Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)  If a 10-year,$1,000 par,zero coupon bond were issued at a price that gave investors a 10% yield to maturity,and if interest rates then dropped to the point where rd = YTM = 5%,the bond would sell at a premium over its $1,000 par value. 
B)  If a 10-year,$1,000 par,10% coupon bond were issued at par,and if interest rates then dropped to the point where rd = YTM = 5%,we could be sure that the bond would sell at a premium above its $1,000 par value. 
C)  Other things held constant,including the coupon rate,a corporation would rather issue noncallable bonds than callable bonds. 
D)  Other things held constant,a callable bond would have a lower required rate of return than a noncallable bond because it would have a shorter expected life. 
E)  Bonds are exposed to both reinvestment risk and price risk.Longer-term low-coupon bonds,relative to shorter-term high-coupon bonds,are generally more exposed to reinvestment risk than price risk. 
A)  If a 10-year,$1,000 par,zero coupon bond were issued at a price that gave investors a 10% yield to maturity,and if interest rates then dropped to the point where rd = YTM = 5%,the bond would sell at a premium over its $1,000 par value. 
B)  If a 10-year,$1,000 par,10% coupon bond were issued at par,and if interest rates then dropped to the point where rd = YTM = 5%,we could be sure that the bond would sell at a premium above its $1,000 par value. 
C)  Other things held constant,including the coupon rate,a corporation would rather issue noncallable bonds than callable bonds. 
D)  Other things held constant,a callable bond would have a lower required rate of return than a noncallable bond because it would have a shorter expected life. 
E)  Bonds are exposed to both reinvestment risk and price risk.Longer-term low-coupon bonds,relative to shorter-term high-coupon bonds,are generally more exposed to reinvestment risk than price risk.

Question 2

Tucker Corporation is planning to issue new 20-year bonds.The current plan is to make the bonds non-callable,but this may be changed.If the bonds are made callable after 5 years at a 5% call premium,how would this affect their required rate of return?

Accepted Answer

A)  Because of the call premium,the required rate of return would decline. 
B)  There is no reason to expect a change in the required rate of return. 
C)  The required rate of return would decline because the bond would then be less risky to a bondholder. 
D)  The required rate of return would increase because the bond would then be more risky to a bondholder. 
E)  It is impossible to say without more information. 
A)  Because of the call premium,the required rate of return would decline. 
B)  There is no reason to expect a change in the required rate of return. 
C)  The required rate of return would decline because the bond would then be less risky to a bondholder. 
D)  The required rate of return would increase because the bond would then be more risky to a bondholder. 
E)  It is impossible to say without more information.

Question 3

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

Question 4

As a general rule,a company's debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured.

Accepted Answer

A) True 
 B)False

Question 5

An investor is considering buying one of two 10-year,$1,000 face value,noncallable bonds: Bond A has a 7% annual coupon,while Bond B has a 9% annual coupon.Both bonds have a yield to maturity of 8%,and the YTM is expected to remain constant for the next 10 years.Which of the following statements is CORRECT?

Accepted Answer

A)  Bond B has a higher price than Bond A today,but one year from now the bonds will have the same price. 
B)  One year from now,Bond A's price will be higher than it is today. 
C)  Bond A's current yield is greater than 8%. 
D)  Bond A has a higher price than Bond B today,but one year from now the bonds will have the same price. 
E)  Both bonds have the same price today,and the price of each bond is expected to remain constant until the bonds mature. 
A)  Bond B has a higher price than Bond A today,but one year from now the bonds will have the same price. 
B)  One year from now,Bond A's price will be higher than it is today. 
C)  Bond A's current yield is greater than 8%. 
D)  Bond A has a higher price than Bond B today,but one year from now the bonds will have the same price. 
E)  Both bonds have the same price today,and the price of each bond is expected to remain constant until the bonds mature.

Question 6

Which of the following statements is CORRECT?

Accepted Answer

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

Question 7

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 8

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 9

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

Question 10

If 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. )

Accepted Answer

A) True 
 B)False

Question 11

Moerdyk Corporation's bonds have a 15-year maturity,a 7.25% semiannual coupon,and a par value of $1,000.The going interest rate (rd)is 5.00%,based on semiannual compounding.What is the bond's price?

