Question 1

Cornwall Corporation is planning to raise $1,000,000 to finance a new plant.Which of the following statements is CORRECT?

Accepted Answer

A) If debt is used to raise the million dollars, but $500,000 is raised as first mortgage bonds on the new plant and $500,000 as debentures, the interest rate on the first mortgage bonds would be lower than it would be if the entire $1 million were raised by selling first mortgage bonds. 
B) If two tiers of debt are used (with one senior and one subordinated debt class), the subordinated debt will carry a lower interest rate. 
C) If debt is used to raise the million dollars, the cost of the debt would be lower if the debt were in the form of a fixed-rate bond rather than a floating-rate bond. 
D) If debt is used to raise the million dollars, the cost of the debt would be higher if the debt were in the form of a mortgage bond rather than an unsecured term loan. 
E) The company would be especially eager to have a call provision included in the indenture if its management thinks that interest rates are almost certain to rise in the foreseeable future. 
A) If debt is used to raise the million dollars, but $500,000 is raised as first mortgage bonds on the new plant and $500,000 as debentures, the interest rate on the first mortgage bonds would be lower than it would be if the entire $1 million were raised by selling first mortgage bonds. 
B) If two tiers of debt are used (with one senior and one subordinated debt class), the subordinated debt will carry a lower interest rate. 
C) If debt is used to raise the million dollars, the cost of the debt would be lower if the debt were in the form of a fixed-rate bond rather than a floating-rate bond. 
D) If debt is used to raise the million dollars, the cost of the debt would be higher if the debt were in the form of a mortgage bond rather than an unsecured term loan. 
E) The company would be especially eager to have a call provision included in the indenture if its management thinks that interest rates are almost certain to rise in the foreseeable future.

Question 2

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 3

The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds,other things held constant.

Accepted Answer

A) True 
 B)False

Question 4

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 5

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 6

Noncallable bonds that mature in 10 years were recently issued by Sternglass Inc.They have a par value of $1,000 and an annual coupon of 5.5%.If the current market interest rate is 7.0%,at what price should the bonds sell?

Accepted Answer

A) $829.21 
B) $850.47 
C) $872.28 
D) $894.65 
E) $917.01 
A) $829.21 
B) $850.47 
C) $872.28 
D) $894.65 
E) $917.01

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

The Gergen Group's 5-year bonds yield 6.85%,and 5-year T-bonds yield 4.75%.The real risk-free rate is r* = 2.80%,the default risk premium for Gergen's bonds is DRP = 0.85% versus zero for T-bonds,the liquidity premium on Gergen's bonds is LP = 1.25%,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 inflation premium (IP)on 5-year bonds?

Accepted Answer

A) 1.40% 
B) 1.55% 
C) 1.71% 
D) 1.88% 
E) 2.06% 
A) 1.40% 
B) 1.55% 
C) 1.71% 
D) 1.88% 
E) 2.06%

Question 9

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 10

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 11

Which of the following statements is CORRECT?

Accepted Answer

A) If the maturity risk premium (MRP) is greater than zero, then the yield curve must have an upward slope. 
B) Because long-term bonds are riskier than short-term bonds, yields on long-term Treasury bonds will always be higher than yields on short-term T-bonds. 
C) If the maturity risk premium (MRP) equals zero, the yield curve must be flat. 
D) The yield curve can never be downward sloping. 
E) If inflation is expected to increase in the future, and if the maturity risk premium (MRP) is greater than zero, then the yield curve will have an upward slope. 
A) If the maturity risk premium (MRP) is greater than zero, then the yield curve must have an upward slope. 
B) Because long-term bonds are riskier than short-term bonds, yields on long-term Treasury bonds will always be higher than yields on short-term T-bonds. 
C) If the maturity risk premium (MRP) equals zero, the yield curve must be flat. 
D) The yield curve can never be downward sloping. 
E) If inflation is expected to increase in the future, and if the maturity risk premium (MRP) is greater than zero, then the yield curve will have an upward slope.

