Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)  All else equal, a bond that has a coupon rate of 10% will sell at a discount if the required return for bonds of similar risk is 8%. 
B)  The price of a discount bond will increase over time, assuming that the bond's yield to maturity remains constant. 
C)  For a given firm, its debentures are likely to have a lower yield to maturity than its mortgage bonds. 
D)  When large firms are in financial distress, they are almost always liquidated, whereas smaller firms are generally reorganized. 
E)  The total return on a bond during a given year consists only of the coupon interest payments received. 
A)  All else equal, a bond that has a coupon rate of 10% will sell at a discount if the required return for bonds of similar risk is 8%. 
B)  The price of a discount bond will increase over time, assuming that the bond's yield to maturity remains constant. 
C)  For a given firm, its debentures are likely to have a lower yield to maturity than its mortgage bonds. 
D)  When large firms are in financial distress, they are almost always liquidated, whereas smaller firms are generally reorganized. 
E)  The total return on a bond during a given year consists only of the coupon interest payments received. B

Question 2

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 C

Question 3

CMS Corporation's balance sheet as of today is as follows:
 
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 C

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)  If rates fall after its issue, a zero coupon bond could trade at a price above its par value. 
B)  If rates fall rapidly, a zero coupon bond's expected appreciation could become negative. 
C)  If a firm moves from a position of strength toward financial distress, its bonds' yield to maturity would probably decline. 
D)  If a bond is selling at a premium, this implies that its yield to maturity exceeds its coupon rate. 
E)  If a coupon bond is selling at par, its current yield equals its yield to maturity. 
A)  If rates fall after its issue, a zero coupon bond could trade at a price above its par value. 
B)  If rates fall rapidly, a zero coupon bond's expected appreciation could become negative. 
C)  If a firm moves from a position of strength toward financial distress, its bonds' yield to maturity would probably decline. 
D)  If a bond is selling at a premium, this implies that its yield to maturity exceeds its coupon rate. 
E)  If a coupon bond is selling at par, its current yield equals its yield to maturity.

Question 5

The Gergen Group's 5-year bonds yield 6.85%, and 5-year T-bonds yield 4.75%.The real risk-free rate is r* = 2.80%, the default risk premium for Gergen's bonds is DRP = 0.85% versus zero for T-bonds, the liquidity premium on Gergen's bonds is LP = 1.25%, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1)´ 0.1%, where t = number of years to maturity.What is the inflation premium (IP)on 5-year bonds?

Accepted Answer

A)  1.40% 
B)  1.55% 
C)  1.71% 
D)  1.88% 
E)  2.06% 
A)  1.40% 
B)  1.55% 
C)  1.71% 
D)  1.88% 
E)  2.06%

Question 6

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.

Question 7

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.

Question 8

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 9

Which of the following statements is CORRECT?

Accepted Answer

A)  A 10-year, 10% coupon bond has less reinvestment rate risk than a 10-year, 5% coupon bond (assuming all else equal). 
B)  The total return on a bond during a given year is the sum of the coupon interest payments received during the year and the change in the value of the bond from the beginning to the end of the year. 
C)  The price of a 20-year, 10% bond is less sensitive to changes in interest rates than the price of a 5-year, 10% bond. 
D)  A $1, 000 bond with $100 annual interest payments that has 5 years to maturity and is not expected to default would sell at a discount if interest rates were below 9% and at a premium if interest rates were greater than 11%. 
E)  10-year, zero coupon bonds have higher reinvestment rate risk than 10-year, 10% coupon bonds. 
A)  A 10-year, 10% coupon bond has less reinvestment rate risk than a 10-year, 5% coupon bond (assuming all else equal). 
B)  The total return on a bond during a given year is the sum of the coupon interest payments received during the year and the change in the value of the bond from the beginning to the end of the year. 
C)  The price of a 20-year, 10% bond is less sensitive to changes in interest rates than the price of a 5-year, 10% bond. 
D)  A $1, 000 bond with $100 annual interest payments that has 5 years to maturity and is not expected to default would sell at a discount if interest rates were below 9% and at a premium if interest rates were greater than 11%. 
E)  10-year, zero coupon bonds have higher reinvestment rate risk than 10-year, 10% coupon bonds.

