Question 1

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 2

A Treasury bond has an 8% annual coupon and a 7.5% yield to maturity. Which of the following statements is CORRECT?

Accepted Answer

A)  the bond has a current yield greater than 8%. 
B)  the bond sells at a discount. 
C)  the bond's required rate of return is less than 7.5%. 
D)  if the yield to maturity remains constant, the price of the bond will decline over time. 
E)  the bond sells at a price below par. 
A)  the bond has a current yield greater than 8%. 
B)  the bond sells at a discount. 
C)  the bond's required rate of return is less than 7.5%. 
D)  if the yield to maturity remains constant, the price of the bond will decline over time. 
E)  the bond sells at a price below par.

Question 3

Chandler Co.'s 5-year bonds yield 7.00%, and 5-year T-bonds yield 5.15%. The real risk-free rate is r* = 3.0%, the inflation premium for 5-year bonds is IP = 1.75%, the liquidity premium for Chandler's bonds is LP = 0.75% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t σ 1) × 0.1%, where t = number of years to maturity. What is the default risk premium (DRP) on Chandler's bonds?

Accepted Answer

A)  0.99% 
B)  1.10% 
C)  1.21% 
D)  1.33% 
E)  1.46% 
A)  0.99% 
B)  1.10% 
C)  1.21% 
D)  1.33% 
E)  1.46%

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)  if a coupon bond is selling at a discount, its price will continue to decline until it reaches its par value at maturity. 
B)  if interest rates increase, the price of a 10-year coupon bond will decline by a greater percentage than the price of a 10-year zero coupon bond. 
C)  if a bond's yield to maturity exceeds its annual coupon, then the bond will trade at a premium. 
D)  if a coupon bond is selling at a premium, its current yield equals its yield to maturity. 
E)  if a coupon bond is selling at par, its current yield equals its yield to maturity. 
A)  if a coupon bond is selling at a discount, its price will continue to decline until it reaches its par value at maturity. 
B)  if interest rates increase, the price of a 10-year coupon bond will decline by a greater percentage than the price of a 10-year zero coupon bond. 
C)  if a bond's yield to maturity exceeds its annual coupon, then the bond will trade at a premium. 
D)  if a coupon bond is selling at a premium, its current yield equals its yield to maturity. 
E)  if a coupon bond is selling at par, its current yield equals its yield to maturity.

Question 5

McCurdy Co.'s Class Q bonds have a 12-year maturity, $1,000 par value, and a 5.75% coupon paid semiannually (2.875% each 6 months), and those bonds sell at their par value. McCurdy's Class P bonds have the same risk, maturity, and par value, but the P bonds pay a 5.75% annual coupon. Neither bond is callable. At what price should the annual payment bond sell?

Accepted Answer

A)  $943.98 
B)  $968.18 
C)  $993.01 
D)  $1,017.83 
E)  $1,043.28 
A)  $943.98 
B)  $968.18 
C)  $993.01 
D)  $1,017.83 
E)  $1,043.28

Question 6

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.

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

Which of the following statements is CORRECT?

Accepted Answer

A)  on an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss. 
B)  on an expected yield basis, the expected current yield will always be positive because an investor would not purchase a bond that is not expected to pay any cash coupon interest. 
C)  if a coupon bond is selling at par, its current yield equals its yield to maturity. 
D)  the current yield on bond a exceeds the current yield on bond b; therefore, bond a must have a higher yield to maturity than bond b. 
E)  if a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity. 
A)  on an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss. 
B)  on an expected yield basis, the expected current yield will always be positive because an investor would not purchase a bond that is not expected to pay any cash coupon interest. 
C)  if a coupon bond is selling at par, its current yield equals its yield to maturity. 
D)  the current yield on bond a exceeds the current yield on bond b; therefore, bond a must have a higher yield to maturity than bond b. 
E)  if a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity.

Question 9

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 10

There is an inverse relationship between bonds' quality ratings and their required rates of return. Thus, the required return is lowest for AAA-rated bonds, and required returns increase as the ratings get lower.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements is CORRECT?

