Question 1

Assume that the current corporate bond yield curve is upward sloping.Under this condition,then we could be sure that

Accepted Answer

A)  The economy is not in a recession. 
B)  Long-term bonds are a better buy than short-term bonds. 
C)  Maturity risk premiums could help to explain the yield curve's upward slope. 
D)  Long-term interest rates are more volatile than short-term rates. 
E)  Inflation is expected to decline in the future. 
A)  The economy is not in a recession. 
B)  Long-term bonds are a better buy than short-term bonds. 
C)  Maturity risk premiums could help to explain the yield curve's upward slope. 
D)  Long-term interest rates are more volatile than short-term rates. 
E)  Inflation is expected to decline in the future.

Question 2

Rogoff Co.'s 15-year bonds have an annual coupon rate of 9.5%.Each bond has face value of $1,000 and makes semiannual interest payments.If you require an 11.0% nominal yield to maturity on this investment,what is the maximum price you should be willing to pay for the bond?

Accepted Answer

A)  $891.00 
B)  $913.27 
C)  $936.10 
D)  $959.51 
E)  $983.49 
A)  $891.00 
B)  $913.27 
C)  $936.10 
D)  $959.51 
E)  $983.49

Question 3

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 4

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 5

Bonds for two companies were just issued: Short Corp.'s bonds will mature in 5 years,and Long Corp.'s bonds will mature in 15 years.Both bonds promise to pay a semiannual coupon,they are not callable or convertible,and they are equally liquid.Further,assume that the Treasury yield curve is based only on expectations about future inflation,i.e.,that the maturity risk premium is zero for T-bonds.Under these conditions,which of the following statements is correct?

Accepted Answer

A)  If the Treasury yield curve is downward sloping, Long's bonds must under all conditions have the lower yield. 
B)  If the yield curve for Treasury securities is upward sloping, Long's bonds must under all conditions have a higher yield than Short's bonds. 
C)  If the yield curve for Treasury securities is flat, Short's bond must under all conditions have the same yield as Long's bonds. 
D)  If Long's and Short's bonds have the same default risk, their yields must under all conditions be equal. 
E)  If the Treasury yield curve is upward sloping and Short has less default risk than Long, then Short's bonds must under all conditions have the lower yield. 
A)  If the Treasury yield curve is downward sloping, Long's bonds must under all conditions have the lower yield. 
B)  If the yield curve for Treasury securities is upward sloping, Long's bonds must under all conditions have a higher yield than Short's bonds. 
C)  If the yield curve for Treasury securities is flat, Short's bond must under all conditions have the same yield as Long's bonds. 
D)  If Long's and Short's bonds have the same default risk, their yields must under all conditions be equal. 
E)  If the Treasury yield curve is upward sloping and Short has less default risk than Long, then Short's bonds must under all conditions have the lower yield.

Question 6

Kessen Inc.'s bonds mature in 7 years,have a par value of $1,000,and make an annual coupon payment of $70.The market interest rate for the bonds is 8.5%.What is the bond's price?

Accepted Answer

A)  $923.22 
B)  $946.30 
C)  $969.96 
D)  $994.21 
E)  $1,019.06 
A)  $923.22 
B)  $946.30 
C)  $969.96 
D)  $994.21 
E)  $1,019.06

Question 7

If its yield to maturity declined by 1%,which of the following bonds would have the largest percentage increase in value?

Accepted Answer

A)  A 1-year bond with an 8% coupon. 
B)  A 10-year bond with an 8% coupon. 
C)  A 10-year bond with a 12% coupon. 
D)  A 10-year zero coupon bond. 
E)  A 1-year zero coupon bond. 
A)  A 1-year bond with an 8% coupon. 
B)  A 10-year bond with an 8% coupon. 
C)  A 10-year bond with a 12% coupon. 
D)  A 10-year zero coupon bond. 
E)  A 1-year zero coupon bond.

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)  Long-term bonds have less interest rate price risk but more reinvestment rate risk than short-term bonds. 
B)  If interest rates increase, all bond prices will increase, but the increase will be greater for bonds that have less interest rate risk. 
C)  Relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more interest rate price risk but less reinvestment rate risk. 
D)  Long-term bonds have less interest rate price risk and also less reinvestment rate risk than short-term bonds. 
E)  One advantage of a zero coupon Treasury bond is that no one who owns the bond has to pay any taxes on it until it matures or is sold. 
A)  Long-term bonds have less interest rate price risk but more reinvestment rate risk than short-term bonds. 
B)  If interest rates increase, all bond prices will increase, but the increase will be greater for bonds that have less interest rate risk. 
C)  Relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more interest rate price risk but less reinvestment rate risk. 
D)  Long-term bonds have less interest rate price risk and also less reinvestment rate risk than short-term bonds. 
E)  One advantage of a zero coupon Treasury bond is that no one who owns the bond has to pay any taxes on it until it matures or is sold.

