Question 1

Which of the following statements is CORRECT?

Accepted Answer

A) Senior debt is debt that has been more recently issued, and in bankruptcy it is paid off after junior debt because the junior debt was issued first. 
B) A company's subordinated debt has less default risk than its senior debt. 
C) Convertible bonds generally have lower coupon rates than non-convertible bonds of similar default risk because they offer the possibility of capital gains. 
D) Junk bonds typically provide a lower yield to maturity than investment-grade bonds. 
E) A debenture is a secured bond that is backed by some or all of the firm's fixed assets. 
A) Senior debt is debt that has been more recently issued, and in bankruptcy it is paid off after junior debt because the junior debt was issued first. 
B) A company's subordinated debt has less default risk than its senior debt. 
C) Convertible bonds generally have lower coupon rates than non-convertible bonds of similar default risk because they offer the possibility of capital gains. 
D) Junk bonds typically provide a lower yield to maturity than investment-grade bonds. 
E) A debenture is a secured bond that is backed by some or all of the firm's fixed assets.

Question 2

Assume that interest rates on 20-year Treasury and corporate bonds with different ratings,all of which are noncallable,are as follows:
​
  The differences in rates among these issues were most probably caused primarily by:

Accepted Answer

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

Question 3

Sadik Inc.'s bonds currently sell for $1,180 and have a par value of $1,000.They pay a $105 annual coupon and have a 15-year maturity,but they can be called in 5 years at $1,100.What is their yield to call (YTC)?

Accepted Answer

A) 6.63% 
B) 6.98% 
C) 7.35% 
D) 7.74% 
E) 8.12% 
A) 6.63% 
B) 6.98% 
C) 7.35% 
D) 7.74% 
E) 8.12%

Question 4

If a firm raises capital by selling new bonds,it could be called the "issuing firm," and the coupon rate is generally set equal to the required rate on bonds of equal risk.

Accepted Answer

A) True 
 B)False

Question 5

Ryngaert Inc.recently issued noncallable bonds that mature in 15 years.They have a par value of $1,000 and an annual coupon of 5.7%.If the current market interest rate is 7.0%,at what price should the bonds sell?

Accepted Answer

A) $817.12 
B) $838.07 
C) $859.56 
D) $881.60 
E) $903.64 
A) $817.12 
B) $838.07 
C) $859.56 
D) $881.60 
E) $903.64

Question 6

Malko Enterprises' bonds currently sell for $1,050.They have a 6-year maturity,an annual coupon of $75,and a par value of $1,000.What is their current yield?

Accepted Answer

A) 7.14% 
B) 7.50% 
C) 7.88% 
D) 8.27% 
E) 8.68% 
A) 7.14% 
B) 7.50% 
C) 7.88% 
D) 8.27% 
E) 8.68%

Question 7

Which of the following statements is CORRECT?

Accepted Answer

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

Question 8

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 9

Which of the following bonds has the greatest price risk?

Accepted Answer

A) A 10-year $100 annuity. 
B) A 10-year, $1,000 face value, zero coupon bond. 
C) A 10-year, $1,000 face value, 10% coupon bond with annual interest payments. 
D) All 10-year bonds have the same price risk since they have the same maturity. 
E) A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments. 
A) A 10-year $100 annuity. 
B) A 10-year, $1,000 face value, zero coupon bond. 
C) A 10-year, $1,000 face value, 10% coupon bond with annual interest payments. 
D) All 10-year bonds have the same price risk since they have the same maturity. 
E) A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments.

Question 10

Taussig Corp.'s bonds currently sell for $1,150.They have a 6.35% annual coupon rate and a 20-year maturity,but they can be called in 5 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?

Accepted Answer

A) 3.42% 
B) 3.60% 
C) 3.79% 
D) 3.99% 
E) 4.20% 
A) 3.42% 
B) 3.60% 
C) 3.79% 
D) 3.99% 
E) 4.20%

Question 11

Which of the following statements is CORRECT?

Accepted Answer

A) 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. 
B) Long-term bonds have less price risk but more reinvestment risk than short-term bonds. 
C) If interest rates increase, all bond prices will increase, but the increase will be greater for bonds that have less price risk. 
D) Relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more price risk but less reinvestment risk. 
E) Long-term bonds have less price risk and also less reinvestment risk than short-term bonds. 
A) 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. 
B) Long-term bonds have less price risk but more reinvestment risk than short-term bonds. 
C) If interest rates increase, all bond prices will increase, but the increase will be greater for bonds that have less price risk. 
D) Relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more price risk but less reinvestment risk. 
E) Long-term bonds have less price risk and also less reinvestment risk than short-term bonds.

Question 12

Radoski Corporation's bonds make an annual coupon interest payment of 7.35%.The bonds have a par value of $1,000,a current price of $1,130,and mature in 12 years.What is the yield to maturity on these bonds?

Accepted Answer

A) 5.52% 
B) 5.82% 
C) 6.11% 
D) 6.41% 
E) 6.73% 
A) 5.52% 
B) 5.82% 
C) 6.11% 
D) 6.41% 
E) 6.73%

Question 13

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

Accepted Answer

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

Question 14

Which of the following statements is CORRECT?

