Question 1

J.Masson Inc.recently issued noncallable bonds that mature in 10 years.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

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A) One advantage of a zero coupon Treasury bond is that no one who owns the bond has to pay any taxes on it until it matures or is sold. 
B) Long-term bonds have less interest rate price risk but more reinvestment rate risk than short-term bonds. 
C) If interest rates increase, all bond prices will increase, but the increase will be greater for bonds that have less interest rate risk. 
D) Relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more interest rate price risk but less reinvestment rate risk. 
E) Long-term bonds have less interest rate price risk and also less reinvestment rate risk than short-term bonds.

Question 3

Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, generally be subject to much more interest rate price risk if you purchased a 30-day bond than if you bought a 30-year bond.

Accepted Answer

A) True 
 B)False

Question 4

Niendorf Corporation's 5-year bonds yield 6.75%, and 5-year T-bonds yield 4.80%.The real risk-free rate is r* = 2.75%, the inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Niendorf's bonds is DRP = 1.20% 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 liquidity premium (LP) on Niendorf's bonds?

Accepted Answer

A) 0.49% 
B) 0.55% 
C) 0.61% 
D) 0.68% 
E) 0.75%

Question 5

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

Three $1,000 face value bonds that mature in 10 years have the same level of risk, hence their YTMs are equal.Bond A has an 8% annual coupon, Bond B has a 10% annual coupon, and Bond C has a 12% annual coupon.Bond B sells at par.Assuming interest rates remain constant for the next 10 years, which of the following statements is CORRECT?

Accepted Answer

A) Bond A's current yield will increase each year. 
B) Since the bonds have the same YTM, they should all have the same price, and since interest rates are not expected to change, their prices should all remain at their current levels until maturity. 
C) Bond C sells at a premium (its price is greater than par), and its price is expected to increase over the next year. 
D) Bond A sells at a discount (its price is less than par), and its price is expected to increase over the next year. 
E) Over the next year, Bond A's price is expected to decrease, Bond B's price is expected to stay the same, and Bond C's price is expected to increase.

Question 7

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 8

Short Corp.just issued bonds that will mature in 10 years, and Long Corp.issued bonds that will mature in 20 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 upward sloping and Short has less default risk than Long, then Short's bonds must under all conditions have the lower yield. 
B) If the Treasury yield curve is downward sloping, Long's bonds must under all conditions have the lower yield. 
C) 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. 
D) If the yield curve for Treasury securities is flat, Short's bond must under all conditions have the same yield as Long's bonds. 
E) If Long's and Short's bonds have the same default risk, their yields must under all conditions be equal.

Question 9

Sadik Inc.'s bonds currently sell for $1,280 and have a par value of $1,000.They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050.What is their yield to call (YTC)?

Accepted Answer

A) 6.39% 
B) 6.72% 
C) 7.08% 
D) 7.45% 
E) 7.82%

Question 10

"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 11

5-year Treasury bonds yield 5.5%.The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year bonds is 0.4%.What is the real risk-free rate, r*?

Accepted Answer

A) 2.59% 
B) 2.88% 
C) 3.20% 
D) 3.52% 
E) 3.87%

Question 12

Taussig Corp.'s bonds currently sell for $1,150.They have a 6.75% annual coupon rate and a 15-year maturity, but they can be called in 6 years at $1,067.50.Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future.Under these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds, the YTC or the YTM?

Accepted Answer

A) 3.92% 
B) 4.12% 
C) 4.34% 
D) 4.57% 
E) 4.81%

Question 13

Bonds A, B, and C all have a maturity of 10 years and a yield to maturity of 7%.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) If the yield to maturity on each bond decreases to 6%, Bond A will have the largest percentage increase in its price. 
B) Bond A has the most interest rate risk. 
C) 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. 
D) If the yield to maturity on each bond increases to 8%, the prices of all three bonds will decline. 
E) Bond C sells at a premium over its par value.

Question 14

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

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 16

Which of the following statements is CORRECT?

Accepted Answer

A) 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. 
B) Subordinated debt has less default risk than senior debt. 
C) Convertible bonds have lower coupon rates than non-convertible bonds of similar default risk because they offer the possibility of capital gains. 
D) Junk bonds typically provide a lower yield to maturity than investment-grade bonds. 
E) A debenture is a secured bond that is backed by some or all of the firm's fixed assets.

Question 17

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 18

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

Consider some bonds with one 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%

Question 20

Which of the following statements is CORRECT?

Accepted Answer

A) A zero coupon bond's current yield is equal to its yield to maturity. 
B) If a bond's yield to maturity exceeds its coupon rate, the bond will sell at par. 
C) All else equal, if a bond's yield to maturity increases, its price will fall. 
D) If a bond's yield to maturity exceeds its coupon rate, the bond will sell at a premium over par. 
E) All else equal, if a bond's yield to maturity increases, its current yield will fall.

Exam 5: Bonds

J.Masson Inc.recently issued noncallable bonds that mature in 10 years.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 statements is CORRECT?

Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, generally be subject to much more interest rate price risk if you purchased a 30-day bond than if you bought a 30-year bond.

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.

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.

Sadik Inc.'s bonds currently sell for $1,280 and have a par value of $1,000.They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050.What is their yield to call (YTC) ?

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

5-year Treasury bonds yield 5.5%.The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year bonds is 0.4%.What is the real risk-free rate, r*?

Bonds A, B, and C all have a maturity of 10 years and a yield to maturity of 7%.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?

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.

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?

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

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.

Consider some bonds with one 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?

Which of the following statements is CORRECT?