Question 1

Which of the following statements is false?

Accepted Answer

A)  Investors pay less for bonds with credit risk than they would for an otherwise identical default-free bond. 
B)  Credit spreads fluctuate as perceptions regarding the probability of default change. 
C)  Credit spreads are higher for bonds with higher ratings. 
D)  We refer to the difference between the yields of the corporate bonds and the treasury yields as the default spread or credit spread. 
A)  Investors pay less for bonds with credit risk than they would for an otherwise identical default-free bond. 
B)  Credit spreads fluctuate as perceptions regarding the probability of default change. 
C)  Credit spreads are higher for bonds with higher ratings. 
D)  We refer to the difference between the yields of the corporate bonds and the treasury yields as the default spread or credit spread.

Question 2

Use the information for the question(s) below.
Luther Industries needs to raise $25 million to fund a new office complex. The company plans on issuing ten-year bonds with a face value of $1,000 and a coupon rate of 7.0% (annual payments). The following table summarizes the YTM for similar ten-year corporate bonds of various credit ratings:
  
-Assuming that Luther's bonds receive a AAA rating,the price of the bonds will be closest to:

Accepted Answer

A)  $1,021 
B)  $1,014 
C)  $1,000 
D)  $937 
A)  $1,021 
B)  $1,014 
C)  $1,000 
D)  $937

Question 3

What rating must Luther receive on these bonds if they want the bonds to be issued at par?

Accepted Answer

A)  A 
B)  B 
C)  BBB 
D)  AA 
A)  A 
B)  B 
C)  BBB 
D)  AA

Question 4

Which of the following statements is false?

Accepted Answer

A)  Prices of bonds with lower durations are more sensitive to interest rate changes. 
B)  When a bond is trading at a discount, the price increase between coupons will exceed the drop when a coupon is paid, so the bond's price will rise and its discount will decline as time passes. 
C)  Coupon bonds may trade at a discount, at a premium, or at par. 
D)  The sensitivity of a bond's price to changes in interest rates is the bond's duration. 
A)  Prices of bonds with lower durations are more sensitive to interest rate changes. 
B)  When a bond is trading at a discount, the price increase between coupons will exceed the drop when a coupon is paid, so the bond's price will rise and its discount will decline as time passes. 
C)  Coupon bonds may trade at a discount, at a premium, or at par. 
D)  The sensitivity of a bond's price to changes in interest rates is the bond's duration.

Question 5

Which of the following statements is false?

Accepted Answer

A)  If the bond trades at a discount, an investor who buys the bond will earn a return both from receiving the coupons and from receiving a face value that exceeds the price paid for the bond. 
B)  Most coupon bond issuers choose a coupon rate so that the bonds will initially trade at, or very near to, par. 
C)  Coupon bonds always trade for a discount. 
D)  At any point in time, changes in market interest rates affect a bond's yield to maturity and its price. 
A)  If the bond trades at a discount, an investor who buys the bond will earn a return both from receiving the coupons and from receiving a face value that exceeds the price paid for the bond. 
B)  Most coupon bond issuers choose a coupon rate so that the bonds will initially trade at, or very near to, par. 
C)  Coupon bonds always trade for a discount. 
D)  At any point in time, changes in market interest rates affect a bond's yield to maturity and its price.

Question 6

Sovereign bonds,unlike corporate bonds,are insulated from default risk because the issuer has the ultimate ability to print money to meet debt servicing obligations. A major reason that investors do in fact associate risk with the bonds of certain countries is that

Accepted Answer

A)  were it necessary to print money to meet their debt obligations, this would likely increase inflation and thereby result in a decline in the real rate of return when the debt matures. 
B)  there is uncertainty because governments often face re-election during the period prior to the maturity of their sovereign bonds. 
C)  sovereign bonds are usually less liquid than corporate bonds denominated in the same currency. 
D)  corporate bonds are backed by tangible physical assets which is not the case with sovereign bonds. 
A)  were it necessary to print money to meet their debt obligations, this would likely increase inflation and thereby result in a decline in the real rate of return when the debt matures. 
B)  there is uncertainty because governments often face re-election during the period prior to the maturity of their sovereign bonds. 
C)  sovereign bonds are usually less liquid than corporate bonds denominated in the same currency. 
D)  corporate bonds are backed by tangible physical assets which is not the case with sovereign bonds.

