Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)  The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates. 
B)  You hold two bonds. One is a 10-year, zero coupon, bond and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline. 
C)  The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates. 
D)  The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates. 
E)  You hold two bonds. One is a 10-year, zero coupon, issue and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the larger percentage decline. 
A)  The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates. 
B)  You hold two bonds. One is a 10-year, zero coupon, bond and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline. 
C)  The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates. 
D)  The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates. 
E)  You hold two bonds. One is a 10-year, zero coupon, issue and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the larger percentage decline.

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)  All else equal, a bond that has a coupon rate of 10% will sell at a discount if the required return for bonds of similar risk is 8%. 
B)  The price of a discount bond will increase over time, assuming that the bond's yield to maturity remains constant. 
C)  For a given firm, its debentures are likely to have a lower yield to maturity than its mortgage bonds. 
D)  When large firms are in financial distress, they are almost always liquidated, whereas smaller firms are generally reorganized. 
E)  The total return on a bond during a given year consists only of the coupon interest payments received. 
A)  All else equal, a bond that has a coupon rate of 10% will sell at a discount if the required return for bonds of similar risk is 8%. 
B)  The price of a discount bond will increase over time, assuming that the bond's yield to maturity remains constant. 
C)  For a given firm, its debentures are likely to have a lower yield to maturity than its mortgage bonds. 
D)  When large firms are in financial distress, they are almost always liquidated, whereas smaller firms are generally reorganized. 
E)  The total return on a bond during a given year consists only of the coupon interest payments received.

Question 3

Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

Accepted Answer

A)  Market interest rates rise sharply. 
B)  Market interest rates decline sharply. 
C)  The company's financial situation deteriorates significantly. 
D)  Inflation increases significantly. 
E)  The company's bonds are downgraded. 
A)  Market interest rates rise sharply. 
B)  Market interest rates decline sharply. 
C)  The company's financial situation deteriorates significantly. 
D)  Inflation increases significantly. 
E)  The company's bonds are downgraded.

Question 4

Currently,Bruner Inc.'s bonds sell for $1,250.They pay a $120 annual coupon,have a 15-year maturity,and a $1,000 par value,but they can be called in 5 years at $1,050.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.What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM.)

Accepted Answer

A)  2.11% 
B)  2.32% 
C)  2.55% 
D)  2.80% 
E)  3.09% 
A)  2.11% 
B)  2.32% 
C)  2.55% 
D)  2.80% 
E)  3.09%

Question 5

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 6

Squire Inc.'s 5-year bonds yield 6.75%,and 5-year T-bonds yield 4.80%.The real risk-free rate is r* = 2.75%,the inflation premium for 5-year bonds is IP = 1.65%,the default risk premium for Squire's bonds is DRP = 1.20% versus zero for T-bonds,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 liquidity premium (LP)on Squire's bonds?

Accepted Answer

A)  0.49% 
B)  0.55% 
C)  0.61% 
D)  0.68% 
E)  0.75% 
A)  0.49% 
B)  0.55% 
C)  0.61% 
D)  0.68% 
E)  0.75%

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)  If a coupon bond is selling at a discount, then the bond's expected capital gains yield is negative. 
B)  If a bond is selling at a discount, the yield to call is a better measure of the expected return than the yield to maturity. 
C)  The current yield on Bond A exceeds the current yield on Bond B. Therefore, Bond A must have a higher yield to maturity than Bond B. 
D)  If a coupon bond is selling at par, its current yield equals its yield to maturity. 
E)  If a coupon bond is selling at a premium, then the bond's current yield is zero. 
A)  If a coupon bond is selling at a discount, then the bond's expected capital gains yield is negative. 
B)  If a bond is selling at a discount, the yield to call is a better measure of the expected return than the yield to maturity. 
C)  The current yield on Bond A exceeds the current yield on Bond B. Therefore, Bond A must have a higher yield to maturity than Bond B. 
D)  If a coupon bond is selling at par, its current yield equals its yield to maturity. 
E)  If a coupon bond is selling at a premium, then the bond's current yield is zero.

Question 8

Stephenson Co.'s 15-year bond with a face value of $1,000 currently sells for $850.Which of the following statements is CORRECT?

Accepted Answer

A)  The bond's current yield exceeds its yield to maturity. 
B)  The bond's yield to maturity is greater than its coupon rate. 
C)  The bond's current yield is equal to its coupon rate. 
D)  If the yield to maturity stays constant until the bond matures, the bond's price will remain at $850. 
E)  The bond's coupon rate exceeds its current yield. 
A)  The bond's current yield exceeds its yield to maturity. 
B)  The bond's yield to maturity is greater than its coupon rate. 
C)  The bond's current yield is equal to its coupon rate. 
D)  If the yield to maturity stays constant until the bond matures, the bond's price will remain at $850. 
E)  The bond's coupon rate exceeds its current yield.

