Question 1

Which of the following statements is NOT CORRECT?

Accepted Answer

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

Question 2

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 3

Gilligan Co.'s bonds currently sell for $1,150.They have a 6.75% annual coupon rate and a 15-year maturity,and are callable in 6 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,the YTC or the YTM?

Accepted Answer

A)  3.92% 
B)  4.12% 
C)  4.34% 
D)  4.57% 
E)  4.81% 
A)  3.92% 
B)  4.12% 
C)  4.34% 
D)  4.57% 
E)  4.81%

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)  The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates. 
B)  You hold two bonds.One is a 10-year,zero coupon,bond and the other is a 10-year bond that pays a 6% annual coupon.The same market rate,6%,applies to both bonds.If the market rate rises from the current level,the zero coupon bond will experience the smaller percentage decline. 
C)  The shorter the time to maturity,the greater the change in the value of a bond in response to a given change in interest rates. 
D)  The longer the time to maturity,the smaller the change in the value of a bond in response to a given change in interest rates. 
E)  You hold two bonds.One is a 10-year,zero coupon,issue and the other is a 10-year bond that pays a 6% annual coupon.The same market rate,6%,applies to both bonds.If the market rate rises from the current level,the zero coupon bond will experience the larger percentage decline. 
A)  The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates. 
B)  You hold two bonds.One is a 10-year,zero coupon,bond and the other is a 10-year bond that pays a 6% annual coupon.The same market rate,6%,applies to both bonds.If the market rate rises from the current level,the zero coupon bond will experience the smaller percentage decline. 
C)  The shorter the time to maturity,the greater the change in the value of a bond in response to a given change in interest rates. 
D)  The longer the time to maturity,the smaller the change in the value of a bond in response to a given change in interest rates. 
E)  You hold two bonds.One is a 10-year,zero coupon,issue and the other is a 10-year bond that pays a 6% annual coupon.The same market rate,6%,applies to both bonds.If the market rate rises from the current level,the zero coupon bond will experience the larger percentage decline.

Question 5

If its yield to maturity declined by 1%,which of the following bonds would have the largest percentage increase in value?

Accepted Answer

A)  A 1-year bond with an 8% coupon. 
B)  A 10-year bond with an 8% coupon. 
C)  A 10-year bond with a 12% coupon. 
D)  A 10-year zero coupon bond. 
E)  A 1-year zero coupon bond. 
A)  A 1-year bond with an 8% coupon. 
B)  A 10-year bond with an 8% coupon. 
C)  A 10-year bond with a 12% coupon. 
D)  A 10-year zero coupon bond. 
E)  A 1-year zero coupon bond.

Question 6

A call provision gives bondholders the right to demand,or "call for," repayment of a bond.Typically,calls are exercised if interest rates rise,because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

Accepted Answer

A) True 
 B)False

Question 7

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 8

5-year Treasury bonds yield 5.5%.The inflation premium (IP)is 1.9%,and the maturity risk premium (MRP)on 5-year bonds is 0.4%.What is the real risk-free rate,r*?

Accepted Answer

A)  2.59% 
B)  2.88% 
C)  3.20% 
D)  3.52% 
E)  3.87% 
A)  2.59% 
B)  2.88% 
C)  3.20% 
D)  3.52% 
E)  3.87%

Question 9

Assuming all else is constant,which of the following statements is CORRECT?

Accepted Answer

A)  For any given maturity,a 1.0 percentage point decrease in the market interest rate would cause a smaller dollar capital gain than the capital loss stemming from a 1.0 percentage point increase in the interest rate. 
B)  From a corporate borrower's point of view,interest paid on bonds is not tax-deductible. 
C)  Price sensitivity as measured by the percentage change in price due to a given change in the required rate of return decreases as a bond's maturity increases. 
D)  For a bond of any maturity,a 1.0 percentage point increase in the market interest rate (rd)causes a larger dollar capital loss than the capital gain stemming from a 1.0 percentage point decrease in the interest rate. 
E)  A 20-year zero coupon bond has more reinvestment rate risk than a 20-year coupon bond. 
A)  For any given maturity,a 1.0 percentage point decrease in the market interest rate would cause a smaller dollar capital gain than the capital loss stemming from a 1.0 percentage point increase in the interest rate. 
B)  From a corporate borrower's point of view,interest paid on bonds is not tax-deductible. 
C)  Price sensitivity as measured by the percentage change in price due to a given change in the required rate of return decreases as a bond's maturity increases. 
D)  For a bond of any maturity,a 1.0 percentage point increase in the market interest rate (rd)causes a larger dollar capital loss than the capital gain stemming from a 1.0 percentage point decrease in the interest rate. 
E)  A 20-year zero coupon bond has more reinvestment rate risk than a 20-year coupon bond.

