Question 1

Assuming other things are held constant, which of the following is true of bonds?

Accepted Answer

A)  A bond's sensitivity to the change in price from a change in the interest rate increases as its maturity increases. 
B)  For a given bond of any maturity, a given percentage point increase in the interest rate causes a larger dollar capital loss than the capital gain stemming from an identical decrease in the interest rate. 
C)  For any given maturity, a given percentage point decrease in the interest rate causes a smaller dollar capital loss than the capital gain stemming from an identical decrease in the interest rate. 
D)  In the year of purchase of bonds, an investor gets a deduction for the difference in the market value of bonds purchased at a premium and the face value of the bonds. 
E)  A 20-year bond has more interest rate reinvestment risk than a 2-year bond. 
A)  A bond's sensitivity to the change in price from a change in the interest rate increases as its maturity increases. 
B)  For a given bond of any maturity, a given percentage point increase in the interest rate causes a larger dollar capital loss than the capital gain stemming from an identical decrease in the interest rate. 
C)  For any given maturity, a given percentage point decrease in the interest rate causes a smaller dollar capital loss than the capital gain stemming from an identical decrease in the interest rate. 
D)  In the year of purchase of bonds, an investor gets a deduction for the difference in the market value of bonds purchased at a premium and the face value of the bonds. 
E)  A 20-year bond has more interest rate reinvestment risk than a 2-year bond.

Question 2

Which of the following mathematical expressions is used to compute the percentage rate of return on a bond?

Accepted Answer

A)  Current Yield + Coupon Rate of Interest 
B)  Current Yield + Capital Gains Yield 
C)  Market Return + Maturity Value 
D)  Market Yield + Current Yield 
E)  Market Yield + Capital Gains Yield 
A)  Current Yield + Coupon Rate of Interest 
B)  Current Yield + Capital Gains Yield 
C)  Market Return + Maturity Value 
D)  Market Yield + Current Yield 
E)  Market Yield + Capital Gains Yield

Question 3

Tony's Pizzeria plans to issue bonds with a par value of $1,000 and 10 years to maturity. These bonds will pay $45 interest every 6 months. Current market conditions are such that the bonds will be sold at net $937.79. What is the yield to maturity (YTM) of the issue as a broker would quote it to an investor? (Round the answer to the nearest whole number.)

Accepted Answer

A)  11% 
B)  10% 
C)  9% 
D)  8% 
E)  7% 
A)  11% 
B)  10% 
C)  9% 
D)  8% 
E)  7%

Question 4

The risk that income from a bond portfolio will vary because cash flows must be reinvested at current market rates is called:

Accepted Answer

A)  interest rate price risk. 
B)  market yield risk. 
C)  interest rate reinvestment risk. 
D)  capital gain yield risk. 
E)  yield to maturity risk. 
A)  interest rate price risk. 
B)  market yield risk. 
C)  interest rate reinvestment risk. 
D)  capital gain yield risk. 
E)  yield to maturity risk.

Question 5

If an investor buys a bond and holds it until it matures, the average rate of return the investor will earn per year is called the bond's:

Accepted Answer

A)  coupon rate. 
B)  yield to maturity. 
C)  yield to call. 
D)  current yield. 
E)  capital gains yield. 
A)  coupon rate. 
B)  yield to maturity. 
C)  yield to call. 
D)  current yield. 
E)  capital gains yield.

Question 6

A bond's value will increase with increases in interest rate over time.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following ratings by Moody's represents bonds that are least investment grade?

Accepted Answer

A)  Caa 
B)  Baa 
C)  B 
D)  Ba 
E)  Aa 
A)  Caa 
B)  Baa 
C)  B 
D)  Ba 
E)  Aa

Question 8

Changes in a firm's bond rating affect its ability to:

Accepted Answer

A)  claim deductions in tax liability computation. 
B)  procure raw material in sufficient quantity for manufacturing processes. 
C)  increase the coupon rate on bonds issued to investors. 
D)  borrow long-term capital and the cost of such funds. 
E)  exercise a call provision on its bonds. 
A)  claim deductions in tax liability computation. 
B)  procure raw material in sufficient quantity for manufacturing processes. 
C)  increase the coupon rate on bonds issued to investors. 
D)  borrow long-term capital and the cost of such funds. 
E)  exercise a call provision on its bonds.

Question 9

Other things held constant, if a bond indenture contains a call provision, the yield to maturity (YTM) on the bond that would exist without such a call provision will be _____ the YTM with the call provision.

