Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)  Other things held constant, a callable bond should have a lower yield to maturity than a noncallable bond. 
B)  Once a firm declares bankruptcy, it must then be liquidated by the trustee, who uses the proceeds to pay bondholders, unpaid wages, taxes, and lawyer fees. 
C)  Income bonds must pay interest only if the company earns the interest. Thus, these securities cannot bankrupt a company prior to their maturity, and this makes them safer to the issuing corporation than "regular" bonds. 
D)  A firm with a sinking fund that gave it the choice of calling the required bonds at par or buying the bonds in the open market would generally choose the open market purchase if the coupon rate exceeded the going interest rate. 
E)  One disadvantage of zero coupon bonds is that the issuing firm cannot realize any tax savings from the debt until the bonds mature. 
A)  Other things held constant, a callable bond should have a lower yield to maturity than a noncallable bond. 
B)  Once a firm declares bankruptcy, it must then be liquidated by the trustee, who uses the proceeds to pay bondholders, unpaid wages, taxes, and lawyer fees. 
C)  Income bonds must pay interest only if the company earns the interest. Thus, these securities cannot bankrupt a company prior to their maturity, and this makes them safer to the issuing corporation than "regular" bonds. 
D)  A firm with a sinking fund that gave it the choice of calling the required bonds at par or buying the bonds in the open market would generally choose the open market purchase if the coupon rate exceeded the going interest rate. 
E)  One disadvantage of zero coupon bonds is that the issuing firm cannot realize any tax savings from the debt until the bonds mature.

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)  The market value of a bond will always approach its par value as its maturity date approaches. This holds true even if the firm has filed for bankruptcy. 
B)  Rising inflation makes the actual yield to maturity on a bond greater than a quoted yield to maturity that is based on market prices. 
C)  The yield to maturity on a coupon bond that sells at its par value consists entirely of a current interest yield; it has a zero expected capital gains yield. 
D)  On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss. 
E)  The yield to maturity for a coupon bond that sells at a premium consists entirely of a positive capital gains yield; it has a zero current interest yield. 
A)  The market value of a bond will always approach its par value as its maturity date approaches. This holds true even if the firm has filed for bankruptcy. 
B)  Rising inflation makes the actual yield to maturity on a bond greater than a quoted yield to maturity that is based on market prices. 
C)  The yield to maturity on a coupon bond that sells at its par value consists entirely of a current interest yield; it has a zero expected capital gains yield. 
D)  On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss. 
E)  The yield to maturity for a coupon bond that sells at a premium consists entirely of a positive capital gains yield; it has a zero current interest yield.

Question 3

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 4

A 10-year bond pays an annual coupon,its YTM is 8%,and it currently trades at a premium.Which of the following statements is CORRECT?

Accepted Answer

A)  If the yield to maturity remains at 8%, then the bond's price will decline over the next year. 
B)  The bond's coupon rate is less than 8%. 
C)  If the yield to maturity increases, then the bond's price will increase. 
D)  If the yield to maturity remains at 8%, then the bond's price will remain constant over the next year. 
E)  The bond's current yield is less than 8%. 
A)  If the yield to maturity remains at 8%, then the bond's price will decline over the next year. 
B)  The bond's coupon rate is less than 8%. 
C)  If the yield to maturity increases, then the bond's price will increase. 
D)  If the yield to maturity remains at 8%, then the bond's price will remain constant over the next year. 
E)  The bond's current yield is less than 8%.

Question 5

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 prevent the use of additional debt.

Accepted Answer

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

Question 6

Reinegar Corporation is planning two new issues of 25-year bonds.Bond Par will be sold at its $1,000 par value,and it will have a 10% semiannual coupon.Bond OID will be an Original Issue Discount bond,and it will also have a 25-year maturity and a $1,000 par value,but its semiannual coupon will be only 6.25%.If both bonds are to provide investors with the same effective yield,how many of the OID bonds must Reinegar issue to raise $3,000,000? Disregard flotation costs,and round your final answer up to a whole number of bonds.

Accepted Answer

A)  4,228 
B)  4,337 
C)  4,448 
D)  4,562 
E)  4,676 
A)  4,228 
B)  4,337 
C)  4,448 
D)  4,562 
E)  4,676

Question 7

A 10-year corporate bond has an annual coupon of 9%.The bond is currently selling at par ($1,000).Which of the following statements is NOT CORRECT?

