Exam 5: Bonds, Bond Valuation, and Interest Rates

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

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

Which of the following statements is CORRECT?

Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?

Perry Inc.'s bonds currently sell for $1,150.They have a 6-year maturity,an annual coupon of $85,and a par value of $1,000.What is their current yield?

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?

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

Which of the following statements is CORRECT?

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.

Which of the following statements is CORRECT?

Curtis Corporation's noncallable bonds currently sell for $1,165.They have a 15-year maturity,an annual coupon of $95,and a par value of $1,000.What is their yield to maturity?

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)?

Rogoff Co.'s 15-year bonds have an annual coupon rate of 9.5%.Each bond has face value of $1,000 and makes semiannual interest payments.If you require an 11.0% nominal yield to maturity on this investment,what is the maximum price you should be willing to pay for the bond?

Which of the following statements is CORRECT?

Suppose International Digital Technologies decides to raise a total of $200 million,with $100 million as long-term debt and $100 million as common equity.The debt can be mortgage bonds or debentures,but by an iron-clad provision in its charter,the company can never raise any additional debt beyond the original $100 million.Given these conditions,which of the following statements is CORRECT?

A zero coupon bond is a bond that pays no interest and is offered (and subsequently sells initially)at par.These bonds provide compensation to investors in the form of capital appreciation.

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?

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

If 10-year T-bonds have a yield of 6.2%,10-year corporate bonds yield 8.5%,the maturity risk premium on all 10-year bonds is 1.3%,and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds,what is the default risk premium on the corporate bond?

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.