Question 1

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 2

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 3

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 4

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

Question 5

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 6

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 7

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 8

A call provision gives bondholders the right to demand,or "call for," repayment of a bond.Typically,calls are exercised if interest rates rise,because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

Accepted Answer

A) True 
 B)False

Question 9

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 10

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 11

Bond A has a 9% annual coupon while Bond B has a 6% annual coupon.Both bonds have a 7% yield to maturity,and the YTM is expected to remain constant.Which of the following statements is CORRECT?

Accepted Answer

A) The prices of both bonds will remain unchanged. 
B) The price of Bond A will decrease over time, but the price of Bond B will increase over time. 
C) The prices of both bonds will increase by 7% per year. 
D) The prices of both bonds will increase over time, but the price of Bond A will increase by more. 
E) The price of Bond B will decrease over time, but the price of Bond A will increase over time. 
A) The prices of both bonds will remain unchanged. 
B) The price of Bond A will decrease over time, but the price of Bond B will increase over time. 
C) The prices of both bonds will increase by 7% per year. 
D) The prices of both bonds will increase over time, but the price of Bond A will increase by more. 
E) The price of Bond B will decrease over time, but the price of Bond A will increase over time.

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

Junk bonds are high risk,high yield debt instruments.They are often used to finance leveraged buyouts and mergers,and to provide financing to companies of questionable financial strength.

Accepted Answer

A) True 
 B)False

Question 14

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 15

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 16

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 17

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 18

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 19

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 20

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%

Exam 4: Bond Valuation

Which of the following statements is CORRECT?

Which of the following statements is NOT CORRECT?

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?

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

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)?

A call provision gives bondholders the right to demand,or "call for," repayment of a bond.Typically,calls are exercised if interest rates rise,because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

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.

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

Bond A has a 9% annual coupon while Bond B has a 6% annual coupon.Both bonds have a 7% yield to maturity,and the YTM is expected to remain constant.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?

Junk bonds are high risk,high yield debt instruments.They are often used to finance leveraged buyouts and mergers,and to provide financing to companies of questionable financial strength.

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?

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?

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)?

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

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?