Question 9

You are considering three different bonds for your portfolio.Each bond has a 10-year maturity and a yield to maturity of 10%.Bond X has an 8% annual coupon,Bond Y has a 10% annual coupon,and Bond Z has a 12% annual coupon.Which of the following statements is CORRECT?

Accepted Answer

A)  Bond X has the greatest reinvestment rate risk. 
B)  If market interest rates decline, all of the bonds will have an increase in price, and Bond Z will have the largest percentage increase in price. 
C)  If market interest rates remain at 10%, Bond Z's price will be 10% higher one year from today. 
D)  If market interest rates increase, Bond X's price will increase, Bond Z's price will decline, and Bond Y's price will remain the same. 
E)  If the bonds' market interest rates remain at 10%, Bond Z's price will be lower one year from now than it is today. 
A)  Bond X has the greatest reinvestment rate risk. 
B)  If market interest rates decline, all of the bonds will have an increase in price, and Bond Z will have the largest percentage increase in price. 
C)  If market interest rates remain at 10%, Bond Z's price will be 10% higher one year from today. 
D)  If market interest rates increase, Bond X's price will increase, Bond Z's price will decline, and Bond Y's price will remain the same. 
E)  If the bonds' market interest rates remain at 10%, Bond Z's price will be lower one year from now than it is today.

Question 10

Field Industries' outstanding bonds have a 25-year maturity and $1,000 par value.Their nominal yield to maturity is 9.25%,they pay interest semiannually,and they sell at a price of $850.What is the bond's nominal (annual)coupon interest rate?

Accepted Answer

A)  6.27% 
B)  6.60% 
C)  6.95% 
D)  7.32% 
E)  7.70% 
A)  6.27% 
B)  6.60% 
C)  6.95% 
D)  7.32% 
E)  7.70%

Question 11

Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?

Accepted Answer

A)  20-year, 10% coupon bond. 
B)  20-year, 5% coupon bond. 
C)  1-year, 10% coupon bond. 
D)  20-year, zero coupon bond. 
E)  10-year, zero coupon bond. 
A)  20-year, 10% coupon bond. 
B)  20-year, 5% coupon bond. 
C)  1-year, 10% coupon bond. 
D)  20-year, zero coupon bond. 
E)  10-year, zero coupon bond.

Question 12

CMS Corporation's balance sheet as of today is as follows: $$\begin{array} { l r } 
\text { Long-term debt (bonds, at par) } & \text { \$10,000,00 } \
\text { Preferred stock } & 2,000,000 \
\text { Common stock (\$10 par) } & 10,000,000 \
\text { Retained earning } & 4,000,000 \
\hline \text { Tatal debt and equity } & 26000000
\end{array}$$
The bonds have a 4.0% coupon rate,payable semiannually,and a par value of $1,000.They mature exactly 10 years from today.The yield to maturity is 12%,so the bonds now sell below par.What is the current market value of the firm's debt?

Accepted Answer

A)  $5,276,731 
B)  $5,412,032 
C)  $5,547,332 
D)  $7,706,000 
E)  $7,898,650 
A)  $5,276,731 
B)  $5,412,032 
C)  $5,547,332 
D)  $7,706,000 
E)  $7,898,650

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)  All else equal, an increase in interest rates will have a greater effect on the prices of short-term than long-term bonds. 
B)  All else equal, an increase in interest rates will have a greater effect on higher-coupon bonds than it will have on lower-coupon bonds. 
C)  If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value. 
D)  If a bond's yield to maturity exceeds its coupon rate, the bond's current yield must be less than its coupon rate. 
E)  If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price regardless of the bond's coupon rates. 
A)  All else equal, an increase in interest rates will have a greater effect on the prices of short-term than long-term bonds. 
B)  All else equal, an increase in interest rates will have a greater effect on higher-coupon bonds than it will have on lower-coupon bonds. 
C)  If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value. 
D)  If a bond's yield to maturity exceeds its coupon rate, the bond's current yield must be less than its coupon rate. 
E)  If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price regardless of the bond's coupon rates.

Question 14

There is an inverse relationship between bonds' quality ratings and their required rates of return.Thus,the required return is lowest for AAA-rated bonds,and required returns increase as the ratings get lower.