Accepted Answer

A)  higher than 
B)  lower than 
C)  the same as 
D)  moving with 
E)  unrelated to 
A)  higher than 
B)  lower than 
C)  the same as 
D)  moving with 
E)  unrelated to

Question 10

The quality ratings assigned to bonds reflect the:

Accepted Answer

A)  probability of their face value increasing to above their market value. 
B)  probabilities of their going into default. 
C)  probabilities of different returns on their sinking fund investments. 
D)  probabilities of their maturity value becoming lower than the principal value. 
E)  probabilities of their being recalled by the exercise of a call provision. 
A)  probability of their face value increasing to above their market value. 
B)  probabilities of their going into default. 
C)  probabilities of different returns on their sinking fund investments. 
D)  probabilities of their maturity value becoming lower than the principal value. 
E)  probabilities of their being recalled by the exercise of a call provision.

Question 11

A $1,000 par value bond sells for $1,216. It matures in 20 years, has a 14 percent coupon, pays interest semiannually, and can be called in 5 years at a price of $1,100. The bond's yield to maturity is: (Round the answer to two decimal places.)

Accepted Answer

A)  6.05%. 
B)  10.00%. 
C)  10.06%. 
D)  8.59%. 
E)  11.26%. 
A)  6.05%. 
B)  10.00%. 
C)  10.06%. 
D)  8.59%. 
E)  11.26%.

Question 12

A(n) _____ is a provision that facilitates the orderly retirement of a bond issue.

Accepted Answer

A)  amortization fund 
B)  depreciation fund 
C)  redemption fund 
D)  conversion fund 
E)  sinking fund 
A)  amortization fund 
B)  depreciation fund 
C)  redemption fund 
D)  conversion fund 
E)  sinking fund

Question 13

Lower-grade bonds offer higher returns than high-grade bonds because of:

Accepted Answer

A)  their increase in coupon interest rate over the life of the bonds. 
B)  their higher risk and more restricted market. 
C)  their maturity value being higher than the market value. 
D)  their attractive returns to risk-averse investors. 
E)  their tax-free returns and no capital gain tax liability. 
A)  their increase in coupon interest rate over the life of the bonds. 
B)  their higher risk and more restricted market. 
C)  their maturity value being higher than the market value. 
D)  their attractive returns to risk-averse investors. 
E)  their tax-free returns and no capital gain tax liability.

Question 14

The maturity date is the date:

Accepted Answer

A)  on which the market interest rate equals the coupon rate on a bond. 
B)  the principal amount of debt is due. 
C)  on which investors make no capital gain or loss on an investment. 
D)  the interest payment is due. 
E)  on which the market value of a bond is more than the face value of the bond. 
A)  on which the market interest rate equals the coupon rate on a bond. 
B)  the principal amount of debt is due. 
C)  on which investors make no capital gain or loss on an investment. 
D)  the interest payment is due. 
E)  on which the market value of a bond is more than the face value of the bond.

Question 15

Assume that a 15-year, $1,000 face value bond pays interest of $37.50 every 3 months. If an investor requires a simple annual rate of return of 12 percent with quarterly compounding, how much should the investor be willing to pay for this bond? (Round the answer to two decimal places.)

Accepted Answer

A)  $821.92 
B)  $1,207.57 
C)  $986.43 
D)  $1,120.71 
E)  $1,358.24 
A)  $821.92 
B)  $1,207.57 
C)  $986.43 
D)  $1,120.71 
E)  $1,358.24

Question 16

A change in market conditions causes the market price of a bond to change because of changes in the bond's:

Accepted Answer

A)  coupon rate. 
B)  yield to call. 
C)  yield to maturity. 
D)  principal value. 
E)  maturity value. 
A)  coupon rate. 
B)  yield to call. 
C)  yield to maturity. 
D)  principal value. 
E)  maturity value.

Question 17

Rick bought a bond when it was issued by Macroflex Corporation 14 years ago. The bond, which has a $1,000 face value and a coupon rate equal to 10 percent, matures in six years. Interest is paid every six months; the next interest payment is scheduled for six months from today. If the yield on similar risk investments is 14 percent, the current market value (price) of the bond is: (Round the answer to two decimal places.)

Accepted Answer

A)  $841.15. 
B)  $1,238.28. 
C)  $904.67. 
D)  $757.26. 
E)  $844.45. 
A)  $841.15. 
B)  $1,238.28. 
C)  $904.67. 
D)  $757.26. 
E)  $844.45.