Accepted Answer

A)  The bond's yield to maturity is 9%. 
B)  The bond's current yield is 9%. 
C)  If the bond's yield to maturity remains constant, the bond will continue to sell at par. 
D)  The bond's current yield exceeds its capital gains yield. 
E)  The bond's expected capital gains yield is positive. 
A)  The bond's yield to maturity is 9%. 
B)  The bond's current yield is 9%. 
C)  If the bond's yield to maturity remains constant, the bond will continue to sell at par. 
D)  The bond's current yield exceeds its capital gains yield. 
E)  The bond's expected capital gains yield is positive.

Question 8

Ranger Inc.would like to issue new 20-year bonds.Initially,the plan was to make the bonds non-callable.If the bonds were made callable after 5 years at a 5% call premium,how would this affect their required rate of return?

Accepted Answer

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

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)  Liquidity premiums are generally higher on Treasury than corporate bonds. 
B)  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. 
C)  Default risk premiums are generally lower on corporate than on Treasury bonds. 
D)  Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds. 
E)  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. 
A)  Liquidity premiums are generally higher on Treasury than corporate bonds. 
B)  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. 
C)  Default risk premiums are generally lower on corporate than on Treasury bonds. 
D)  Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds. 
E)  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.

Question 10

If 10-year T-bonds have a yield of 6.2%,10-year corporate bonds yield 8.5%,the maturity risk premium on all 10-year bonds is 1.3%,and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds,what is the default risk premium on the corporate bond?

Accepted Answer

A)  1.90% 
B)  2.09% 
C)  2.30% 
D)  2.53% 
E)  2.78% 
A)  1.90% 
B)  2.09% 
C)  2.30% 
D)  2.53% 
E)  2.78%

Question 11

Assume that a 10-year Treasury bond has a 12% annual coupon,while a 15-year T-bond has an 8% annual coupon.Assume also that the yield curve is flat,and all Treasury securities have a 10% yield to maturity.Which of the following statements is CORRECT?

Accepted Answer

A)  If interest rates decline, the prices of both bonds will increase, but the 10-year bond would have a larger percentage increase in price. 
B)  The 10-year bond would sell at a discount, while the 15-year bond would sell at a premium. 
C)  The 10-year bond would sell at a premium, while the 15-year bond would sell at par. 
D)  If the yield to maturity on both bonds remains at 10% over the next year, the price of the 10-year bond would increase, but the price of the 15-year bond would fall. 
E)  If interest rates decline, the prices of both bonds will increase, but the 15-year bond would have a larger percentage increase in price. 
A)  If interest rates decline, the prices of both bonds will increase, but the 10-year bond would have a larger percentage increase in price. 
B)  The 10-year bond would sell at a discount, while the 15-year bond would sell at a premium. 
C)  The 10-year bond would sell at a premium, while the 15-year bond would sell at par. 
D)  If the yield to maturity on both bonds remains at 10% over the next year, the price of the 10-year bond would increase, but the price of the 15-year bond would fall. 
E)  If interest rates decline, the prices of both bonds will increase, but the 15-year bond would have a larger percentage increase in price.

Question 12

Under normal conditions,which of the following would be most likely to increase the coupon rate required to enable a bond to be issued at par?

Accepted Answer

A)  Adding a call provision. 
B)  The rating agencies change the bond's rating from Baa to Aaa. 
C)  Making the bond a first mortgage bond rather than a debenture. 
D)  Adding a sinking fund. 
E)  Adding additional restrictive covenants that limit management's actions. 
A)  Adding a call provision. 
B)  The rating agencies change the bond's rating from Baa to Aaa. 
C)  Making the bond a first mortgage bond rather than a debenture. 
D)  Adding a sinking fund. 
E)  Adding additional restrictive covenants that limit management's actions.

