, which of the following would be most likely to increase the coupon rate required to enable a bond to be issued at par?

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.

Rogoff Co.'s 15-year bonds havean annual coupon rate of 9.5% Each bond has face value of $1,000 and makes semiannual interest payments If you require an 11.0% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

Noncallable bonds that mature in 10 years were recently issued by Sternglass Inc They have a par value of $1,000 and an annual coupon of 5.5% If the current market interest rate is 7.0%, at what price should the bonds sell?

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.)

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.

Which of the following statements is CORRECT?

McCurdy Co.'s Class Q bonds have a 12-year maturity, $1,000 par value, and a 5.75% coupon paid semiannually (2.875% each 6 months), and those bonds sell at their par value McCurdy's Class P bonds have the same risk, maturity, and par value, but the P bonds pay a 5.75% annual coupon Neither bond is callable At what price should the annual payment bond sell?

year ago Lerner and Luckmann Coissued 15-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000Today, the market interest rate on these bonds is 5.5% What is the current price of the bonds, given that they now have 14 years to maturity?

10-year T-bonds have a yield of 6.2%, 10-year corporate bonds yield 8.5%, the maturity risk premium on all 10-year bonds is 1.3%, and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond?

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.