Question 1

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. E

Question 2

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 D

Question 3

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% E

Question 4

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 5

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 6

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 7

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 8

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 9

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 10

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.

Question 11

5-year Treasury bonds yield 5.5%.The inflation premium (IP)is 1.9%,and the maturity risk premium (MRP)on 5-year bonds is 0.4%.What is the real risk-free rate,r*?

Accepted Answer

A) 2.59% 
B) 2.88% 
C) 3.20% 
D) 3.52% 
E) 3.87% 
A) 2.59% 
B) 2.88% 
C) 3.20% 
D) 3.52% 
E) 3.87%

Question 12

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 13

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 14

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 15

Bonds A,B,and C all have a maturity of 15 years and a yield to maturity of 9%.Bond A's price exceeds its par value,Bond B's price equals its par value,and Bond C's price is less than its par value.Which of the following statements is CORRECT?

Accepted Answer

A) Bond A has the most interest rate risk. 
B) If the yield to maturity on the three bonds remains constant, the prices of the three bonds will remain the same over the next year. 
C) If the yield to maturity on each bond increases to 8%, the prices of all three bonds will decline. 
D) Bond C sells at a premium over its par value. 
E) If the yield to maturity on each bond decreases to 6%, Bond A will have the largest percentage increase in its price. 
A) Bond A has the most interest rate risk. 
B) If the yield to maturity on the three bonds remains constant, the prices of the three bonds will remain the same over the next year. 
C) If the yield to maturity on each bond increases to 8%, the prices of all three bonds will decline. 
D) Bond C sells at a premium over its par value. 
E) If the yield to maturity on each bond decreases to 6%, Bond A will have the largest percentage increase in its price.

Question 16

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 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) 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 19

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 20

Which of the following statements is CORRECT?

Accepted Answer

A) A bond's current yield must always be either equal to its yield to maturity or between its yield to maturity and its coupon rate. 
B) If a bond sells at par, then its current yield will be less than its yield to maturity. 
C) If a bond sells for less than par, then its yield to maturity is less than its coupon rate. 
D) A discount bond's price declines each year until it matures, when its value equals its par value. 
E) Assume that two bonds have equal maturities and are of equal risk, but one bond sells at par while the other sells at a premium above par. The premium bond must have a lower current yield and a higher capital gains yield than the par bond. 
A) A bond's current yield must always be either equal to its yield to maturity or between its yield to maturity and its coupon rate. 
B) If a bond sells at par, then its current yield will be less than its yield to maturity. 
C) If a bond sells for less than par, then its yield to maturity is less than its coupon rate. 
D) A discount bond's price declines each year until it matures, when its value equals its par value. 
E) Assume that two bonds have equal maturities and are of equal risk, but one bond sells at par while the other sells at a premium above par. The premium bond must have a lower current yield and a higher capital gains yield than the par bond.

Exam 4: Bond Valuation

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 statements is NOT 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?

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?

Which of the following statements is CORRECT?

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.

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?

5-year Treasury bonds yield 5.5%.The inflation premium (IP)is 1.9%,and the maturity risk premium (MRP)on 5-year bonds is 0.4%.What is the real risk-free rate,r*?

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

Bonds A,B,and C all have a maturity of 15 years and a yield to maturity of 9%.Bond A's price exceeds its par value,Bond B's price equals its par value,and Bond C's price is less than its par value.Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

An Overview of Financial Management and the Financial Environment

Risk and Return: Part I

Risk and Return: Part Ii

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Basic Stock Valuation

Corporate Valuation and Financial Planning

Corporate Governance

Determining the Cost of Capital

Capital Budgeting: Decision Rules

Cash Flow Estimation and Risk Analysis

Real Options

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Dynamic Capital Structures and Corporate Valuation

Initial Public Offerings, investment Banking, and Financial Restructuring

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Supply Chains and Working Capital Management

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Mergers and Corporate Control

Multinational Financial Management

Time Value of Money

Basic Financial Tools: a Review

Pension Plan Management

Financial Management in Not-For-Profit Businesses

a Values of the Areas Under the Standard Normal

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