Question 7

Use the information for the question(s) below.
The Sisyphean Company has a bond outstanding with a face value of $1,000 that reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semi-annually.
-Assuming the appropriate YTM on the Sisyphean bond is 9.0%,then the price that this bond trades for will be closest to:

Accepted Answer

A)  $946 
B)  $919 
C)  $1,086 
D)  $1,000 
A)  $946 
B)  $919 
C)  $1,086 
D)  $1,000

Question 8

Which of the following statements is false?

Accepted Answer

A)  The yield to maturity of a coupon bond is a weighted average of the yields on the zero-coupon bonds. 
B)  If the zero-coupon yield curve is downward sloping, the yield to maturity will decrease with the coupon rate. 
C)  The information in the zero-coupon yield curve is sufficient to price all other risk-free bonds. 
D)  When the yield curve is flat, all zero-coupon and coupon-paying bonds will have the same yield, independent of their maturities and coupon rates. 
A)  The yield to maturity of a coupon bond is a weighted average of the yields on the zero-coupon bonds. 
B)  If the zero-coupon yield curve is downward sloping, the yield to maturity will decrease with the coupon rate. 
C)  The information in the zero-coupon yield curve is sufficient to price all other risk-free bonds. 
D)  When the yield curve is flat, all zero-coupon and coupon-paying bonds will have the same yield, independent of their maturities and coupon rates.

Question 9

Use the table for the question(s) below.
The following table summarizes prices of various default-free zero-coupon bonds (expressed as a percentage of face value):
  
-Compute the yield to maturity for each of the five zero-coupon bonds.

Accepted Answer

@#IMG-DLM& Each yield to matur

Question 10

Which of the following statements is false?

Accepted Answer

A)  Because the cash flows promised by the bond are the most that bondholders can hope to receive, the cash flows that a purchaser of a bond with credit risk expects to receive may be less than that amount. 
B)  By consulting bond ratings, investors can assess the credit-worthiness of a particular bond issue. 
C)  Because the yield to maturity for a bond is calculated using the promised cash flows, the yield of bonds with credit risk will be lower than that of otherwise identical default-free bonds. 
D)  A higher yield to maturity does not necessarily imply that a bond's expected return is higher. 
A)  Because the cash flows promised by the bond are the most that bondholders can hope to receive, the cash flows that a purchaser of a bond with credit risk expects to receive may be less than that amount. 
B)  By consulting bond ratings, investors can assess the credit-worthiness of a particular bond issue. 
C)  Because the yield to maturity for a bond is calculated using the promised cash flows, the yield of bonds with credit risk will be lower than that of otherwise identical default-free bonds. 
D)  A higher yield to maturity does not necessarily imply that a bond's expected return is higher.

Question 11

Consider a corporate bond with a $1,000 face value,10% coupon with semiannual coupon payments,5 years until maturity,and which currently is selling for (has a cash price of)$1,113.80.The next coupon payment will be made in 63 days and there are 182 days in the current coupon period.The clean price for this bond is closest to:

Accepted Answer

A)  $1,146.50 
B)  $1,065.70 
C)  $1,113.80 
D)  $1,081.10 
A)  $1,146.50 
B)  $1,065.70 
C)  $1,113.80 
D)  $1,081.10

Question 12

Which of the following statements is false?

Accepted Answer

A)  Investors pay less for bonds with credit risk than they would for an otherwise identical default-free bond. 
B)  The yield to maturity of a defaultable bond is equal to the expected return of investing in the bond. 
C)  The risk of default, which is known as the credit risk of the bond, means that the bond's cash flows are not known with certainty. 
D)  For corporate bonds, the issuer may default-that is, it might not pay back the full amount promised in the bond certificate. 
A)  Investors pay less for bonds with credit risk than they would for an otherwise identical default-free bond. 
B)  The yield to maturity of a defaultable bond is equal to the expected return of investing in the bond. 
C)  The risk of default, which is known as the credit risk of the bond, means that the bond's cash flows are not known with certainty. 
D)  For corporate bonds, the issuer may default-that is, it might not pay back the full amount promised in the bond certificate.

Question 13

Which of the four bonds is the most sensitive to a one percent increase in the YTM?

Accepted Answer

A)  Bond A 
B)  Bond B 
C)  Bond C 
D)  Bond D 
A)  Bond A 
B)  Bond B 
C)  Bond C 
D)  Bond D

Question 14

In December 2008 in the US,Treasury Bills traded with a negative yield. To profit from this anomoly,investors could have been expected to

Accepted Answer

A)  sell T-Bills to materialize a profit over the life of the investment. 
B)  buy T-Bills to materialize a profit over the life of the investment. 
C)  continue to hold their investments until maturity. 
D)  continue to hold their investments but sell prior to maturity. 
A)  sell T-Bills to materialize a profit over the life of the investment. 
B)  buy T-Bills to materialize a profit over the life of the investment. 
C)  continue to hold their investments until maturity. 
D)  continue to hold their investments but sell prior to maturity.

