Question 1

Which of the following statements is CORRECT?

Accepted Answer

A) A zero coupon bond's current yield is equal to its yield to maturity. 
B) If a bond's yield to maturity exceeds its coupon rate, the bond will sell at par. 
C) All else equal, if a bond's yield to maturity increases, its price will fall. 
D) If a bond's yield to maturity exceeds its coupon rate, the bond will sell at a premium over par. 
E) All else equal, if a bond's yield to maturity increases, its current yield will fall. 
A) A zero coupon bond's current yield is equal to its yield to maturity. 
B) If a bond's yield to maturity exceeds its coupon rate, the bond will sell at par. 
C) All else equal, if a bond's yield to maturity increases, its price will fall. 
D) If a bond's yield to maturity exceeds its coupon rate, the bond will sell at a premium over par. 
E) All else equal, if a bond's yield to maturity increases, its current yield will fall.

Question 2

Other things equal,a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

Accepted Answer

A) True 
 B)False

Question 3

A 10-year Treasury bond has an 8% coupon,and an 8-year Treasury bond has a 10% coupon.Neither is callable,and both have the same yield to maturity.If the yield to maturity of both bonds increases by the same amount,which of the following statements would be CORRECT?

Accepted Answer

A) The prices of both bonds will decrease by the same amount. 
B) Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price. 
C) The prices of both bonds would increase by the same amount. 
D) One bond's price would increase, while the other bond's price would decrease. 
E) The prices of the two bonds would remain constant. 
A) The prices of both bonds will decrease by the same amount. 
B) Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price. 
C) The prices of both bonds would increase by the same amount. 
D) One bond's price would increase, while the other bond's price would decrease. 
E) The prices of the two bonds would remain constant.

Question 4

Income bonds pay interest only if the issuing company actually earns the indicated interest.Thus,these securities cannot bankrupt a company,and this makes them safer from an investor's perspective than regular bonds.

Accepted Answer

A) True 
 B)False

Question 5

Moerdyk Corporation's bonds have a 15-year maturity,a 7.25% semiannual coupon,and a par value of $1,000.The going interest rate (rd)is 6.20%,based on semiannual compounding.What is the bond's price?

Accepted Answer

A) $1,047.19 
B) $1,074.05 
C) $1,101.58 
D) $1,129.12 
E) $1,157.35 
A) $1,047.19 
B) $1,074.05 
C) $1,101.58 
D) $1,129.12 
E) $1,157.35

Question 6

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 7

Which of the following statements is CORRECT?

Accepted Answer

A) 10-year, zero coupon bonds have more reinvestment risk than 10-year, 10% coupon bonds. 
B) A 10-year, 10% coupon bond has less reinvestment risk than a 10-year, 5% coupon bond (assuming all else equal). 
C) The total (rate of) return on a bond during a given year is the sum of the coupon interest payments received during the year and the change in the value of the bond from the beginning to the end of the year, divided by the bond's price at the beginning of the year. 
D) The price of a 20-year, 10% bond is less sensitive to changes in interest rates than the price of a 5-year, 10% bond. 
E) A $1,000 bond with $100 annual interest payments that has 5 years to maturity and is not expected to default would sell at a discount if interest rates were below 9% and at a premium if interest rates were greater than 11%. 
A) 10-year, zero coupon bonds have more reinvestment risk than 10-year, 10% coupon bonds. 
B) A 10-year, 10% coupon bond has less reinvestment risk than a 10-year, 5% coupon bond (assuming all else equal). 
C) The total (rate of) return on a bond during a given year is the sum of the coupon interest payments received during the year and the change in the value of the bond from the beginning to the end of the year, divided by the bond's price at the beginning of the year. 
D) The price of a 20-year, 10% bond is less sensitive to changes in interest rates than the price of a 5-year, 10% bond. 
E) A $1,000 bond with $100 annual interest payments that has 5 years to maturity and is not expected to default would sell at a discount if interest rates were below 9% and at a premium if interest rates were greater than 11%.