Accepted Answer

A)  $1,235.47 
B)  $976.02 
C)  $1,457.85 
D)  $1,050.15 
E)  $1,359.01 
A)  $1,235.47 
B)  $976.02 
C)  $1,457.85 
D)  $1,050.15 
E)  $1,359.01

Question 12

Assuming all else is constant,which of the following statements is CORRECT?

Accepted Answer

A)  Other things held constant,a 20-year zero coupon bond has more reinvestment risk than a 20-year coupon bond. 
B)  Other things held constant,for any given maturity,a 1.0 percentage point decrease in the market interest rate would cause a smaller dollar capital gain than the capital loss stemming from a 1.0 percentage point increase in the interest rate. 
C)  From a corporate borrower's point of view,interest paid on bonds is not tax-deductible. 
D)  Other things held constant,price sensitivity as measured by the percentage change in price due to a given change in the required rate of return decreases as a bond's maturity increases. 
E)  For a bond of any maturity,a 1.0 percentage point increase in the market interest rate (rd)causes a larger dollar capital loss than the capital gain stemming from a 1.0 percentage point decrease in the interest rate. 
A)  Other things held constant,a 20-year zero coupon bond has more reinvestment risk than a 20-year coupon bond. 
B)  Other things held constant,for any given maturity,a 1.0 percentage point decrease in the market interest rate would cause a smaller dollar capital gain than the capital loss stemming from a 1.0 percentage point increase in the interest rate. 
C)  From a corporate borrower's point of view,interest paid on bonds is not tax-deductible. 
D)  Other things held constant,price sensitivity as measured by the percentage change in price due to a given change in the required rate of return decreases as a bond's maturity increases. 
E)  For a bond of any maturity,a 1.0 percentage point increase in the market interest rate (rd)causes a larger dollar capital loss than the capital gain stemming from a 1.0 percentage point decrease in the interest rate.

Question 13

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 14

Suppose a new company decides to raise a total of $200 million,with $100 million as common equity and $100 million as long-term debt.The debt can be mortgage bonds or debentures,but by an iron-clad provision in its charter,the company can never raise any additional debt beyond the original $100 million.Given these conditions,which of the following statements is CORRECT?

Accepted Answer

A)  The higher the percentage of debt represented by mortgage bonds,the riskier both types of bonds will be and,consequently,the higher the firm's total dollar interest charges will be. 
B)  If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds,we could be certain that the firm's total interest expense would be lower than if the debt were raised by issuing $100 million of debentures. 
C)  In this situation,we cannot tell for sure how,or even whether,the firm's total interest expense on the $100 million of debt would be affected by the mix of debentures versus first mortgage bonds.The interest rate on each type of bond would increase as the percentage of mortgage bonds used was increased,but the average cost might well be such that the firm's total interest charges would not be affected materially by the mix between the two. 
D)  The higher the percentage of debentures,the greater the risk borne by each debenture,and thus the higher the required rate of return on the debentures. 
E)  If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds,we could be certain that the firm's total interest expense would be lower than if the debt were raised by issuing $100 million of first mortgage bonds. 
A)  The higher the percentage of debt represented by mortgage bonds,the riskier both types of bonds will be and,consequently,the higher the firm's total dollar interest charges will be. 
B)  If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds,we could be certain that the firm's total interest expense would be lower than if the debt were raised by issuing $100 million of debentures. 
C)  In this situation,we cannot tell for sure how,or even whether,the firm's total interest expense on the $100 million of debt would be affected by the mix of debentures versus first mortgage bonds.The interest rate on each type of bond would increase as the percentage of mortgage bonds used was increased,but the average cost might well be such that the firm's total interest charges would not be affected materially by the mix between the two. 
D)  The higher the percentage of debentures,the greater the risk borne by each debenture,and thus the higher the required rate of return on the debentures. 
E)  If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds,we could be certain that the firm's total interest expense would be lower than if the debt were raised by issuing $100 million of first mortgage bonds.

Question 15

A call provision gives bondholders the right to demand,or "call for," repayment of a bond.Typically,companies call bonds if interest rates rise and do not call them if interest rates decline.

