Question 1

Which of the following statements is CORRECT?

Accepted Answer

A) A bond is likely to be called if its coupon rate is below its YTM. 
B) A bond is likely to be called if its market price is below its par value. 
C) 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. 
D) A bond is likely to be called if its market price is equal to its par value. 
E) A bond is likely to be called if it sells at a discount below par. 
A) A bond is likely to be called if its coupon rate is below its YTM. 
B) A bond is likely to be called if its market price is below its par value. 
C) 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. 
D) A bond is likely to be called if its market price is equal to its par value. 
E) A bond is likely to be called if it sells at a discount below par.

Question 2

Assume that a noncallable 10-year T-bond has a 12% annual coupon,while a 15-year noncallable 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 would increase, but the 15-year bond would have a larger percentage increase in price. 
B) If interest rates decline, the prices of both bonds would increase, but the 10-year bond would have a larger percentage increase in price. 
C) The 10-year bond would sell at a discount, while the 15-year bond would sell at a premium. 
D) The 10-year bond would sell at a premium, while the 15-year bond would sell at par. 
E) 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. 
A) If interest rates decline, the prices of both bonds would increase, but the 15-year bond would have a larger percentage increase in price. 
B) If interest rates decline, the prices of both bonds would increase, but the 10-year bond would have a larger percentage increase in price. 
C) The 10-year bond would sell at a discount, while the 15-year bond would sell at a premium. 
D) The 10-year bond would sell at a premium, while the 15-year bond would sell at par. 
E) 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.

Question 3

Which of the following statements is CORRECT?

Accepted Answer

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

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A) 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. 
B) A callable 10-year, 10% bond should sell at a higher price than an otherwise similar noncallable bond. 
C) 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. 
D) 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. 
E) 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. 
A) 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. 
B) A callable 10-year, 10% bond should sell at a higher price than an otherwise similar noncallable bond. 
C) 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. 
D) 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. 
E) 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.

Question 5

Because short-term interest rates are much more volatile than long-term rates,you would,in the real world,generally be subject to much more price risk if you purchased a 30-day bond than if you bought a 30-year bond.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A) If a coupon bond is selling at a premium, then the bond's current yield is zero. 
B) If a coupon bond is selling at a discount, then the bond's expected capital gains yield is negative. 
C) 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. 
D) 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. 
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 premium, then the bond's current yield is zero. 
B) If a coupon bond is selling at a discount, then the bond's expected capital gains yield is negative. 
C) 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. 
D) 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. 
E) If a coupon bond is selling at par, its current yield equals its yield to maturity.

Question 7

A bond that had a 20-year original maturity with 1 year left to maturity has more 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 8

Sinking funds are provisions included in bond indentures that require companies to retire bonds on a scheduled basis prior to their final maturity.Many indentures allow the company to acquire bonds for sinking fund purposes by either (1)purchasing bonds on the open market at the going market price or (2)selecting the bonds to be called by a lottery administered by the trustee,in which case the price paid is the bond's face value.

Accepted Answer

A) True 
 B)False

Question 9

Restrictive covenants are designed primarily to protect bondholders by constraining the actions of managers.Such covenants are spelled out in bond indentures.

Accepted Answer

A) True 
 B)False

Question 10

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 11

A call provision gives bondholders the right to demand,or "call for," repayment of a bond.Typically,companies call bonds if interest rates rise and do not call them if interest rates decline.

Accepted Answer

A) True 
 B)False

Question 12

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

Question 13

Three $1,000 face value,10-year,noncallable,bonds have the same amount of risk,hence their YTMs are equal.Bond 8 has an 8% annual coupon,Bond 10 has a 10% annual coupon,and Bond 12 has a 12% annual coupon.Bond 10 sells at par.Assuming that interest rates remain constant for the next 10 years,which of the following statements is CORRECT?

Accepted Answer

A) Bond 8's current yield will increase each year. 
B) 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. 
C) Bond 12 sells at a premium (its price is greater than par), and its price is expected to increase over the next year. 
D) Bond 8 sells at a discount (its price is less than par), and its price is expected to increase over the next year. 
E) Over the next year, Bond 8's price is expected to decrease, Bond 10's price is expected to stay the same, and Bond 12's price is expected to increase. 
A) Bond 8's current yield will increase each year. 
B) 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. 
C) Bond 12 sells at a premium (its price is greater than par), and its price is expected to increase over the next year. 
D) Bond 8 sells at a discount (its price is less than par), and its price is expected to increase over the next year. 
E) Over the next year, Bond 8's price is expected to decrease, Bond 10's price is expected to stay the same, and Bond 12's price is expected to increase.