Accepted Answer

A)  the total yield on a bond is derived from dividends plus changes in the price of the bond. 
B)  bonds are riskier than common stocks and therefore have higher required returns. 
C)  bonds issued by larger companies always have lower yields to maturity (less risk) than bonds issued by smaller companies. 
D)  the market value of a bond will always approach its par value as its maturity date approaches, provided the bond's required return remains constant. 
E)  if the federal reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices. 
A)  the total yield on a bond is derived from dividends plus changes in the price of the bond. 
B)  bonds are riskier than common stocks and therefore have higher required returns. 
C)  bonds issued by larger companies always have lower yields to maturity (less risk) than bonds issued by smaller companies. 
D)  the market value of a bond will always approach its par value as its maturity date approaches, provided the bond's required return remains constant. 
E)  if the federal reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices.

Question 12

Which of the following statements is NOT CORRECT?

Accepted Answer

A)  the expected return on a corporate bond must be less than its promised return if the probability of default is greater than zero. 
B)  all else equal, senior debt has less default risk than subordinated debt. 
C)  a company's bond rating is affected by its financial ratios and provisions in its indenture. 
D)  under chapter 11 of the bankruptcy act, the assets of a firm that declares bankruptcy must be liquidated, and the sale proceeds must be used to pay off its debt according to the seniority of the debt as spelled out in the act. 
E)  all else equal, secured debt is less risky than unsecured debt. 
A)  the expected return on a corporate bond must be less than its promised return if the probability of default is greater than zero. 
B)  all else equal, senior debt has less default risk than subordinated debt. 
C)  a company's bond rating is affected by its financial ratios and provisions in its indenture. 
D)  under chapter 11 of the bankruptcy act, the assets of a firm that declares bankruptcy must be liquidated, and the sale proceeds must be used to pay off its debt according to the seniority of the debt as spelled out in the act. 
E)  all else equal, secured debt is less risky than unsecured debt.

Question 13

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 14

Bonds A, B, and C all have a maturity of 15 years and a yield to maturity of 9%. Bond A's price exceeds its par value, Bond B's price equals its par value, and Bond C's price is less than its par value. Which of the following statements is CORRECT?

Accepted Answer

A)  bond a has the most interest rate risk. 
B)  if the yield to maturity on the three bonds remains constant, the prices of the three bonds will remain the same over the next year. 
C)  if the yield to maturity on each bond increases to 8%, the prices of all three bonds will decline. 
D)  bond c sells at a premium over its par value. 
E)  if the yield to maturity on each bond decreases to 6%, bond a will have the largest percentage increase in its price. 
A)  bond a has the most interest rate risk. 
B)  if the yield to maturity on the three bonds remains constant, the prices of the three bonds will remain the same over the next year. 
C)  if the yield to maturity on each bond increases to 8%, the prices of all three bonds will decline. 
D)  bond c sells at a premium over its par value. 
E)  if the yield to maturity on each bond decreases to 6%, bond a will have the largest percentage increase in its price.

Question 15

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?

Accepted Answer

A)  if the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds, we could be certain that the firm's total interest expense would be lower than if the debt were raised by issuing $100 million of debentures. 
B)  in this situation, we cannot tell for sure how, or whether, the firm's total interest expense on the $100 million of debt would be affected by the mix of debentures versus first mortgage bonds. the interest rate on each of the two types of bonds would increase as the percentage of mortgage bonds used was increased, but the result might well be such that the firm's total interest charges would not be affected materially by the mix between the two. 
C)  the higher the percentage of debentures, the greater the risk borne by each debenture, and thus the higher the required rate of return on the debentures. 
D)  if the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds, we could be certain that the firm's total interest expense would be lower than if the debt were raised by issuing $100 million of first mortgage bonds. 
E)  the higher the percentage of debt represented by mortgage bonds, the riskier both types of bonds will be and, consequently, the higher the firm's total dollar interest charges will be. 
A)  if the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds, we could be certain that the firm's total interest expense would be lower than if the debt were raised by issuing $100 million of debentures. 
B)  in this situation, we cannot tell for sure how, or whether, the firm's total interest expense on the $100 million of debt would be affected by the mix of debentures versus first mortgage bonds. the interest rate on each of the two types of bonds would increase as the percentage of mortgage bonds used was increased, but the result might well be such that the firm's total interest charges would not be affected materially by the mix between the two. 
C)  the higher the percentage of debentures, the greater the risk borne by each debenture, and thus the higher the required rate of return on the debentures. 
D)  if the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds, we could be certain that the firm's total interest expense would be lower than if the debt were raised by issuing $100 million of first mortgage bonds. 
E)  the higher the percentage of debt represented by mortgage bonds, the riskier both types of bonds will be and, consequently, the higher the firm's total dollar interest charges will be.

