Question 1

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)  The bond is selling below its par value. 
B)  The bond is selling at a discount. 
C)  If the yield to maturity remains constant, the bond's price one year from now will be lower than its current price. 
D)  The bond's current yield is greater than 9%. 
E)  If the yield to maturity remains constant, the bond's price one year from now will be higher than its current price. 
A)  The bond is selling below its par value. 
B)  The bond is selling at a discount. 
C)  If the yield to maturity remains constant, the bond's price one year from now will be lower than its current price. 
D)  The bond's current yield is greater than 9%. 
E)  If the yield to maturity remains constant, the bond's price one year from now will be higher than its current price.

Question 2

Squire Inc.'s 5-year bonds yield 6.75%, and 5-year T-bonds yield 4.80%.The real risk-free rate is r* = 2.75%, the inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Squire's bonds is DRP = 1.20% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t − 1) × 0.1%, where t = number of years to maturity.What is the liquidity premium (LP) on Squire's bonds?

Accepted Answer

A)  0.49% 
B)  0.55% 
C)  0.61% 
D)  0.68% 
E)  0.75% 
A)  0.49% 
B)  0.55% 
C)  0.61% 
D)  0.68% 
E)  0.75%

Question 3

Field Industries' outstanding bonds have a 25-year maturity and $1,000 par value.Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $850.What is the bond's nominal (annual) coupon interest rate?

Accepted Answer

A)  6.27% 
B)  6.60% 
C)  6.95% 
D)  7.32% 
E)  7.70% 
A)  6.27% 
B)  6.60% 
C)  6.95% 
D)  7.32% 
E)  7.70%

Question 4

Currently, Bruner Inc.'s bonds sell for $1,250.They pay a $120 annual coupon, have a 15-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.)

Accepted Answer

A)  2.11% 
B)  2.32% 
C)  2.55% 
D)  2.80% 
E)  3.09% 
A)  2.11% 
B)  2.32% 
C)  2.55% 
D)  2.80% 
E)  3.09%

Question 5

Which of the following statements is CORRECT?

Accepted Answer

A)  If a bond's yield to maturity exceeds its coupon rate, the bond will sell at par. 
B)  All else equal, if a bond's yield to maturity increases, its price will fall. 
C)  If a bond's yield to maturity exceeds its coupon rate, the bond will sell at a premium over par. 
D)  All else equal, if a bond's yield to maturity increases, its current yield will fall. 
E)  A zero coupon bond's current yield is equal to its yield to maturity. 
A)  If a bond's yield to maturity exceeds its coupon rate, the bond will sell at par. 
B)  All else equal, if a bond's yield to maturity increases, its price will fall. 
C)  If a bond's yield to maturity exceeds its coupon rate, the bond will sell at a premium over par. 
D)  All else equal, if a bond's yield to maturity increases, its current yield will fall. 
E)  A zero coupon bond's current yield is equal to its yield to maturity.

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)  If a coupon bond is selling at a discount, its price will continue to decline until it reaches its par value at maturity. 
B)  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. 
C)  If a bond's yield to maturity exceeds its annual coupon, then the bond will trade at a premium. 
D)  If a coupon bond is selling at a premium, its current yield equals its yield to maturity. 
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 discount, its price will continue to decline until it reaches its par value at maturity. 
B)  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. 
C)  If a bond's yield to maturity exceeds its annual coupon, then the bond will trade at a premium. 
D)  If a coupon bond is selling at a premium, its current yield equals its yield to maturity. 
E)  If a coupon bond is selling at par, its current yield equals its yield to maturity.

Question 7

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

Accepted Answer

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

Question 8

Which of the following statements is CORRECT?

Accepted Answer

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

Question 9

Which of the following statements is CORRECT?

Accepted Answer

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

Question 10

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 11

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

Accepted Answer

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

Question 12

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

Question 13

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

Question 14

Chandler Co.'s 5-year bonds yield 7.00%, and 5-year T-bonds yield 5.15%.The real risk-free rate is r* = 3.0%, the inflation premium for 5-year bonds is IP = 1.75%, the liquidity premium for Chandler's bonds is LP = 0.75% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t − 1) × 0.1%, where t = number of years to maturity.What is the default risk premium (DRP) on Chandler's bonds?