Accepted Answer

A) True 
 B)False

Question 16

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 17

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 18

Adams Enterprises' noncallable bonds currently sell for $910.They have a 15-year maturity,an annual coupon of $85,and a par value of $1,000.What is their yield to maturity?

Accepted Answer

A)  7.34% 
B)  9.66% 
C)  8.60% 
D)  9.95% 
E)  11.21% 
A)  7.34% 
B)  9.66% 
C)  8.60% 
D)  9.95% 
E)  11.21%

Question 19

You are considering two bonds.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 price of Bond B will decrease over time,but the price of Bond A will increase over time. 
B)  The prices of both bonds will remain unchanged. 
C)  The price of Bond A will decrease over time,but the price of Bond B will increase over time. 
D)  The prices of both bonds will increase by 7% per year. 
E)  The prices of both bonds will increase over time,but the price of Bond A will increase at a faster rate. 
A)  The price of Bond B will decrease over time,but the price of Bond A will increase over time. 
B)  The prices of both bonds will remain unchanged. 
C)  The price of Bond A will decrease over time,but the price of Bond B will increase over time. 
D)  The prices of both bonds will increase by 7% per year. 
E)  The prices of both bonds will increase over time,but the price of Bond A will increase at a faster rate.

Question 20

Listed below are some provisions that are often contained in bond indentures.Which of these provisions,viewed alone,would tend to reduce the yield to maturity that investors would otherwise require on a newly issued bond?
​1)Fixed assets are used as security for a bond.
2)A given bond is subordinated to other classes of debt.
3)The bond can be converted into the firm's common stock.
4)The bond has a sinking fund.
5)The bond has a call provision.
6)The indenture contains covenants that restrict the use of additional debt.

Accepted Answer

A)  1,3,4,6 
B)  1,4,6 
C)  1,2,3,4,6 
D)  1,2,3,4,5,6 
E)  1,3,4,5,6 
A)  1,3,4,6 
B)  1,4,6 
C)  1,2,3,4,6 
D)  1,2,3,4,5,6 
E)  1,3,4,5,6

Which of the following statements is CORRECT?

Tucker Corporation is planning to issue new 20-year bonds.The current plan is to make the bonds non-callable,but this may be changed.If the bonds are made callable after 5 years at a 5% call premium,how would this affect their required rate of return?

As a general rule,a company's debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured.

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.

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?

Moerdyk Corporation's bonds have a 15-year maturity,a 7.25% semiannual coupon,and a par value of $1,000.The going interest rate (r_d)is 5.00%,based on semiannual compounding.What is the bond's price?

Assuming all else is constant,which of the following statements is CORRECT?

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 call provision gives bondholders the right to demand,or "call for," repayment of a bond.Typically,companies call bonds if interest rates rise and do not call them if interest rates decline.

Which of the following statements is CORRECT?

Adams Enterprises' noncallable bonds currently sell for $910.They have a 15-year maturity,an annual coupon of $85,and a par value of $1,000.What is their yield to maturity?

You are considering two bonds.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?

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Exam 7: Bonds and Their Valuation

Which of the following statements is CORRECT?

Tucker Corporation is planning to issue new 20-year bonds.The current plan is to make the bonds non-callable,but this may be changed.If the bonds are made callable after 5 years at a 5% call premium,how would this affect their required rate of return?

As a general rule,a company's debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured.

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.

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?

Moerdyk Corporation's bonds have a 15-year maturity,a 7.25% semiannual coupon,and a par value of $1,000.The going interest rate (rd)is 5.00%,based on semiannual compounding.What is the bond's price?

Assuming all else is constant,which of the following statements is CORRECT?

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 call provision gives bondholders the right to demand,or "call for," repayment of a bond.Typically,companies call bonds if interest rates rise and do not call them if interest rates decline.

Which of the following statements is CORRECT?

Adams Enterprises' noncallable bonds currently sell for $910.They have a 15-year maturity,an annual coupon of $85,and a par value of $1,000.What is their yield to maturity?

You are considering two bonds.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?

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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

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Moerdyk Corporation's bonds have a 15-year maturity,a 7.25% semiannual coupon,and a par value of $1,000.The going interest rate (r_d)is 5.00%,based on semiannual compounding.What is the bond's price?