Question 14

Moon Software Inc.is planning to issue two types of 25-year,noncallable bonds to raise a total of $6 million,$3 million from each type of bond.First,3,000 bonds with a 10% semiannual coupon will be sold at their $1,000 par value to raise $3,000,000.These are called "par" bonds.Second,Original Issue Discount (OID)bonds,also with a 25-year maturity and a $1,000 par value,will be sold,but these bonds will have a semiannual coupon of only 6.25%.The OID bonds must be offered at below par in order to provide investors with the same effective yield as the par bonds.How many OID bonds must the firm 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

Question 15

An investor is considering buying one of two 10-year,$1,000 face value,noncallable 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%,and the YTM is expected to remain constant for the next 10 years.Which of the following statements is CORRECT?

Accepted Answer

A) Bond B has a higher price than Bond A today, but one year from now the bonds will have the same price. 
B) One year from now, Bond A's price will be higher than it is today. 
C) Bond A's current yield is greater than 8%. 
D) Bond A has a higher price than Bond B today, but one year from now the bonds will have the same price. 
E) Both bonds have the same price today, and the price of each bond is expected to remain constant until the bonds mature. 
A) Bond B has a higher price than Bond A today, but one year from now the bonds will have the same price. 
B) One year from now, Bond A's price will be higher than it is today. 
C) Bond A's current yield is greater than 8%. 
D) Bond A has a higher price than Bond B today, but one year from now the bonds will have the same price. 
E) Both bonds have the same price today, and the price of each bond is expected to remain constant until the bonds mature.

Question 16

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

Accepted Answer

A) 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. 
B) 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. 
C) If two classes of debt are used (with one senior and the other subordinated to all other debt), the subordinated debt will carry a lower interest rate. 
D) 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. 
E) 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. 
A) 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. 
B) 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. 
C) If two classes of debt are used (with one senior and the other subordinated to all other debt), the subordinated debt will carry a lower interest rate. 
D) 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. 
E) 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.

Question 17

Kebt Corporation's Class Semi bonds have a 12-year maturity and an 8.75% coupon paid semiannually (4.375% each 6 months),and those bonds sell at their $1,000 par value.The firm's Class Ann bonds have the same risk,maturity,nominal interest rate,and par value,but these bonds pay interest annually.Neither bond is callable.At what price should the annual payment bond sell?

Accepted Answer

A) $ 937.56 
B) $ 961.60 
C) $ 986.25 
D) $1,010.91 
E) $1,036.18 
A) $ 937.56 
B) $ 961.60 
C) $ 986.25 
D) $1,010.91 
E) $1,036.18

Question 18

Amram Inc.can issue a 20-year bond with a 6% annual coupon at par.This bond is not convertible,not callable,and has no sinking fund.Alternatively,Amram 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 Amram would have to pay on the second bond,the convertible,callable bond with the sinking fund,to have it sell initially at par?

Accepted Answer

A) The coupon rate should be exactly equal to 6%. 
B) The coupon rate could be less than, equal to, or greater than 6%, depending on the specific terms set, but in the real world the convertible feature would probably cause the coupon rate to be less than 6%. 
C) The rate should be slightly greater than 6%. 
D) The rate should be over 7%. 
E) The rate should be over 8%. 
A) The coupon rate should be exactly equal to 6%. 
B) The coupon rate could be less than, equal to, or greater than 6%, depending on the specific terms set, but in the real world the convertible feature would probably cause the coupon rate to be less than 6%. 
C) The rate should be slightly greater than 6%. 
D) The rate should be over 7%. 
E) The rate should be over 8%.

Question 19

Which of the following statements is CORRECT?

Accepted Answer

A) 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. 
B) 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. 
C) Other things held constant, including the coupon rate, a corporation would rather issue noncallable bonds than callable bonds. 
D) Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond because it would have a shorter expected life. 
E) Bonds are exposed to both reinvestment risk and price risk. Longer-term low-coupon bonds, relative to shorter-term high-coupon bonds, are generally more exposed to reinvestment risk than price risk. 
A) 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. 
B) 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. 
C) Other things held constant, including the coupon rate, a corporation would rather issue noncallable bonds than callable bonds. 
D) Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond because it would have a shorter expected life. 
E) Bonds are exposed to both reinvestment risk and price risk. Longer-term low-coupon bonds, relative to shorter-term high-coupon bonds, are generally more exposed to reinvestment risk than price risk.

Question 20

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

Exam 7: Bonds and Their Valuation

Which of the following statements is CORRECT?

Assume that a noncallable 10-year T-bond has a 12% annual coupon,while a 15-year noncallable 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?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Because short-term interest rates are much more volatile than long-term rates,you would,in the real world,generally be subject to much more price risk if you purchased a 30-day bond than if you bought a 30-year bond.

Which of the following statements is CORRECT?

A bond that had a 20-year original maturity with 1 year left to maturity has more 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.)

Restrictive covenants are designed primarily to protect bondholders by constraining the actions of managers.Such covenants are spelled out in bond indentures.

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.

A call provision gives bondholders the right to demand,or "call for," repayment of a bond.Typically,companies call bonds if interest rates rise and do not call them if interest rates decline.

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

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

Which of the following statements is CORRECT?

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.

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