Question 1

Which of the following statements is CORRECT?

Accepted Answer

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

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)  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. 
B)  Other things held constant, a corporation would rather issue noncallable bonds than callable bonds. 
C)  Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond. 
D)  Reinvestment rate risk is worse from an investor's standpoint than interest rate price risk if the investor has a short investment time horizon. 
E)  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. 
A)  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. 
B)  Other things held constant, a corporation would rather issue noncallable bonds than callable bonds. 
C)  Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond. 
D)  Reinvestment rate risk is worse from an investor's standpoint than interest rate price risk if the investor has a short investment time horizon. 
E)  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. A

Question 3

Because short-term interest rates are much more volatile than long-term rates,you would,in the real world,generally be subject to much more interest rate price risk if you purchased a 30-day bond than if you bought a 30-year bond.

Accepted Answer

A) True 
 B)False  False

Question 4

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 5

The Gergen Group's 5-year bonds yield 6.85%,and 5-year T-bonds yield 4.75%.The real risk-free rate is r* = 2.80%,the default risk premium for Gergen's bonds is DRP = 0.85% versus zero for T-bonds,the liquidity premium on Gergen's bonds is LP = 1.25%,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 inflation premium (IP)on 5-year bonds?

Accepted Answer

A)  1.40% 
B)  1.55% 
C)  1.71% 
D)  1.88% 
E)  2.06% 
A)  1.40% 
B)  1.55% 
C)  1.71% 
D)  1.88% 
E)  2.06%

Question 6

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 7

One year ago Lerner and Luckmann Co.issued 15-year,noncallable,7.5% annual coupon bonds at their par value of $1,000.Today,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?

Accepted Answer

A)  $1,077.01 
B)  $1,104.62 
C)  $1,132.95 
D)  $1,162.00 
E)  $1,191.79 
A)  $1,077.01 
B)  $1,104.62 
C)  $1,132.95 
D)  $1,162.00 
E)  $1,191.79

Question 8

If 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.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)  A callable 10-year, 10% bond should sell at a higher price than an otherwise similar noncallable bond. 
B)  Corporate treasurers dislike issuing callable bonds because these bonds may require the company to raise additional funds earlier than would be true if noncallable bonds with the same maturity were used. 
C)  Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is above the coupon rate than if it is below the coupon rate. 
D)  The actual life of a callable bond will always be equal to or less than the actual life of a noncallable bond with the same maturity. Therefore, if the yield curve is upward sloping, the required rate of return will be lower on the callable bond. 
E)  Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is below the coupon rate than if it is above the coupon rate. 
A)  A callable 10-year, 10% bond should sell at a higher price than an otherwise similar noncallable bond. 
B)  Corporate treasurers dislike issuing callable bonds because these bonds may require the company to raise additional funds earlier than would be true if noncallable bonds with the same maturity were used. 
C)  Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is above the coupon rate than if it is below the coupon rate. 
D)  The actual life of a callable bond will always be equal to or less than the actual life of a noncallable bond with the same maturity. Therefore, if the yield curve is upward sloping, the required rate of return will be lower on the callable bond. 
E)  Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is below the coupon rate than if it is above the coupon rate.

Question 10

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?

Accepted Answer

A)  $943.98 
B)  $968.18 
C)  $993.01 
D)  $1,017.83 
E)  $1,043.28 
A)  $943.98 
B)  $968.18 
C)  $993.01 
D)  $1,017.83 
E)  $1,043.28

Question 11

Perry Inc.'s bonds currently sell for $1,150.They have a 6-year maturity,an annual coupon of $85,and a par value of $1,000.What is their current yield?

Accepted Answer

A)  7.39% 
B)  7.76% 
C)  8.15% 
D)  8.56% 
E)  8.98% 
A)  7.39% 
B)  7.76% 
C)  8.15% 
D)  8.56% 
E)  8.98%

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A)  The total yield on a bond is derived from dividends plus changes in the price of the bond. 
B)  Bonds are riskier than common stocks and therefore have higher required returns. 
C)  Bonds issued by larger companies always have lower yields to maturity (less risk) than bonds issued by smaller companies. 
D)  The market value of a bond will always approach its par value as its maturity date approaches, provided the bond's required return remains constant. 
E)  If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices. 
A)  The total yield on a bond is derived from dividends plus changes in the price of the bond. 
B)  Bonds are riskier than common stocks and therefore have higher required returns. 
C)  Bonds issued by larger companies always have lower yields to maturity (less risk) than bonds issued by smaller companies. 
D)  The market value of a bond will always approach its par value as its maturity date approaches, provided the bond's required return remains constant. 
E)  If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices.