Question 18

_____ bonds are often called by the firm prior to maturity.

Accepted Answer

A)  Floating rate 
B)  Mortgage 
C)  Callable 
D)  Municipal 
E)  Corporate 
A)  Floating rate 
B)  Mortgage 
C)  Callable 
D)  Municipal 
E)  Corporate

Question 19

The current price of a 10-year, $1,000 par value bond is $1,158.91. Interest on this bond is paid every six months, and the simple annual yield is 14 percent. Given this information, the annual coupon rate on the bond is: (Round the answer to the nearest whole number.)

Accepted Answer

A)  10%. 
B)  12%. 
C)  14%. 
D)  17%. 
E)  21%. 
A)  10%. 
B)  12%. 
C)  14%. 
D)  17%. 
E)  21%.

Question 20

One of the disadvantages of issuing zero coupon bonds is that the tax shield associated with the bonds' appreciation cannot be claimed until the bond matures.

Accepted Answer

A) True 
 B)False

Assuming other things are held constant, which of the following is true of bonds?

Which of the following mathematical expressions is used to compute the percentage rate of return on a bond?

The risk that income from a bond portfolio will vary because cash flows must be reinvested at current market rates is called:

If an investor buys a bond and holds it until it matures, the average rate of return the investor will earn per year is called the bond's:

A bond's value will increase with increases in interest rate over time.

Which of the following ratings by Moody's represents bonds that are least investment grade?

Changes in a firm's bond rating affect its ability to:

Other things held constant, if a bond indenture contains a call provision, the yield to maturity (YTM) on the bond that would exist without such a call provision will be _____ the YTM with the call provision.

The quality ratings assigned to bonds reflect the:

A $1,000 par value bond sells for $1,216. It matures in 20 years, has a 14 percent coupon, pays interest semiannually, and can be called in 5 years at a price of $1,100. The bond's yield to maturity is: (Round the answer to two decimal places.)

A(n) _____ is a provision that facilitates the orderly retirement of a bond issue.

Lower-grade bonds offer higher returns than high-grade bonds because of:

The maturity date is the date:

Assume that a 15-year, $1,000 face value bond pays interest of $37.50 every 3 months. If an investor requires a simple annual rate of return of 12 percent with quarterly compounding, how much should the investor be willing to pay for this bond? (Round the answer to two decimal places.)

A change in market conditions causes the market price of a bond to change because of changes in the bond's:

_____ bonds are often called by the firm prior to maturity.

The current price of a 10-year, $1,000 par value bond is $1,158.91. Interest on this bond is paid every six months, and the simple annual yield is 14 percent. Given this information, the annual coupon rate on the bond is: (Round the answer to the nearest whole number.)

One of the disadvantages of issuing zero coupon bonds is that the tax shield associated with the bonds' appreciation cannot be claimed until the bond matures.

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Stocks Equity Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Capital Structure

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Financial Planning and Control

Filters

Exam 6: Bonds Debtcharacteristics and Valuation

Assuming other things are held constant, which of the following is true of bonds?

Which of the following mathematical expressions is used to compute the percentage rate of return on a bond?

The risk that income from a bond portfolio will vary because cash flows must be reinvested at current market rates is called:

If an investor buys a bond and holds it until it matures, the average rate of return the investor will earn per year is called the bond's:

A bond's value will increase with increases in interest rate over time.

Which of the following ratings by Moody's represents bonds that are least investment grade?

Changes in a firm's bond rating affect its ability to:

Other things held constant, if a bond indenture contains a call provision, the yield to maturity (YTM) on the bond that would exist without such a call provision will be _____ the YTM with the call provision.

The quality ratings assigned to bonds reflect the:

A $1,000 par value bond sells for $1,216. It matures in 20 years, has a 14 percent coupon, pays interest semiannually, and can be called in 5 years at a price of $1,100. The bond's yield to maturity is: (Round the answer to two decimal places.)

A(n) _____ is a provision that facilitates the orderly retirement of a bond issue.

Lower-grade bonds offer higher returns than high-grade bonds because of:

The maturity date is the date:

Assume that a 15-year, $1,000 face value bond pays interest of $37.50 every 3 months. If an investor requires a simple annual rate of return of 12 percent with quarterly compounding, how much should the investor be willing to pay for this bond? (Round the answer to two decimal places.)

A change in market conditions causes the market price of a bond to change because of changes in the bond's:

_____ bonds are often called by the firm prior to maturity.

The current price of a 10-year, $1,000 par value bond is $1,158.91. Interest on this bond is paid every six months, and the simple annual yield is 14 percent. Given this information, the annual coupon rate on the bond is: (Round the answer to the nearest whole number.)

One of the disadvantages of issuing zero coupon bonds is that the tax shield associated with the bonds' appreciation cannot be claimed until the bond matures.

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Stocks Equity Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Capital Structure

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Financial Planning and Control

Filters