Question 10

A bond has a $1, 000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default.The bond should sell at a premium if interest rates are below 10% and at a discount if interest rates are greater than 10%.

Accepted Answer

A) True 
 B)False

Question 11

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

Accepted Answer

A)  20-year, 10% coupon bond. 
B)  20-year, 5% coupon bond. 
C)  1-year, 10% coupon bond. 
D)  20-year, zero coupon bond. 
E)  10-year, zero coupon bond. 
A)  20-year, 10% coupon bond. 
B)  20-year, 5% coupon bond. 
C)  1-year, 10% coupon bond. 
D)  20-year, zero coupon bond. 
E)  10-year, zero coupon bond.

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A)  The most likely explanation for an inverted yield curve is that investors expect inflation to increase. 
B)  The most likely explanation for an inverted yield curve is that investors expect inflation to decrease. 
C)  If the yield curve is inverted, short-term bonds have lower yields than long-term bonds. 
D)  Inverted yield curves can exist for Treasury bonds, but because of default premiums, the corporate yield curve can never be inverted. 
E)  The higher the maturity risk premium, the higher the probability that the yield curve will be inverted. 
A)  The most likely explanation for an inverted yield curve is that investors expect inflation to increase. 
B)  The most likely explanation for an inverted yield curve is that investors expect inflation to decrease. 
C)  If the yield curve is inverted, short-term bonds have lower yields than long-term bonds. 
D)  Inverted yield curves can exist for Treasury bonds, but because of default premiums, the corporate yield curve can never be inverted. 
E)  The higher the maturity risk premium, the higher the probability that the yield curve will be inverted.

Question 13

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 14

The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds, other things held constant.

Accepted Answer

A) True 
 B)False

Question 15

Sinking funds are devices used to force companies to retire bonds on a scheduled basis prior to their maturity.Many bond indentures allow the company to acquire bonds for a sinking fund by either purchasing bonds in the market or selecting the bonds to be acquired by a lottery administered by the trustee through a call at face value.

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

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 18

Under normal conditions, which of the following would be most likely to increase the coupon rate required to enable a bond to be issued at par?

Accepted Answer

A)  Adding a call provision. 
B)  The rating agencies change the bond's rating from Baa to Aaa. 
C)  Making the bond a first mortgage bond rather than a debenture. 
D)  Adding a sinking fund. 
E)  Adding additional restrictive covenants that limit management's actions. 
A)  Adding a call provision. 
B)  The rating agencies change the bond's rating from Baa to Aaa. 
C)  Making the bond a first mortgage bond rather than a debenture. 
D)  Adding a sinking fund. 
E)  Adding additional restrictive covenants that limit management's actions.

Question 19

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 20

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 - 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%

Which of the following statements is CORRECT?

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?

CMS Corporation's balance sheet as of today is as follows: 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?

Which of the following statements is CORRECT?

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?

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?

A bond has a $1, 000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default.The bond should sell at a premium if interest rates are below 10% and at a discount if interest rates are greater than 10%.

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

Which of the following statements is CORRECT?

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

The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds, other things held constant.

"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?

Under normal conditions, which of the following would be most likely to increase the coupon rate required to enable a bond to be issued at par?

Which of the following statements is CORRECT?

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Exam 5: Bonds, bond valuation, and interest rates

Which of the following statements is CORRECT?

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?

CMS Corporation's balance sheet as of today is as follows: 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?

Which of the following statements is CORRECT?

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?

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?

A bond has a $1, 000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default.The bond should sell at a premium if interest rates are below 10% and at a discount if interest rates are greater than 10%.

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

Which of the following statements is CORRECT?

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

The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds, other things held constant.

"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?

Under normal conditions, which of the following would be most likely to increase the coupon rate required to enable a bond to be issued at par?

Which of the following statements is 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

Valuation of stocks and corporations

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

Corporate valuation and financial planning

Agency conflicts and corporate governance

Distributions to shareholders: dividends and repurchases

Capital structure decisions

Supply chains and working capital management

Multinational financial management

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