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)  A 10-year, 10% coupon bond has less reinvestment rate risk than a 10-year, 5% coupon bond (assuming all else equal). 
B)  The total return on a bond during a given year is the sum of the coupon interest payments received during the year and the change in the value of the bond from the beginning to the end of the year. 
C)  The price of a 20-year, 10% bond is less sensitive to changes in interest rates than the price of a 5-year, 10% bond. 
D)  A $1,000 bond with $100 annual interest payments that has 5 years to maturity and is not expected to default would sell at a discount if interest rates were below 9% and at a premium if interest rates were greater than 11%. 
E)  10-year, zero coupon bonds have higher reinvestment rate risk than 10-year, 10% coupon bonds. 
A)  A 10-year, 10% coupon bond has less reinvestment rate risk than a 10-year, 5% coupon bond (assuming all else equal). 
B)  The total return on a bond during a given year is the sum of the coupon interest payments received during the year and the change in the value of the bond from the beginning to the end of the year. 
C)  The price of a 20-year, 10% bond is less sensitive to changes in interest rates than the price of a 5-year, 10% bond. 
D)  A $1,000 bond with $100 annual interest payments that has 5 years to maturity and is not expected to default would sell at a discount if interest rates were below 9% and at a premium if interest rates were greater than 11%. 
E)  10-year, zero coupon bonds have higher reinvestment rate risk than 10-year, 10% coupon bonds.

Question 14

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 15

Sommers Co.'s bonds currently sell for $1,080 and have a par value of $1,000.They pay a $100 annual coupon and have a 15-year maturity,but they can be called in 5 years at $1,125.What is their yield to maturity (YTM)?

Accepted Answer

A)  8.56% 
B)  9.01% 
C)  9.46% 
D)  9.93% 
E)  10.43% 
A)  8.56% 
B)  9.01% 
C)  9.46% 
D)  9.93% 
E)  10.43%

Question 16

The 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.

Accepted Answer

A) True 
 B)False

Question 17

Curtis Corporation's noncallable bonds currently sell for $1,165.They have a 15-year maturity,an annual coupon of $95,and a par value of $1,000.What is their yield to maturity?

Accepted Answer

A)  6.20% 
B)  6.53% 
C)  6.87% 
D)  7.24% 
E)  7.62% 
A)  6.20% 
B)  6.53% 
C)  6.87% 
D)  7.24% 
E)  7.62%

Question 18

You have funds that you want to invest in bonds,and you just noticed in the financial pages of the local newspaper that you can buy a $1,000 par value bond for $800.The coupon rate is 10% (with annual payments),and there are 10 years before the bond will mature and pay off its $1,000 par value.You should buy the bond if your required return on bonds with this risk is 12%.

Accepted Answer

A) True 
 B)False

Question 19

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.

Accepted Answer

A) True 
 B)False

Question 20

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,and an 8% yield to maturity.Which of the following statements is CORRECT?

Accepted Answer

A)  Bond A trades at a discount, whereas Bond B trades at a premium. 
B)  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. 
C)  If the yield to maturity for both bonds immediately decreases to 6%, Bond A's bond will have a larger percentage increase in value. 
D)  Bond A's current yield is greater than that of Bond B. 
E)  Bond A's capital gains yield is greater than Bond B's capital gains yield. 
A)  Bond A trades at a discount, whereas Bond B trades at a premium. 
B)  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. 
C)  If the yield to maturity for both bonds immediately decreases to 6%, Bond A's bond will have a larger percentage increase in value. 
D)  Bond A's current yield is greater than that of Bond B. 
E)  Bond A's capital gains yield is greater than Bond B's capital gains yield.

Exam 5: Bonds, bond Valuation, and Interest Rates

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Because short-term interest rates are much more volatile than long-term rates,you would,in the real world,generally be subject to much more interest rate price risk if you purchased a 30-day bond than if you bought a 30-year bond.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

One year ago Lerner and Luckmann Co.issued 15-year,noncallable,7.5% annual coupon bonds at their par value of $1,000.Today,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?

If 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?

Perry Inc.'s bonds currently sell for $1,150.They have a 6-year maturity,an annual coupon of $85,and a par value of $1,000.What is their current yield?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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

Sommers Co.'s bonds currently sell for $1,080 and have a par value of $1,000.They pay a $100 annual coupon and have a 15-year maturity,but they can be called in 5 years at $1,125.What is their yield to maturity (YTM)?

The 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.

Curtis Corporation's noncallable bonds currently sell for $1,165.They have a 15-year maturity,an annual coupon of $95,and a par value of $1,000.What is their yield to maturity?

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,and an 8% yield to maturity.Which of the following statements is CORRECT?

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Analysis of Financial Statements

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