Question 10

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 11

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 12

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 13

Bonds for two companies were just issued: Short Corp.'s bonds will mature in 5 years,and Long Corp.'s bonds will mature in 15 years.Both bonds promise to pay a semiannual coupon,they are not callable or convertible,and they are equally liquid.Further,assume that the Treasury yield curve is based only on expectations about future inflation,i.e. ,that the maturity risk premium is zero for T-bonds.Under these conditions,which of the following statements is correct?

Accepted Answer

A)  If the Treasury yield curve is downward sloping,Long's bonds must under all conditions have the lower yield. 
B)  If the yield curve for Treasury securities is upward sloping,Long's bonds must under all conditions have a higher yield than Short's bonds. 
C)  If the yield curve for Treasury securities is flat,Short's bond must under all conditions have the same yield as Long's bonds. 
D)  If Long's and Short's bonds have the same default risk,their yields must under all conditions be equal. 
E)  If the Treasury yield curve is upward sloping and Short has less default risk than Long,then Short's bonds must under all conditions have the lower yield. 
A)  If the Treasury yield curve is downward sloping,Long's bonds must under all conditions have the lower yield. 
B)  If the yield curve for Treasury securities is upward sloping,Long's bonds must under all conditions have a higher yield than Short's bonds. 
C)  If the yield curve for Treasury securities is flat,Short's bond must under all conditions have the same yield as Long's bonds. 
D)  If Long's and Short's bonds have the same default risk,their yields must under all conditions be equal. 
E)  If the Treasury yield curve is upward sloping and Short has less default risk than Long,then Short's bonds must under all conditions have the lower yield.

Question 14

A 15-year bond has an annual coupon rate of 8%.The coupon rate will remain fixed until the bond matures.The bond has a yield to maturity of 6%.Which of the following statements is CORRECT?

Accepted Answer

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

Question 15

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 16

Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

Accepted Answer

A)  Market interest rates rise sharply. 
B)  Market interest rates decline sharply. 
C)  The company's financial situation deteriorates significantly. 
D)  Inflation increases significantly. 
E)  The company's bonds are downgraded. 
A)  Market interest rates rise sharply. 
B)  Market interest rates decline sharply. 
C)  The company's financial situation deteriorates significantly. 
D)  Inflation increases significantly. 
E)  The company's bonds are downgraded.

Question 17

Which of the following statements is CORRECT?

Accepted Answer

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

Question 18

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 19

For bonds,price sensitivity to a given change in interest rates is generally greater the longer before the bond matures.

Accepted Answer

A) True 
 B)False

Question 20

An 8-year Treasury bond has a 10% coupon,and a 10-year Treasury bond has an 8% coupon.Both bonds 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)  Both bonds would decline in price,but the 10-year bond would have the greater percentage decline in price. 
B)  The prices of both bonds would increase by the same amount. 
C)  One bond's price would increase,while the other bond's price would decrease. 
D)  The prices of the two bonds would remain constant. 
E)  The prices of both bonds will decrease by the same amount. 
A)  Both bonds would decline in price,but the 10-year bond would have the greater percentage decline in price. 
B)  The prices of both bonds would increase by the same amount. 
C)  One bond's price would increase,while the other bond's price would decrease. 
D)  The prices of the two bonds would remain constant. 
E)  The prices of both bonds will decrease by the same amount.

Exam 5: Bonds, Bond Valuation, and Interest Rates

Which of the following statements is NOT CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

If its yield to maturity declined by 1%,which of the following bonds would have the largest percentage increase in value?

A call provision gives bondholders the right to demand,or "call for," repayment of a bond.Typically,calls are exercised if interest rates rise,because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

Which of the following statements is CORRECT?

5-year Treasury bonds yield 5.5%.The inflation premium (IP)is 1.9%,and the maturity risk premium (MRP)on 5-year bonds is 0.4%.What is the real risk-free rate,r*?

Assuming all else is constant,which of the following statements is CORRECT?

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?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

A 15-year bond has an annual coupon rate of 8%.The coupon rate will remain fixed until the bond matures.The bond has a yield to maturity of 6%.Which of the following statements is CORRECT?

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

Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

Which of the following statements is CORRECT?

For bonds,price sensitivity to a given change in interest rates is generally greater the longer before the bond matures.

An 8-year Treasury bond has a 10% coupon,and a 10-year Treasury bond has an 8% coupon.Both bonds 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?

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Risk and Return

Corporate Valuation and Stock Valuation

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Financial Planning and Applications to Corporate Valuation

Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, Seasoned Offerings, and Investment Banks

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Dynamic Capital Structures and Corporate Valuation

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, Reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not-For-Profit Businesses

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