Question 1

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  True

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)  If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices.
B)  The total yield on a bond is derived from dividends plus changes in the price of the bond.
C)  Bonds are riskier than common stocks and therefore have higher required returns.
D)  Bonds issued by larger companies always have lower yields to maturity (less risk)  than bonds issued by smaller companies.
E)  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

Question 3

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

Question 4

Tucker Corporation is planning 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)  Because of the call premium, the required rate of return would decline.
B)  There is no reason to expect a change in the required rate of return.
C)  The required rate of return would decline because the bond would then be less risky to a bondholder.
D)  The required rate of return would increase because the bond would then be more risky to a bondholder.
E)  It is impossible to say without more information.

Question 5

Which of the following statements is NOT CORRECT?

Accepted Answer

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

Question 6

Which of the following statements is CORRECT?

Accepted Answer

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

Question 7

Wachowicz Corporation issued 15-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000 one year ago.Today, the market interest rate on these bonds is 5.5%.What is the current price of the bonds, given that they now have 14 years to maturity?

Accepted Answer

A)  $1,077.01
B)  $1,104.62
C)  $1,132.95
D)  $1,162.00
E)  $1,191.79

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)  One disadvantage of zero coupon bonds is that the issuing firm cannot realize any tax savings from the debt until the bonds mature.
B)  Other things held constant, a callable bond should have a lower yield to maturity than a noncallable bond.
C)  Once a firm declares bankruptcy, it must then be liquidated by the trustee, who uses the proceeds to pay bondholders, unpaid wages, taxes, and lawyer fees.
D)  Income bonds must pay interest only if the company earns the interest.Thus, these securities cannot bankrupt a company prior to their maturity, and this makes them safer to the issuing corporation than "regular" bonds.
E)  A firm with a sinking fund that gave it the choice of calling the required bonds at par or buying the bonds in the open market would generally choose the open market purchase if the coupon rate exceeded the going interest rate.

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)  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.
B)  The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.
C)  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.
D)  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.
E)  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.

Question 10

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

Question 11

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

Accepted Answer

A)  A 20-year zero coupon bond has more reinvestment rate risk than a 20-year coupon bond.
B)  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.
C)  From a corporate borrower's point of view, interest paid on bonds is not tax-deductible.
D)  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.
E)  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.

Question 12

market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.

Accepted Answer

A) True 
 B)False

Question 13

bonds are high risk, high yield debt instruments.They are often used to finance leveraged buyouts and mergers, and to provide financing to companies of questionable financial strength.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following statements is CORRECT?

Accepted Answer

A)  The yield to maturity for a coupon bond that sells at a premium consists entirely of a positive capital gains yield; it has a zero current interest yield.
B)  The market value of a bond will always approach its par value as its maturity date approaches.This holds true even if the firm has filed for bankruptcy.
C)  Rising inflation makes the actual yield to maturity on a bond greater than a quoted yield to maturity that is based on market prices.
D)  The yield to maturity on a coupon bond that sells at its par value consists entirely of a current interest yield; it has a zero expected capital gains yield.
E)  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.

Question 15

bond that had a 20-year original maturity with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity.(Assume that the bonds have equal default risk and equal coupon rates, and they cannot be called.)

Accepted Answer

A) True 
 B)False

Question 16

Which of the following statements is CORRECT?

Accepted Answer

A)  All else equal, high-coupon bonds have less reinvestment rate risk than low-coupon bonds.
B)  All else equal, long-term bonds have less interest rate price risk than short-term bonds.
C)  All else equal, low-coupon bonds have less interest rate price risk than high-coupon bonds.
D)  All else equal, short-term bonds have less reinvestment rate risk than long-term bonds.
E)  All else equal, long-term bonds have less reinvestment rate risk than short-term bonds.

Question 17

Which of the following statements is CORRECT?

Accepted Answer

A)  If a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity.
B)  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.
C)  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.
D)  If a coupon bond is selling at par, its current yield equals its yield to maturity.
E)  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.

Question 18

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

Question 19

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

Question 20

Which of the following statements is CORRECT?

Accepted Answer

A)  If a coupon bond is selling at par, its current yield equals its yield to maturity.
B)  If a coupon bond is selling at a discount, its price will continue to decline until it reaches its par value at maturity.
C)  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.
D)  If a bond's yield to maturity exceeds its annual coupon, then the bond will trade at a premium.
E)  If a coupon bond is selling at a premium, its current yield equals its yield to maturity.

Exam 5: Bonds

Which of the following statements is CORRECT?

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?

Tucker Corporation is planning 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?

Which of the following statements is NOT CORRECT?

Which of the following statements is CORRECT?

Wachowicz Corporation issued 15-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000 one year ago.Today, the market interest rate on these bonds is 5.5%.What is the current price of the bonds, given that they now have 14 years to maturity?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% 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?

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

market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.

bonds are high risk, high yield debt instruments.They are often used to finance leveraged buyouts and mergers, and to provide financing to companies of questionable financial strength.

Which of the following statements is CORRECT?

bond that had a 20-year original maturity with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity.(Assume that the bonds have equal default risk and equal coupon rates, and they cannot be called.)

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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

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

Which of the following statements is CORRECT?