Accepted Answer

A) 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. 
B) 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. 
C) If a bond sells at par, then its current yield will be less than its yield to maturity. 
D) If a bond sells for less than par, then its yield to maturity is less than its coupon rate. 
E) A discount bond's price declines each year until it matures, when its value equals its par value. 
A) 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. 
B) 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. 
C) If a bond sells at par, then its current yield will be less than its yield to maturity. 
D) If a bond sells for less than par, then its yield to maturity is less than its coupon rate. 
E) A discount bond's price declines each year until it matures, when its value equals its par value.

Question 15

A 25-year,$1,000 par value bond has an 8.5% annual payment coupon.The bond currently sells for $925.If the yield to maturity remains at its current rate,what will the price be 5 years from now?

Accepted Answer

A) $884.19 
B) $906.86 
C) $930.11 
D) $953.36 
E) $977.20 
A) $884.19 
B) $906.86 
C) $930.11 
D) $953.36 
E) $977.20

Question 16

Bonds A,B,and C all have a maturity of 10 years and a yield to maturity of 7%.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.None of the bonds can be called.Which of the following statements is CORRECT?

Accepted Answer

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

Question 17

A 12-year bond has an annual coupon of 9%.The coupon rate will remain fixed until the bond matures.The bond has a yield to maturity of 7%.Which of the following statements is CORRECT?

Accepted Answer

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

Question 18

Which of the following statements is CORRECT?

Accepted Answer

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

Question 19

Which of the following statements is CORRECT?

Accepted Answer

A) All else equal, secured debt is more risky than unsecured debt. 
B) The expected return on a corporate bond must be greater than its promised return if the probability of default is greater than zero. 
C) All else equal, senior debt has more default risk than subordinated debt. 
D) A company's bond rating is affected by its financial ratios but not by provisions in its indenture. 
E) Under Chapter 7 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 claims against it according to the priority of the claims as spelled out in the Act. 
A) All else equal, secured debt is more risky than unsecured debt. 
B) The expected return on a corporate bond must be greater than its promised return if the probability of default is greater than zero. 
C) All else equal, senior debt has more default risk than subordinated debt. 
D) A company's bond rating is affected by its financial ratios but not by provisions in its indenture. 
E) Under Chapter 7 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 claims against it according to the priority of the claims as spelled out in the Act.

Question 20

Which of the following statements is CORRECT?

Accepted Answer

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

Exam 7: Bonds and Their Valuation

Which of the following statements is CORRECT?

Assume that interest rates on 20-year Treasury and corporate bonds with different ratings,all of which are noncallable,are as follows: ​ The differences in rates among these issues were most probably caused primarily by:

Sadik Inc.'s bonds currently sell for $1,180 and have a par value of $1,000.They pay a $105 annual coupon and have a 15-year maturity,but they can be called in 5 years at $1,100.What is their yield to call (YTC)?

If a firm raises capital by selling new bonds,it could be called the "issuing firm," and the coupon rate is generally set equal to the required rate on bonds of equal risk.

Ryngaert Inc.recently issued noncallable bonds that mature in 15 years.They have a par value of $1,000 and an annual coupon of 5.7%.If the current market interest rate is 7.0%,at what price should the bonds sell?

Malko Enterprises' bonds currently sell for $1,050.They have a 6-year maturity,an annual coupon of $75,and a par value of $1,000.What is their current yield?

Which of the following statements is CORRECT?

Which of the following bonds has the greatest price risk?

Which of the following statements is CORRECT?

Radoski Corporation's bonds make an annual coupon interest payment of 7.35%.The bonds have a par value of $1,000,a current price of $1,130,and mature in 12 years.What is the yield to maturity on these bonds?

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

Which of the following statements is CORRECT?

A 25-year,$1,000 par value bond has an 8.5% annual payment coupon.The bond currently sells for $925.If the yield to maturity remains at its current rate,what will the price be 5 years from now?

Bonds A,B,and C all have a maturity of 10 years and a yield to maturity of 7%.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.None of the bonds can be called.Which of the following statements is CORRECT?

A 12-year bond has an annual coupon of 9%.The coupon rate will remain fixed until the bond matures.The bond has a yield to maturity of 7%.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

Financial Markets and Institutions

Financial Statements, cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Interest Rates

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Real Options and Other Topics in Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and Share Repurchases

Working Capital Management

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Hybrid Financing: Preferred Stock, leasing, warrants, and Convertibles

Mergers and Acquisitions

Continuous Compounding and Discounting

Zero Coupon Bonds

Bankruptcy and Reorganization

Calculating Beta Coefficients

Using the Capm to Estimate the Risk-Adjusted Cost of Capital

Techniques for Measuring Beta Risk

Degree of Leverage

Filters

Assume that interest rates on 20-year Treasury and corporate bonds with different ratings,all of which are noncallable,are as follows: The differences in rates among these issues were most probably caused primarily by: