Question 1

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. E

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)  if their maturities and other characteristics were the same, a 5% coupon bond would have more interest rate price risk than a 10% coupon bond. 
B)  a 10-year coupon bond would have more reinvestment rate risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of reinvestment rate risk. 
C)  a 10-year coupon bond would have more interest rate price risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of interest rate price risk. 
D)  if their maturities and other characteristics were the same, a 5% coupon bond would have less interest rate price risk than a 10% coupon bond. 
E)  a zero coupon bond of any maturity will have more interest rate price risk than any coupon bond, even a perpetuity. 
A)  if their maturities and other characteristics were the same, a 5% coupon bond would have more interest rate price risk than a 10% coupon bond. 
B)  a 10-year coupon bond would have more reinvestment rate risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of reinvestment rate risk. 
C)  a 10-year coupon bond would have more interest rate price risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of interest rate price risk. 
D)  if their maturities and other characteristics were the same, a 5% coupon bond would have less interest rate price risk than a 10% coupon bond. 
E)  a zero coupon bond of any maturity will have more interest rate price risk than any coupon bond, even a perpetuity. A

Question 3

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. D

Question 4

CMS Corporation's balance sheet as of today is as follows: $\begin{array}{lr}
\text { Long-term debt (bonds, at par) } & \$ 10,000,000 \
\text { Preferred stock } & 2,000,000 \
\text { Common stock (\$10 par) } & 10,000,000 \
\text { Retained earnings } & 4.000,000\
\text { Total debt and equity }& \$ 26,000,000
\end{array}$
The bonds have a 4.0% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 12%, so the bonds now sell below par. What is the current market value of the firm's debt?

Accepted Answer

A)  $5,276,731 
B)  $5,412,032 
C)  $5,547,332 
D)  $7,706,000 
E)  $7,898,650 
A)  $5,276,731 
B)  $5,412,032 
C)  $5,547,332 
D)  $7,706,000 
E)  $7,898,650

Question 5

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.

Accepted Answer

A) True 
 B)False

Question 6

Sentry Corp. bonds have an annual coupon payment of 7.25%. The bonds have a par value of $1,000, a current price of $1,125, and they will mature in 13 years. What is the yield to maturity on these bonds?

Accepted Answer

A)  5.56% 
B)  5.85% 
C)  6.14% 
D)  6.45% 
E)  6.77% 
A)  5.56% 
B)  5.85% 
C)  6.14% 
D)  6.45% 
E)  6.77%

Question 7

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 8

Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT?

Accepted Answer

A)  the prices of both bonds will remain unchanged. 
B)  the price of bond a will decrease over time, but the price of bond b will increase over time. 
C)  the prices of both bonds will increase by 7% per year. 
D)  the prices of both bonds will increase over time, but the price of bond a will increase by more. 
E)  the price of bond b will decrease over time, but the price of bond a will increase over time. 
A)  the prices of both bonds will remain unchanged. 
B)  the price of bond a will decrease over time, but the price of bond b will increase over time. 
C)  the prices of both bonds will increase by 7% per year. 
D)  the prices of both bonds will increase over time, but the price of bond a will increase by more. 
E)  the price of bond b will decrease over time, but the price of bond a will increase over time.

Question 9

Assume that interest rates on 15-year noncallable Treasury and corporate bonds with different ratings are as follows: 
$\begin{array} { l l } 
\text { T-6and =7.72\% }& \mathbf { A } = 9.64 \%\
\mathrm { AAA } = 8.72 \% & \mathrm { BBB } = 10.19 \% 
\end{array}$
The differences in rates among these issues were most probably caused primarily by:

Accepted Answer

A)  tax effects. 
B)  default risk differences. 
C)  maturity risk differences. 
D)  inflation differences. 
E)  real risk-free rate differences. 
A)  tax effects. 
B)  default risk differences. 
C)  maturity risk differences. 
D)  inflation differences. 
E)  real risk-free rate differences.

Question 10

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?

Accepted Answer

A)  1.90% 
B)  2.09% 
C)  2.30% 
D)  2.53% 
E)  2.78% 
A)  1.90% 
B)  2.09% 
C)  2.30% 
D)  2.53% 
E)  2.78%

Question 11

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

Question 12

Ranger Inc. would like to issue new 20-year bonds. Initially, the plan was to make the bonds non-callable. If the bonds were made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

Accepted Answer

A)  there is no reason to expect a change in the required rate of return. 
B)  the required rate of return would decline because the bond would then be less risky to a bondholder. 
C)  the required rate of return would increase because the bond would then be more risky to a bondholder. 
D)  it is impossible to say without more information. 
E)  because of the call premium, the required rate of return would decline. 
A)  there is no reason to expect a change in the required rate of return. 
B)  the required rate of return would decline because the bond would then be less risky to a bondholder. 
C)  the required rate of return would increase because the bond would then be more risky to a bondholder. 
D)  it is impossible to say without more information. 
E)  because of the call premium, the required rate of return would decline.

Question 13

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 14

If the required rate of return on a bond (rd) is greater than its coupon interest rate and will remain above that rate, then the market value of the bond will always be below its par value until the bond matures, at which time its market value will equal its par value. (Accrued interest between interest payment dates should not be considered when answering this question.)

Accepted Answer

A) True 
 B)False

Question 15

Noncallable bonds that mature in 10 years were recently issued by Sternglass Inc. They have a par value of $1,000 and an annual coupon of 5.5%. If the current market interest rate is 7.0%, at what price should the bonds sell?

Accepted Answer

A)  $829.21 
B)  $850.47 
C)  $872.28 
D)  $894.65 
E)  $917.01 
A)  $829.21 
B)  $850.47 
C)  $872.28 
D)  $894.65 
E)  $917.01

Question 16

You are considering 2 bonds that will be issued tomorrow. Both are rated triple B (BBB, the lowest investment-grade rating), both mature in 20 years, both have a 10% coupon, neither can be called except for sinking fund purposes, and both are offered to you at their $1,000 par values. However, Bond SF has a sinking fund while Bond NSF does not. Under the sinking fund, the company must call and pay off 5% of the bonds at par each year. The yield curve at the time is upward sloping. The bond's prices, being equal, are probably not in equilibrium, as Bond SF, which has the sinking fund, would generally be expected to have a higher yield than Bond NSF.

Accepted Answer

A) True 
 B)False

Question 17

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 18

The desire for floating-rate bonds, and consequently their increased usage, arose out of the experience of the early 1980s, when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.

Accepted Answer

A) True 
 B)False

Question 19

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.

Question 20

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

Exam 4: Bond Valuation

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is NOT 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.

Sentry Corp. bonds have an annual coupon payment of 7.25%. The bonds have a par value of $1,000, a current price of $1,125, and they will mature in 13 years. What is the yield to maturity on these bonds?

Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT?

Assume that interest rates on 15-year noncallable Treasury and corporate bonds with different ratings are as follows: T-6and =7.72\% =9.64\% =8.72\% =10.19\% The differences in rates among these issues were most probably caused primarily by:

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?

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

Ranger Inc. would like to issue new 20-year bonds. Initially, the plan was to make the bonds non-callable. If the bonds were made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

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.

Noncallable bonds that mature in 10 years were recently issued by Sternglass Inc. They have a par value of $1,000 and an annual coupon of 5.5%. If the current market interest rate is 7.0%, at what price should the bonds sell?

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

The desire for floating-rate bonds, and consequently their increased usage, arose out of the experience of the early 1980s, when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.

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?

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

An Overview of Financial Management and the Financial Environment

Risk and Return-Part I

Risk and Return-Part II

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Basic Stock Valuation

Corporate Valuation and Financial Planning

Corporate Governance

Determining the Cost of Capital

Capital Budgeting: Decision Criteria

Capital Budgeting-Estimating Cash Flows and Analyzing Risk

Real Options

Distributions to Shareholders-Dividends and Repurchases

Capital Structure Decisions

Dynamic Capital Structures and Corporate Valuation

Initial Public Offerings-Investment Banking: and Financial Restructuring

Lease Financing

Hybrid Financing Preferred Stock-Warrants and Convertibles

Supply Chains and Working Capital Management

Providing and Obtaining Credit

Other Topics in Working Capital Management

Enterprise Risk Management

Bankruptcy-Reorganization and Liquidation

Mergers and Corporate Control

Multinational Financial Management

Time Value of Money

Basic Financial Tools: A review

Pension Plan Management

Financial Management in Not for Profit Businesses

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