Question 1

Adams Enterprises' noncallable bonds currently sell for $1,120. They have a 15-year maturity, an annual coupon of $85, and a par value of $1,000. What is their yield to maturity?

Accepted Answer

A)  5.84% 
B)  6.15% 
C)  6.47% 
D)  6.81% 
E)  7.17%

Question 2

A bond that had a 20-year original maturity with 1 year left to maturity has more 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 3

A zero coupon bond is a bond that pays no interest and is offered (and initially sells) at par. These bonds provide compensation to investors in the form of capital appreciation.

Accepted Answer

A) True 
 B)False

Question 4

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

Question 5

An investor is considering buying one of two 10-year, $1,000 face value, noncallable bonds: Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon. Both bonds have a yield to maturity of 8%, and the YTM is expected to remain constant for the next 10 years. Which of the following statements is CORRECT?

Accepted Answer

A)  Bond B has a higher price than Bond A today, but one year from now the bonds will have the same price. 
B)  One year from now, Bond A's price will be higher than it is today. 
C)  Bond A's current yield is greater than 8%. 
D)  Bond A has a higher price than Bond B today, but one year from now the bonds will have the same price. 
E)  Both bonds have the same price today, and the price of each bond is expected to remain constant until the bonds mature.

Question 6

Suppose a new company decides to raise a total of $200 million, with $100 million as common equity and $100 million as long-term debt. 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)  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. 
B)  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. 
C)  In this situation, we cannot tell for sure how, or even 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 type of bond would increase as the percentage of mortgage bonds used was increased, but the average cost might well be such that the firm's total interest charges would not be affected materially by the mix between the two. 
D)  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. 
E)  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.

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)  All else equal, senior debt generally has a lower yield to maturity than subordinated debt. 
B)  An indenture is a bond that is less risky than a mortgage bond. 
C)  The expected return on a corporate bond will generally exceed the bond's yield to maturity. 
D)  If a bond's coupon rate exceeds its yield to maturity, then its expected return to investors will also exceed its yield to maturity. 
E)  Under our bankruptcy laws, any firm that is in financial distress will be forced to declare bankruptcy and then be liquidated.

Question 8

A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon. Neither is callable, and both 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 9

O'Brien Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 25 years. Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $975. What is the bond's nominal coupon interest rate?

Accepted Answer

A)  7.32% 
B)  7.71% 
C)  8.12% 
D)  8.54% 
E)  8.99%

Question 10

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.

Question 11

Which of the following bonds has the greatest price risk?

Accepted Answer

A)  A 10-year $100 annuity. 
B)  A 10-year, $1,000 face value, zero coupon bond. 
C)  A 10-year, $1,000 face value, 10% coupon bond with annual interest payments. 
D)  All 10-year bonds have the same price risk since they have the same maturity. 
E)  A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments.

Question 12

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

Accepted Answer

A)  The company's bonds are downgraded. 
B)  Market interest rates rise sharply. 
C)  Market interest rates decline sharply. 
D)  The company's financial situation deteriorates significantly. 
E)  Inflation increases significantly.

Question 13

Which of the following statements is CORRECT?

Accepted Answer

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

Question 14

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 15

The price sensitivity of a bond to a given change in interest rates is generally greater the longer the bond's remaining maturity.

Accepted Answer

A) True 
 B)False

Question 16

Dyl Inc.'s bonds currently sell for $1,040 and have a par value of $1,000. They pay a $65 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to maturity (YTM)?

Accepted Answer

A)  5.78% 
B)  6.09% 
C)  6.39% 
D)  6.71% 
E)  7.05%

Question 17

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 use of 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 be liquidated by the trustee, who uses the proceeds to pay bondholders, unpaid wages, taxes, and legal 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 gives 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 18

Sadik Inc.'s bonds currently sell for $1,180 and have a par value of $1,000. They pay a $105 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to call (YTC)?

Accepted Answer

A)  6.63% 
B)  6.98% 
C)  7.35% 
D)  7.74% 
E)  8.12%

Question 19

Which of the following statements is CORRECT?

Accepted Answer

A)  If a coupon bond is selling at a premium, then the bond's current yield is zero. 
B)  If a coupon bond is selling at a discount, then the bond's expected capital gains yield is negative. 
C)  If a bond is selling at a discount, the yield to call is a better measure of the expected return than the 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 coupon bond is selling at par, its current yield equals its yield to maturity.

Question 20

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

Exam 7: Bonds

Adams Enterprises' noncallable bonds currently sell for $1,120. They have a 15-year maturity, an annual coupon of $85, and a par value of $1,000. What is their yield to maturity?

A bond that had a 20-year original maturity with 1 year left to maturity has more 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.)

A zero coupon bond is a bond that pays no interest and is offered (and initially sells) at par. These bonds provide compensation to investors in the form of capital appreciation.

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?

Which of the following statements is CORRECT?

A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon. Neither is callable, and both 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?

O'Brien Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 25 years. Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $975. What is the bond's nominal coupon interest rate?

Which of the following statements is CORRECT?

Which of the following bonds has the greatest price risk?

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

Which of the following statements is CORRECT?

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.

The price sensitivity of a bond to a given change in interest rates is generally greater the longer the bond's remaining maturity.

Dyl Inc.'s bonds currently sell for $1,040 and have a par value of $1,000. They pay a $65 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to maturity (YTM) ?

Which of the following statements is CORRECT?

Sadik Inc.'s bonds currently sell for $1,180 and have a par value of $1,000. They pay a $105 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to call (YTC) ?

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.