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)  An indenture is a bond that is less risky than a mortgage bond. 
B)  The expected return on a corporate bond will generally exceed the bond's yield to maturity. 
C)  If a bond's coupon rate exceeds its yield to maturity, then its expected return to investors exceeds the yield to maturity. 
D)  Under our bankruptcy laws, any firm that is in financial distress will be forced to declare bankruptcy and then be liquidated. 
E)  All else equal, senior debt generally has a lower yield to maturity than subordinated debt. 
A)  An indenture is a bond that is less risky than a mortgage bond. 
B)  The expected return on a corporate bond will generally exceed the bond's yield to maturity. 
C)  If a bond's coupon rate exceeds its yield to maturity, then its expected return to investors exceeds the yield to maturity. 
D)  Under our bankruptcy laws, any firm that is in financial distress will be forced to declare bankruptcy and then be liquidated. 
E)  All else equal, senior debt generally has a lower yield to maturity than subordinated debt.

Question 14

Which of the following statements is NOT CORRECT?

Accepted Answer

A)  The expected return on a corporate bond must be less than its promised return if the probability of default is greater than zero. 
B)  All else equal, senior debt has less default risk than subordinated debt. 
C)  A company's bond rating is affected by its financial ratios and provisions in its indenture. 
D)  Under Chapter 11 of the Bankruptcy Act, the assets of a firm that declares bankruptcy must be liquidated, and the sale proceeds must be used to pay off its debt according to the seniority of the debt as spelled out in the Act. 
E)  All else equal, secured debt is less risky than unsecured debt. 
A)  The expected return on a corporate bond must be less than its promised return if the probability of default is greater than zero. 
B)  All else equal, senior debt has less default risk than subordinated debt. 
C)  A company's bond rating is affected by its financial ratios and provisions in its indenture. 
D)  Under Chapter 11 of the Bankruptcy Act, the assets of a firm that declares bankruptcy must be liquidated, and the sale proceeds must be used to pay off its debt according to the seniority of the debt as spelled out in the Act. 
E)  All else equal, secured debt is less risky than unsecured debt.

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A)  If their maturities and other characteristics were the same, a 5% coupon bond would have more interest rate price risk than a 10% coupon bond. 
B)  A 10-year coupon bond would have more reinvestment rate risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of reinvestment rate risk. 
C)  A 10-year coupon bond would have more interest rate price risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of interest rate price risk. 
D)  If their maturities and other characteristics were the same, a 5% coupon bond would have less interest rate price risk than a 10% coupon bond. 
E)  A zero coupon bond of any maturity will have more interest rate price risk than any coupon bond, even a perpetuity. 
A)  If their maturities and other characteristics were the same, a 5% coupon bond would have more interest rate price risk than a 10% coupon bond. 
B)  A 10-year coupon bond would have more reinvestment rate risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of reinvestment rate risk. 
C)  A 10-year coupon bond would have more interest rate price risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of interest rate price risk. 
D)  If their maturities and other characteristics were the same, a 5% coupon bond would have less interest rate price risk than a 10% coupon bond. 
E)  A zero coupon bond of any maturity will have more interest rate price risk than any coupon bond, even a perpetuity.

Question 16

The YTMs of three $1,000 face value bonds that mature in 10 years and have the same level of risk are equal.Bond A has an 8% annual coupon,Bond B has a 10% annual coupon,and Bond C has a 12% annual coupon.Bond B sells at par.Assuming interest rates remain constant for the next 10 years,which of the following statements is CORRECT?

Accepted Answer

A)  Since the bonds have the same YTM, they should all have the same price, and since interest rates are not expected to change, their prices should all remain at their current levels until maturity. 
B)  Bond C sells at a premium (its price is greater than par), and its price is expected to increase over the next year. 
C)  Bond A sells at a discount (its price is less than par), and its price is expected to increase over the next year. 
D)  Over the next year, Bond A's price is expected to decrease, Bond B's price is expected to stay the same, and Bond C's price is expected to increase. 
E)  Bond A's current yield will increase each year. 
A)  Since the bonds have the same YTM, they should all have the same price, and since interest rates are not expected to change, their prices should all remain at their current levels until maturity. 
B)  Bond C sells at a premium (its price is greater than par), and its price is expected to increase over the next year. 
C)  Bond A sells at a discount (its price is less than par), and its price is expected to increase over the next year. 
D)  Over the next year, Bond A's price is expected to decrease, Bond B's price is expected to stay the same, and Bond C's price is expected to increase. 
E)  Bond A's current yield will increase each year.

Question 17

Which of the following statements is CORRECT?