Accepted Answer

A) True 
 B)False

Question 15

A bond that had a 20-year original maturity with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity.(Assume that the bonds have equal default risk and equal coupon rates,and they cannot be called.)

Accepted Answer

A) True 
 B)False

Question 16

A Treasury bond has an 8% annual coupon and a 7.5% yield to maturity.Which of the following statements is CORRECT?

Accepted Answer

A)  The bond has a current yield greater than 8%. 
B)  The bond sells at a discount. 
C)  The bond's required rate of return is less than 7.5%. 
D)  If the yield to maturity remains constant, the price of the bond will decline over time. 
E)  The bond sells at a price below par. 
A)  The bond has a current yield greater than 8%. 
B)  The bond sells at a discount. 
C)  The bond's required rate of return is less than 7.5%. 
D)  If the yield to maturity remains constant, the price of the bond will decline over time. 
E)  The bond sells at a price below par.

Question 17

A 15-year bond has an annual coupon rate of 8%.The coupon rate will remain fixed until the bond matures.The bond has a yield to maturity of 6%.Which of the following statements is CORRECT?

Accepted Answer

A)  The bond is currently selling at a price below its par value. 
B)  If market interest rates remain unchanged, the bond's price one year from now will be lower than it is today. 
C)  The bond should currently be selling at its par value. 
D)  If market interest rates remain unchanged, the bond's price one year from now will be higher than it is today. 
E)  If market interest rates decline, the price of the bond will also decline. 
A)  The bond is currently selling at a price below its par value. 
B)  If market interest rates remain unchanged, the bond's price one year from now will be lower than it is today. 
C)  The bond should currently be selling at its par value. 
D)  If market interest rates remain unchanged, the bond's price one year from now will be higher than it is today. 
E)  If market interest rates decline, the price of the bond will also decline.

Question 18

Chandler Co.'s 5-year bonds yield 7.00%,and 5-year T-bonds yield 5.15%.The real risk-free rate is r* = 3.0%,the inflation premium for 5-year bonds is IP = 1.75%,the liquidity premium for Chandler's bonds is LP = 0.75% versus zero for T-bonds,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 default risk premium (DRP)on Chandler's bonds?

Accepted Answer

A)  0.99% 
B)  1.10% 
C)  1.21% 
D)  1.33% 
E)  1.46% 
A)  0.99% 
B)  1.10% 
C)  1.21% 
D)  1.33% 
E)  1.46%

Question 19

Other things equal,a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

Accepted Answer

A) True 
 B)False

Question 20

Assume that interest rates on 15-year noncallable Treasury and corporate bonds with different ratings are as follows: $$\text { T-6and =7.72\% } \quad \mathbf { A } = 9.64 \%$$
$\begin{array} { l l } \mathrm { AAA } = 8.72 \% & \mathrm { BBB } = 10.18 \% \end{array}$
The differences in rates among these issues were most probably caused primarily by:

Accepted Answer

A)  Tax effects. 
B)  Default risk differences. 
C)  Maturity risk differences. 
D)  Inflation differences. 
E)  Real risk-free rate differences. 
A)  Tax effects. 
B)  Default risk differences. 
C)  Maturity risk differences. 
D)  Inflation differences. 
E)  Real risk-free rate differences.

Exam 5: Bonds, bond Valuation, and Interest Rates

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

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?

Stephenson Co.'s 15-year bond with a face value of $1,000 currently sells for $850.Which of the following statements is CORRECT?

You are considering three different bonds for your portfolio.Each bond has a 10-year maturity and a yield to maturity of 10%.Bond X has an 8% annual coupon,Bond Y has a 10% annual coupon,and Bond Z has a 12% annual coupon.Which of the following statements is CORRECT?

Field Industries' outstanding bonds have a 25-year maturity and $1,000 par value.Their nominal yield to maturity is 9.25%,they pay interest semiannually,and they sell at a price of $850.What is the bond's nominal (annual)coupon interest rate?

Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?

Which of the following statements is CORRECT?

There is an inverse relationship between bonds' quality ratings and their required rates of return.Thus,the required return is lowest for AAA-rated bonds,and required returns increase as the ratings get lower.

A bond that had a 20-year original maturity with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity.(Assume that the bonds have equal default risk and equal coupon rates,and they cannot be called.)

A Treasury bond has an 8% annual coupon and a 7.5% yield to maturity.Which of the following statements is CORRECT?

A 15-year bond has an annual coupon rate of 8%.The coupon rate will remain fixed until the bond matures.The bond has a yield to maturity of 6%.Which of the following statements is CORRECT?

Other things equal,a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

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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