Question 15

The coupon rate is the contractual rate of interest paid on the ________ of the bond.

Accepted Answer

A)  present value 
B)  face value 
C)  price 
D)  prevailing rate of interest 
A)  present value 
B)  face value 
C)  price 
D)  prevailing rate of interest

Question 16

Based upon the information provided in the table above,you can conclude

Accepted Answer

A)  that the yield curve is flat. 
B)  nothing about the shape of the yield curve. 
C)  that the yield curve is downward sloping. 
D)  that the yield curve is upward sloping. 
A)  that the yield curve is flat. 
B)  nothing about the shape of the yield curve. 
C)  that the yield curve is downward sloping. 
D)  that the yield curve is upward sloping.

Question 17

Consider a zero-coupon bond with a face value of $1,000 and 20 years to maturity.The amount that the price of the bond will change if its yield to maturity decreases from 7% to 5% is closest to:

Accepted Answer

A)  $120 
B)  -$53 
C)  $53 
D)  $673 
A)  $120 
B)  -$53 
C)  $53 
D)  $673

Question 18

Consider a zero-coupon bond with a $1,000 face value and 10 years left until maturity.If the bond is currently trading for $459,then the yield to maturity on this bond is closest to:

Accepted Answer

A)  7.5% 
B)  10.4% 
C)  9.7% 
D)  8.1% 
A)  7.5% 
B)  10.4% 
C)  9.7% 
D)  8.1%

Question 19

The YTM of a 3-year default-free security with a face value of $1,000 and an annual coupon rate of 6% is closest to:

Accepted Answer

A)  5.3% 
B)  5.8% 
C)  5.5% 
D)  5.2% 
A)  5.3% 
B)  5.8% 
C)  5.5% 
D)  5.2%

Question 20

Which of the following statements is false?

Accepted Answer

A)  The bond certificate typically specifies that the coupons will be paid periodically until the maturity date of the bond. 
B)  The bond certificate indicates the amounts and dates of all payments to be made. 
C)  The only cash payments the investor will receive from a zero coupon bond are the interest payments that are paid up until the maturity date. 
D)  Usually the face value of a bond is repaid at maturity. 
A)  The bond certificate typically specifies that the coupons will be paid periodically until the maturity date of the bond. 
B)  The bond certificate indicates the amounts and dates of all payments to be made. 
C)  The only cash payments the investor will receive from a zero coupon bond are the interest payments that are paid up until the maturity date. 
D)  Usually the face value of a bond is repaid at maturity.

Exam 6: Valuing Bonds

Which of the following statements is false?

What rating must Luther receive on these bonds if they want the bonds to be issued at par?

Which of the following statements is false?

Which of the following statements is false?

Sovereign bonds,unlike corporate bonds,are insulated from default risk because the issuer has the ultimate ability to print money to meet debt servicing obligations. A major reason that investors do in fact associate risk with the bonds of certain countries is that

Which of the following statements is false?

Use the table for the question(s) below. The following table summarizes prices of various default-free zero-coupon bonds (expressed as a percentage of face value): -Compute the yield to maturity for each of the five zero-coupon bonds.

Which of the following statements is false?

Which of the following statements is false?

Which of the four bonds is the most sensitive to a one percent increase in the YTM?

In December 2008 in the US,Treasury Bills traded with a negative yield. To profit from this anomoly,investors could have been expected to

The coupon rate is the contractual rate of interest paid on the ________ of the bond.

Based upon the information provided in the table above,you can conclude

Consider a zero-coupon bond with a face value of $1,000 and 20 years to maturity.The amount that the price of the bond will change if its yield to maturity decreases from 7% to 5% is closest to:

Consider a zero-coupon bond with a $1,000 face value and 10 years left until maturity.If the bond is currently trading for $459,then the yield to maturity on this bond is closest to:

The YTM of a 3-year default-free security with a face value of $1,000 and an annual coupon rate of 6% is closest to:

Which of the following statements is false?

The Corporation

Introduction to Financial Statement Analysis

Arbitrage and Financial Decision Making

The Time Value of Money

Interest Rates

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behaviour and Capital Market Efficiency

Financial Options

Option Valuation

Real Options

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress, managerial Incentives, and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modelling: a Case Study

The Mechanics of Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

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