Accepted Answer

A)  Most sinking funds require the issuer to provide funds to a trustee, who saves the money so that it will be available to pay off bondholders when the bonds mature. 
B)  A sinking fund provision makes a bond more risky to investors at the time of issuance. 
C)  Sinking fund provisions never require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time. 
D)  If interest rates have increased since a company issued bonds with a sinking fund, the company is less likely to retire the bonds by buying them back in the open market, as opposed to calling them in at the sinking fund call price. 
E)  Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest rates decline after the bond has been issued. 
A)  Most sinking funds require the issuer to provide funds to a trustee, who saves the money so that it will be available to pay off bondholders when the bonds mature. 
B)  A sinking fund provision makes a bond more risky to investors at the time of issuance. 
C)  Sinking fund provisions never require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time. 
D)  If interest rates have increased since a company issued bonds with a sinking fund, the company is less likely to retire the bonds by buying them back in the open market, as opposed to calling them in at the sinking fund call price. 
E)  Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest rates decline after the bond has been issued.

Question 18

Which of the following statements is NOT CORRECT?

Accepted Answer

A)  All else equal, bonds with longer maturities have more interest rate (price) risk than bonds with shorter maturities. 
B)  If a bond is selling at its par value, its current yield equals its yield to maturity. 
C)  If a bond is selling at a premium, its current yield will be greater than its yield to maturity. 
D)  All else equal, bonds with larger coupons have greater interest rate (price) risk than bonds with smaller coupons. 
E)  If a bond is selling at a discount to par, its current yield will be less than its yield to maturity. 
A)  All else equal, bonds with longer maturities have more interest rate (price) risk than bonds with shorter maturities. 
B)  If a bond is selling at its par value, its current yield equals its yield to maturity. 
C)  If a bond is selling at a premium, its current yield will be greater than its yield to maturity. 
D)  All else equal, bonds with larger coupons have greater interest rate (price) risk than bonds with smaller coupons. 
E)  If a bond is selling at a discount to par, its current yield will be less than its yield to maturity.

Question 19

A bond that is callable has a chance of being retired earlier than its stated term to maturity.Therefore,if the yield curve is upward sloping,an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

Accepted Answer

A) True 
 B)False

Question 20

Assume that all interest rates in the economy decline from 10% to 9%.Which of the following bonds would have the largest percentage increase in price?

Accepted Answer

A)  A 1-year bond with a 15% coupon. 
B)  A 3-year bond with a 10% coupon. 
C)  A 10-year zero coupon bond. 
D)  A 10-year bond with a 10% coupon. 
E)  An 8-year bond with a 9% coupon. 
A)  A 1-year bond with a 15% coupon. 
B)  A 3-year bond with a 10% coupon. 
C)  A 10-year zero coupon bond. 
D)  A 10-year bond with a 10% coupon. 
E)  An 8-year bond with a 9% coupon.

Exam 5: Bonds, bond Valuation, and Interest Rates

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

A 10-year bond pays an annual coupon,its YTM is 8%,and it currently trades at a premium.Which of the following statements is CORRECT?

A 10-year corporate bond has an annual coupon of 9%.The bond is currently selling at par ($1,000).Which of the following statements is NOT CORRECT?

Ranger Inc.would like to issue new 20-year bonds.Initially,the plan was to make the bonds non-callable.If the bonds were made callable after 5 years at a 5% call premium,how would this affect their required rate of return?

Which of the following statements is CORRECT?

If 10-year T-bonds have a yield of 6.2%,10-year corporate bonds yield 8.5%,the maturity risk premium on all 10-year bonds is 1.3%,and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds,what is the default risk premium on the corporate bond?

Assume that a 10-year Treasury bond has a 12% annual coupon,while a 15-year T-bond has an 8% annual coupon.Assume also that the yield curve is flat,and all Treasury securities have a 10% yield to maturity.Which of the following statements is CORRECT?

Under normal conditions,which of the following would be most likely to increase the coupon rate required to enable a bond to be issued at par?

Which of the following statements is CORRECT?

Which of the following statements is NOT CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is NOT CORRECT?

A bond that is callable has a chance of being retired earlier than its stated term to maturity.Therefore,if the yield curve is upward sloping,an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

Assume that all interest rates in the economy decline from 10% to 9%.Which of the following bonds would have the largest percentage increase in price?

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

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