Accepted Answer

A)  0.99% 
B)  1.10% 
C)  1.21% 
D)  1.33% 
E)  1.46% 
A)  0.99% 
B)  1.10% 
C)  1.21% 
D)  1.33% 
E)  1.46%

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A)  If a coupon bond is selling at a discount, then the bond's expected capital gains yield is negative. 
B)  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. 
C)  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. 
D)  If a coupon bond is selling at par, its current yield equals its yield to maturity. 
E)  If a coupon bond is selling at a premium, then the bond's current yield is zero. 
A)  If a coupon bond is selling at a discount, then the bond's expected capital gains yield is negative. 
B)  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. 
C)  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. 
D)  If a coupon bond is selling at par, its current yield equals its yield to maturity. 
E)  If a coupon bond is selling at a premium, then the bond's current yield is zero.

Question 16

For bonds, price sensitivity to a given change in interest rates is generally greater the longer before the bond matures.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements is NOT CORRECT?

Accepted Answer

A)  All else equal, bonds with longer maturities have more interest rate (price) risk than bonds with shorter maturities. 
B)  If a bond is selling at its par value, its current yield equals its yield to maturity. 
C)  If a bond is selling at a premium, its current yield will be greater than its yield to maturity. 
D)  All else equal, bonds with larger coupons have greater interest rate (price) risk than bonds with smaller coupons. 
E)  If a bond is selling at a discount to par, its current yield will be less than its yield to maturity. 
A)  All else equal, bonds with longer maturities have more interest rate (price) risk than bonds with shorter maturities. 
B)  If a bond is selling at its par value, its current yield equals its yield to maturity. 
C)  If a bond is selling at a premium, its current yield will be greater than its yield to maturity. 
D)  All else equal, bonds with larger coupons have greater interest rate (price) risk than bonds with smaller coupons. 
E)  If a bond is selling at a discount to par, its current yield will be less than its yield to maturity.

Question 18

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

Accepted Answer

A)  A 10-year, $1,000 face value, zero coupon bond. 
B)  A 10-year, $1,000 face value, 10% coupon bond with annual interest payments. 
C)  All 10-year bonds have the same price risk since they have the same maturity. 
D)  A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments. 
A)  A 10-year, $1,000 face value, zero coupon bond. 
B)  A 10-year, $1,000 face value, 10% coupon bond with annual interest payments. 
C)  All 10-year bonds have the same price risk since they have the same maturity. 
D)  A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments.

Question 19

A bond that is callable has a chance of being retired earlier than its stated term to maturity.Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

Accepted Answer

A) True 
 B)False

Question 20

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)  If the yield to maturity remains at 8%, then the bond's price will decline over the next year. 
B)  The bond's coupon rate is less than 8%. 
C)  If the yield to maturity increases, then the bond's price will increase. 
D)  If the yield to maturity remains at 8%, then the bond's price will remain constant over the next year. 
E)  The bond's current yield is less than 8%. 
A)  If the yield to maturity remains at 8%, then the bond's price will decline over the next year. 
B)  The bond's coupon rate is less than 8%. 
C)  If the yield to maturity increases, then the bond's price will increase. 
D)  If the yield to maturity remains at 8%, then the bond's price will remain constant over the next year. 
E)  The bond's current yield is less than 8%.

Exam 5: Bonds, Bond Valuation, and Interest Rates

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%.Which of the following statements is CORRECT?

Field Industries' outstanding bonds have a 25-year maturity and $1,000 par value.Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $850.What is the bond's nominal (annual) coupon interest rate?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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

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.

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

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?

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 statements is CORRECT?

For bonds, price sensitivity to a given change in interest rates is generally greater the longer before the bond matures.

Which of the following statements is NOT CORRECT?

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

A bond that is callable has a chance of being retired earlier than its stated term to maturity.Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

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?

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Risk and Return

Corporate Valuation and Stock Valuation

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Corporate Valuation and Financial Planning

Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, Seasoned Offerings, and Investment Banks

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Dynamic Capital Structures and Corporate Valuation

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, Reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not-For-Profit Businesses

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