Question 1

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 2

A bond that had a 20-year original maturity with 1 year left to maturity has more 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 3

Which of the following bonds has the greatest 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.

Question 4

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 5

A 25-year,$1,000 par value bond has an 8.5% annual payment coupon.The bond currently sells for $925.If the yield to maturity remains at its current rate,what will the price be 5 years from now?

Accepted Answer

A)  $883.61 
B)  $744.09 
C)  $976.62 
D)  $930.11 
E)  $865.00 
A)  $883.61 
B)  $744.09 
C)  $976.62 
D)  $930.11 
E)  $865.00

Question 6

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 7

Restrictive covenants are designed primarily to protect bondholders by constraining the actions of managers.Such covenants are spelled out in bond indentures.

Accepted Answer

A) True 
 B)False

Question 8

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 9

Kebt Corporation's Class Semi bonds have a 12-year maturity and an 8.50% coupon paid semiannually (4.25% each 6 months),and those bonds sell at their $1,000 par value.The firm's Class Ann bonds have the same risk,maturity,nominal interest rate,and par value,but these bonds pay interest annually.Neither bond is callable.At what price should the annual payment bond sell?

Accepted Answer

A)  $957.25 
B)  $986.86 
C)  $878.30 
D)  $1,164.49 
E)  $907.91 
A)  $957.25 
B)  $986.86 
C)  $878.30 
D)  $1,164.49 
E)  $907.91

Question 10

McCue Inc.'s bonds currently sell for $1,175.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)  1.26% 
B)  1.47% 
C)  1.74% 
D)  1.68% 
E)  1.88% 
A)  1.26% 
B)  1.47% 
C)  1.74% 
D)  1.68% 
E)  1.88%

Question 11

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 12

Radoski Corporation's bonds make an annual coupon interest payment of 7.35% every year.The bonds have a par value of $1,000,a current price of $920,and mature in 12 years.What is the yield to maturity on these bonds?

Accepted Answer

A)  6.83% 
B)  9.53% 
C)  8.10% 
D)  7.25% 
E)  8.44% 
A)  6.83% 
B)  9.53% 
C)  8.10% 
D)  7.25% 
E)  8.44%

Question 13

Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise.Since floating-rate debt shifts price risk to companies,it offers no advantages to corporate issuers.

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 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.

Question 15

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 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 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 16

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 17

Which of the following statements is CORRECT?

Accepted Answer

A)  A bond is likely to be called if its coupon rate is below its YTM. 
B)  A bond is likely to be called if its market price is below its par value. 
C)  Even if a bond's YTC exceeds its YTM,an investor with an investment horizon longer than the bond's maturity would be worse off if the bond were called. 
D)  A bond is likely to be called if its market price is equal to its par value. 
E)  A bond is likely to be called if it sells at a discount below par. 
A)  A bond is likely to be called if its coupon rate is below its YTM. 
B)  A bond is likely to be called if its market price is below its par value. 
C)  Even if a bond's YTC exceeds its YTM,an investor with an investment horizon longer than the bond's maturity would be worse off if the bond were called. 
D)  A bond is likely to be called if its market price is equal to its par value. 
E)  A bond is likely to be called if it sells at a discount below par.

Question 18

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 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 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 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 price risk than bonds with smaller coupons.

Question 19

A 10-year Treasury bond has an 8% coupon,and an 8-year Treasury bond has a 10% coupon.Neither is callable,and both 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?

Accepted Answer

A)  The prices of both bonds will decrease by the same amount. 
B)  Both bonds would decline in price,but the 10-year bond would have the greater percentage decline in price. 
C)  The prices of both bonds would increase by the same amount. 
D)  One bond's price would increase,while the other bond's price would decrease. 
E)  The prices of the two bonds would remain constant. 
A)  The prices of both bonds will decrease by the same amount. 
B)  Both bonds would decline in price,but the 10-year bond would have the greater percentage decline in price. 
C)  The prices of both bonds would increase by the same amount. 
D)  One bond's price would increase,while the other bond's price would decrease. 
E)  The prices of the two bonds would remain constant.

Question 20

The 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.

Accepted Answer

A) True 
 B)False

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

A bond that had a 20-year original maturity with 1 year left to maturity has more 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. )

Which of the following bonds has the greatest price risk?

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.

A 25-year,$1,000 par value bond has an 8.5% annual payment coupon.The bond currently sells for $925.If the yield to maturity remains at its current rate,what will the price be 5 years from now?

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.

Restrictive covenants are designed primarily to protect bondholders by constraining the actions of managers.Such covenants are spelled out in bond indentures.

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

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

Radoski Corporation's bonds make an annual coupon interest payment of 7.35% every year.The bonds have a par value of $1,000,a current price of $920,and mature in 12 years.What is the yield to maturity on these bonds?

Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise.Since floating-rate debt shifts price risk to companies,it offers no advantages to corporate issuers.

Which of the following statements is CORRECT?

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?

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 Treasury bond has an 8% coupon,and an 8-year Treasury bond has a 10% coupon.Neither is callable,and both 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?

The 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.

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements,cash Flow and Taxes

Analysis of Financial Statements

Time Value of Money

Interest Rates

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 Share Repurchases

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

Filters

Exam 7: Bonds and Their Valuation

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

A bond that had a 20-year original maturity with 1 year left to maturity has more 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. )

Which of the following bonds has the greatest price risk?

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.

A 25-year,$1,000 par value bond has an 8.5% annual payment coupon.The bond currently sells for $925.If the yield to maturity remains at its current rate,what will the price be 5 years from now?

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.

Restrictive covenants are designed primarily to protect bondholders by constraining the actions of managers.Such covenants are spelled out in bond indentures.

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

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

Radoski Corporation's bonds make an annual coupon interest payment of 7.35% every year.The bonds have a par value of $1,000,a current price of $920,and mature in 12 years.What is the yield to maturity on these bonds?

Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise.Since floating-rate debt shifts price risk to companies,it offers no advantages to corporate issuers.

Which of the following statements is CORRECT?

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?

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 Treasury bond has an 8% coupon,and an 8-year Treasury bond has a 10% coupon.Neither is callable,and both 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?

The 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.

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements,cash Flow and Taxes

Analysis of Financial Statements

Time Value of Money

Interest Rates

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 Share Repurchases

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

Filters