Question 8

Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise.Since floating-rate debt shifts price risk to companies,it offers no advantages to corporate issuers.

Accepted Answer

A) True 
 B)False

Question 9

McCue Inc.'s bonds currently sell for $1,250.They pay a $90 annual coupon,have a 25-year maturity,and a $1,000 par value,but they can be called in 5 years at $1,050.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.What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM; it is possible to get a negative answer.)

Accepted Answer

A) 2.62% 
B) 2.88% 
C) 3.17% 
D) 3.48% 
E) 3.83% 
A) 2.62% 
B) 2.88% 
C) 3.17% 
D) 3.48% 
E) 3.83%

Question 10

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 11

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) If the yield to maturity remains constant, the bond's price one year from now will be higher than its current price. 
B) The bond is selling below its par value. 
C) The bond is selling at a discount. 
D) If the yield to maturity remains constant, the bond's price one year from now will be lower than its current price. 
E) The bond's current yield is greater than 9%. 
A) If the yield to maturity remains constant, the bond's price one year from now will be higher than its current price. 
B) The bond is selling below its par value. 
C) The bond is selling at a discount. 
D) If the yield to maturity remains constant, the bond's price one year from now will be lower than its current price. 
E) The bond's current yield is greater than 9%.

Question 12

Adams Enterprises' noncallable bonds currently sell for $1,120.They have a 15-year maturity,an annual coupon of $85,and a par value of $1,000.What is their yield to maturity?

Accepted Answer

A) 5.84% 
B) 6.15% 
C) 6.47% 
D) 6.81% 
E) 7.17% 
A) 5.84% 
B) 6.15% 
C) 6.47% 
D) 6.81% 
E) 7.17%

Which of the following statements is CORRECT?

Other things equal,a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

A 10-year Treasury bond has an 8% coupon,and an 8-year Treasury bond has a 10% coupon.Neither is callable,and both have the same yield to maturity.If the yield to maturity of both bonds increases by the same amount,which of the following statements would be CORRECT?

Income bonds pay interest only if the issuing company actually earns the indicated interest.Thus,these securities cannot bankrupt a company,and this makes them safer from an investor's perspective than regular bonds.

Moerdyk Corporation's bonds have a 15-year maturity,a 7.25% semiannual coupon,and a par value of $1,000.The going interest rate (r_d)is 6.20%,based on semiannual compounding.What is the bond's price?

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.

Which of the following statements is CORRECT?

Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise.Since floating-rate debt shifts price risk to companies,it offers no advantages to corporate issuers.

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

Adams Enterprises' noncallable bonds currently sell for $1,120.They have a 15-year maturity,an annual coupon of $85,and a par value of $1,000.What is their yield to maturity?

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

Exam 7: Bonds and Their Valuation

Which of the following statements is CORRECT?

Other things equal,a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

A 10-year Treasury bond has an 8% coupon,and an 8-year Treasury bond has a 10% coupon.Neither is callable,and both have the same yield to maturity.If the yield to maturity of both bonds increases by the same amount,which of the following statements would be CORRECT?

Income bonds pay interest only if the issuing company actually earns the indicated interest.Thus,these securities cannot bankrupt a company,and this makes them safer from an investor's perspective than regular bonds.

Moerdyk Corporation's bonds have a 15-year maturity,a 7.25% semiannual coupon,and a par value of $1,000.The going interest rate (rd)is 6.20%,based on semiannual compounding.What is the bond's price?

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.

Which of the following statements is CORRECT?

Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise.Since floating-rate debt shifts price risk to companies,it offers no advantages to corporate issuers.

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

Adams Enterprises' noncallable bonds currently sell for $1,120.They have a 15-year maturity,an annual coupon of $85,and a par value of $1,000.What is their yield to maturity?

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

Moerdyk Corporation's bonds have a 15-year maturity,a 7.25% semiannual coupon,and a par value of $1,000.The going interest rate (r_d)is 6.20%,based on semiannual compounding.What is the bond's price?