Question 9

Meacham Enterprises' bonds currently sell for $1,280 and have a par value of $1,000.They pay a $135 annual coupon and have a 15-year maturity,but they can be called in 5 years at $1,050.What is their yield to call (YTC)?

Accepted Answer

A)  6.39% 
B)  6.72% 
C)  7.08% 
D)  7.45% 
E)  7.82% 
A)  6.39% 
B)  6.72% 
C)  7.08% 
D)  7.45% 
E)  7.82%

Question 10

Haswell Enterprises' bonds have a 10-year maturity,a 6.25% semiannual coupon,and a par value of $1,000.The going interest rate (rd)is 4.75%,based on semiannual compounding.What is the bond's price?

Accepted Answer

A)  1,063.09 
B)  1,090.35 
C)  1,118.31 
D)  1,146.27 
E)  1,174.93 
A)  1,063.09 
B)  1,090.35 
C)  1,118.31 
D)  1,146.27 
E)  1,174.93

Question 11

A bond has a $1,000 par value,makes annual interest payments of $100,has 5 years to maturity,cannot be called,and is not expected to default.The bond should sell at a premium if interest rates are below 10% and at a discount if interest rates are greater than 10%.

Accepted Answer

A) True 
 B)False

Question 12

Gilligan Co.'s bonds currently sell for $1,150.They have a 6.75% annual coupon rate and a 15-year maturity,and are callable in 6 years at $1,067.50.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.Under these conditions,what rate of return should an investor expect to earn if he or she purchases these bonds,the YTC or the YTM?

Accepted Answer

A)  3.92% 
B)  4.12% 
C)  4.34% 
D)  4.57% 
E)  4.81% 
A)  3.92% 
B)  4.12% 
C)  4.34% 
D)  4.57% 
E)  4.81%

Question 13

An 8-year Treasury bond has a 10% coupon,and a 10-year Treasury bond has an 8% coupon.Both bonds 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)  Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price. 
B)  The prices of both bonds would increase by the same amount. 
C)  One bond's price would increase, while the other bond's price would decrease. 
D)  The prices of the two bonds would remain constant. 
E)  The prices of both bonds will decrease by the same amount. 
A)  Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price. 
B)  The prices of both bonds would increase by the same amount. 
C)  One bond's price would increase, while the other bond's price would decrease. 
D)  The prices of the two bonds would remain constant. 
E)  The prices of both bonds will decrease by the same amount.

Question 14

Jerome Corporation's bonds have 15 years to maturity,an 8.75% coupon paid semiannually,and a $1,000 par value.The bond has a 6.50% nominal yield to maturity,but it can be called in 6 years at a price of $1,050.What is the bond's nominal yield to call?

Accepted Answer

A)  5.01% 
B)  5.27% 
C)  5.54% 
D)  5.81% 
E)  6.10% 
A)  5.01% 
B)  5.27% 
C)  5.54% 
D)  5.81% 
E)  6.10%

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A)  Subordinated debt has less default risk than senior debt. 
B)  Convertible bonds have lower coupon rates than non-convertible bonds of similar default risk because they offer the possibility of capital gains. 
C)  Junk bonds typically provide a lower yield to maturity than investment-grade bonds. 
D)  A debenture is a secured bond that is backed by some or all of the firm's fixed assets. 
E)  Junior debt is debt that has been more recently issued, and in bankruptcy it is paid off after senior debt because the senior debt was issued first. 
A)  Subordinated debt has less default risk than senior debt. 
B)  Convertible bonds have lower coupon rates than non-convertible bonds of similar default risk because they offer the possibility of capital gains. 
C)  Junk bonds typically provide a lower yield to maturity than investment-grade bonds. 
D)  A debenture is a secured bond that is backed by some or all of the firm's fixed assets. 
E)  Junior debt is debt that has been more recently issued, and in bankruptcy it is paid off after senior debt because the senior debt was issued first.

Question 16

Bonds A and B are 15-year,$1,000 face value 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%,which is expected to remain constant for the next 15 years.Which of the following statements is CORRECT?