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A) A bond is likely to be called if its market price is below its par value. 
B) Even if a bond's YTC exceeds its YTM, an investor with an investment horizon longer than the bond's maturity would be worse off if the bond were called. 
C) A bond is likely to be called if its market price is equal to its par value. 
D) A bond is likely to be called if it sells at a discount below par. 
E) A bond is likely to be called if its coupon rate is below its YTM. 
A) A bond is likely to be called if its market price is below its par value. 
B) Even if a bond's YTC exceeds its YTM, an investor with an investment horizon longer than the bond's maturity would be worse off if the bond were called. 
C) A bond is likely to be called if its market price is equal to its par value. 
D) A bond is likely to be called if it sells at a discount below par. 
E) A bond is likely to be called if its coupon rate is below its YTM.

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A) If a 10-year, $1,000 par, 10% coupon bond were issued at par, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond would sell at a premium above its $1,000 par value. 
B) Other things held constant, a corporation would rather issue noncallable bonds than callable bonds. 
C) Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond. 
D) Reinvestment rate risk is worse from an investor's standpoint than interest rate price risk if the investor has a short investment time horizon. 
E) If a 10-year, $1,000 par, zero coupon bond were issued at a price that gave investors a 10% yield to maturity, and if interest rates then dropped to the point where rd = YTM = 5%, the bond would sell at a premium over its $1,000 par value. 
A) If a 10-year, $1,000 par, 10% coupon bond were issued at par, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond would sell at a premium above its $1,000 par value. 
B) Other things held constant, a corporation would rather issue noncallable bonds than callable bonds. 
C) Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond. 
D) Reinvestment rate risk is worse from an investor's standpoint than interest rate price risk if the investor has a short investment time horizon. 
E) If a 10-year, $1,000 par, zero coupon bond were issued at a price that gave investors a 10% yield to maturity, and if interest rates then dropped to the point where rd = YTM = 5%, the bond would sell at a premium over its $1,000 par value.

Question 14

Which of the following statements is CORRECT?

Accepted Answer

A) All else equal, long-term bonds have less interest rate price risk than short-term bonds. 
B) All else equal, low-coupon bonds have less interest rate price risk than high-coupon bonds. 
C) All else equal, short-term bonds have less reinvestment rate risk than long-term bonds. 
D) All else equal, long-term bonds have less reinvestment rate risk than short-term bonds. 
E) All else equal, high-coupon bonds have less reinvestment rate risk than low-coupon bonds. 
A) All else equal, long-term bonds have less interest rate price risk than short-term bonds. 
B) All else equal, low-coupon bonds have less interest rate price risk than high-coupon bonds. 
C) All else equal, short-term bonds have less reinvestment rate risk than long-term bonds. 
D) All else equal, long-term bonds have less reinvestment rate risk than short-term bonds. 
E) All else equal, high-coupon bonds have less reinvestment rate risk than low-coupon bonds.

Question 15

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 16

A 25-year,$1,000 par value bond has an 8.5% annual coupon.The bond currently sells for $875.If the yield to maturity remains at its current rate,what will the price be 5 years from now?

Accepted Answer

A) $839.31 
B) $860.83 
C) $882.90 
D) $904.97 
E) $927.60 
A) $839.31 
B) $860.83 
C) $882.90 
D) $904.97 
E) $927.60

Question 17

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 18

Sentry Corp.bonds have an annual coupon payment of 7.25%.The bonds have a par value of $1,000,a current price of $1,125,and they will mature in 13 years.What is the yield to maturity on these bonds?

Accepted Answer

A) 5.56% 
B) 5.85% 
C) 6.14% 
D) 6.45% 
E) 6.77% 
A) 5.56% 
B) 5.85% 
C) 6.14% 
D) 6.45% 
E) 6.77%

Question 19

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.

Exam 4: Bond Valuation

Cornwall Corporation is planning to raise $1,000,000 to finance a new plant.Which of the following statements is 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.

The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds,other things held constant.

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?

Noncallable bonds that mature in 10 years were recently issued by Sternglass Inc.They have a par value of $1,000 and an annual coupon of 5.5%.If the current market interest rate is 7.0%,at what price should the bonds sell?

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?

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

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?

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?

Which of the following statements is CORRECT?

A 25-year,$1,000 par value bond has an 8.5% annual coupon.The bond currently sells for $875.If the yield to maturity remains at its current rate,what will the price be 5 years from now?

Which of the following statements is CORRECT?

Sentry Corp.bonds have an annual coupon payment of 7.25%.The bonds have a par value of $1,000,a current price of $1,125,and they will mature in 13 years.What is the yield to maturity on these bonds?

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?

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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