Question 16

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 17

Haswell Enterprises' bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 4.75%, based on semiannual compounding. What is the bond's price?

Accepted Answer

A)  1,063.09 
B)  1,090.35 
C)  1,118.31 
D)  1,146.27 
E)  1,174.93 
A)  1,063.09 
B)  1,090.35 
C)  1,118.31 
D)  1,146.27 
E)  1,174.93

Question 18

Which of the following statements is CORRECT?

Accepted Answer

A)  a bond is likely to be called if its market price is below its par value. 
B)  even if a bond's ytc exceeds its ytm, an investor with an investment horizon longer than the bond's maturity would be worse off if the bond were called. 
C)  a bond is likely to be called if its market price is equal to its par value. 
D)  a bond is likely to be called if it sells at a discount below par. 
E)  a bond is likely to be called if its coupon rate is below its ytm. 
A)  a bond is likely to be called if its market price is below its par value. 
B)  even if a bond's ytc exceeds its ytm, an investor with an investment horizon longer than the bond's maturity would be worse off if the bond were called. 
C)  a bond is likely to be called if its market price is equal to its par value. 
D)  a bond is likely to be called if it sells at a discount below par. 
E)  a bond is likely to be called if its coupon rate is below its ytm.

Question 19

Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price?

Accepted Answer

A)  a 1-year bond with a 15% coupon. 
B)  a 3-year bond with a 10% coupon. 
C)  a 10-year zero coupon bond. 
D)  a 10-year bond with a 10% coupon. 
E)  an 8-year bond with a 9% coupon. 
A)  a 1-year bond with a 15% coupon. 
B)  a 3-year bond with a 10% coupon. 
C)  a 10-year zero coupon bond. 
D)  a 10-year bond with a 10% coupon. 
E)  an 8-year bond with a 9% coupon.

Question 20

You are considering three different bonds for your portfolio. Each bond has a 10-year maturity and a yield to maturity of 10%. Bond X has an 8% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a 12% annual coupon. Which of the following statements is CORRECT?

Accepted Answer

A)  bond x has the greatest reinvestment rate risk. 
B)  if market interest rates decline, all of the bonds will have an increase in price, and bond z will have the largest percentage increase in price. 
C)  if market interest rates remain at 10%, bond z's price will be 10% higher one year from today. 
D)  if market interest rates increase, bond x's price will increase, bond z's price will decline, and bond y's price will remain the same. 
E)  if the bonds' market interest rates remain at 10%, bond z's price will be lower one year from now than it is today. 
A)  bond x has the greatest reinvestment rate risk. 
B)  if market interest rates decline, all of the bonds will have an increase in price, and bond z will have the largest percentage increase in price. 
C)  if market interest rates remain at 10%, bond z's price will be 10% higher one year from today. 
D)  if market interest rates increase, bond x's price will increase, bond z's price will decline, and bond y's price will remain the same. 
E)  if the bonds' market interest rates remain at 10%, bond z's price will be lower one year from now than it is today.

Exam 4: Bond Valuation

Which of the following statements is CORRECT?

A Treasury bond has an 8% annual coupon and a 7.5% yield to maturity. Which of the following statements is CORRECT?

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 interest rate risk to companies, it offers no advantages to issuers.

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?

There is an inverse relationship between bonds' quality ratings and their required rates of return. Thus, the required return is lowest for AAA-rated bonds, and required returns increase as the ratings get lower.

Which of the following statements is CORRECT?

Which of the following statements is NOT CORRECT?

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

Bonds A, B, and C all have a maturity of 15 years and a yield to maturity of 9%. Bond A's price exceeds its par value, Bond B's price equals its par value, and Bond C's price is less than its par value. 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?

Haswell Enterprises' bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 4.75%, based on semiannual compounding. What is the bond's price?

Which of the following statements is CORRECT?

Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price?

You are considering three different bonds for your portfolio. Each bond has a 10-year maturity and a yield to maturity of 10%. Bond X has an 8% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a 12% annual coupon. 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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