Accepted Answer

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

Question 17

Nicholas Industries can issue a 20-year bond with a 6% annual coupon.This bond is not convertible,is not callable,and has no sinking fund.Alternatively,Nicholas could issue a 20-year bond that is convertible into common equity,may be called,and has a sinking fund.Which of the following most accurately describes the coupon rate that Nicholas would have to pay on the convertible,callable bond?

Accepted Answer

A)  It could be less than, equal to, or greater than 6%. 
B)  Greater than 6%. 
C)  Exactly equal to 8%. 
D)  Less than 6%. 
E)  Exactly equal to 6%. 
A)  It could be less than, equal to, or greater than 6%. 
B)  Greater than 6%. 
C)  Exactly equal to 8%. 
D)  Less than 6%. 
E)  Exactly equal to 6%.

Question 18

Which of the following statements is CORRECT?

Accepted Answer

A)  If rates fall after its issue, a zero coupon bond could trade at a price above its par value. 
B)  If rates fall rapidly, a zero coupon bond's expected appreciation could become negative. 
C)  If a firm moves from a position of strength toward financial distress, its bonds' yield to maturity would probably decline. 
D)  If a bond is selling at a premium, this implies that its yield to maturity exceeds its coupon rate. 
E)  If a coupon bond is selling at par, its current yield equals its yield to maturity. 
A)  If rates fall after its issue, a zero coupon bond could trade at a price above its par value. 
B)  If rates fall rapidly, a zero coupon bond's expected appreciation could become negative. 
C)  If a firm moves from a position of strength toward financial distress, its bonds' yield to maturity would probably decline. 
D)  If a bond is selling at a premium, this implies that its yield to maturity exceeds its coupon rate. 
E)  If a coupon bond is selling at par, its current yield equals its yield to maturity.

Question 19

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

Accepted Answer

A)  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. 
B)  From a corporate borrower's point of view, interest paid on bonds is not tax-deductible. 
C)  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. 
D)  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. 
E)  A 20-year zero coupon bond has more reinvestment rate risk than a 20-year coupon bond. 
A)  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. 
B)  From a corporate borrower's point of view, interest paid on bonds is not tax-deductible. 
C)  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. 
D)  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. 
E)  A 20-year zero coupon bond has more reinvestment rate risk than a 20-year coupon bond.

Question 20

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

Exam 5: Bonds, bond Valuation, and Interest Rates

Assume that the current corporate bond yield curve is upward sloping.Under this condition,then we could be sure that

Rogoff Co.'s 15-year bonds have an annual coupon rate of 9.5%.Each bond has face value of $1,000 and makes semiannual interest payments.If you require an 11.0% nominal yield to maturity on this investment,what is the maximum price you should be willing to pay for the bond?

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

Which of the following statements is CORRECT?

Kessen Inc.'s bonds mature in 7 years,have a par value of $1,000,and make an annual coupon payment of $70.The market interest rate for the bonds is 8.5%.What is the bond's price?

If its yield to maturity declined by 1%,which of the following bonds would have the largest percentage increase in value?

Which of the following statements is CORRECT?

Meacham Enterprises' bonds currently sell for $1,280 and have a par value of $1,000.They pay a $135 annual coupon and have a 15-year maturity,but they can be called in 5 years at $1,050.What is their yield to call (YTC)?

Haswell Enterprises' bonds have a 10-year maturity,a 6.25% semiannual coupon,and a par value of $1,000.The going interest rate (rd)is 4.75%,based on semiannual compounding.What is the bond's price?

A bond has a $1,000 par value,makes annual interest payments of $100,has 5 years to maturity,cannot be called,and is not expected to default.The bond should sell at a premium if interest rates are below 10% and at a discount if interest rates are greater than 10%.

An 8-year Treasury bond has a 10% coupon,and a 10-year Treasury bond has an 8% coupon.Both bonds 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?

Jerome Corporation's bonds have 15 years to maturity,an 8.75% coupon paid semiannually,and a $1,000 par value.The bond has a 6.50% nominal yield to maturity,but it can be called in 6 years at a price of $1,050.What is the bond's nominal yield to call?

Which of the following statements is CORRECT?

Bonds A and B are 15-year,$1,000 face value 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%,which is expected to remain constant for the next 15 years.Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Assuming all else is constant,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

Valuation of Stocks and Corporations

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

Agency Conflicts and 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

Extension 18 A: Rights Offerings

Lease Financing

Hybrid Financing: Preferred Stock, warrants, and Convertibles

Dynamic Capital Structures

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

Filters

Haswell Enterprises' bonds have a 10-year maturity,a 6.25% semiannual coupon,and a par value of $1,000.The going interest rate (r_d)is 4.75%,based on semiannual compounding.What is the bond's price?