Question 1

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 2

Which of the following bonds has the greatest interest rate price risk?

Accepted Answer

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

Question 3

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.

Question 4

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

Question 5

a firm raises capital by selling new bonds, it is called the "issuing firm," and the coupon rate is generally set equal to the required rate on bonds of equal risk.

Accepted Answer

A) True 
 B)False

Question 6

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.

Question 7

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 8

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

Question 9

Stephenson Co.'s 15-year bond with a face value of $1,000 currently sells for $850 Which of the following statements is CORRECT?

Accepted Answer

A)  The bond's current yield exceeds its yield to maturity. 
B)  The bond's yield to maturity is greater than its coupon rate. 
C)  The bond's current yield is equal to its coupon rate. 
D)  If the yield to maturity stays constant until the bond matures, the bond's price will remain at $850. 
E)  The bond's coupon rate exceeds its current yield.

Question 10

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.

Question 11

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 12

Rogoff Co.'s 15-year bonds havean annual coupon rate of 9.5% Each bond has face value of $1,000 and makes semiannual interest payments If you require an 11.0% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

Accepted Answer

A)  $891.00 
B)  $913.27 
C)  $936.10 
D)  $959.51 
E)  $983.49

Question 13

Noncallable bonds that mature in 10 years were recently issued by Sternglass Inc 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 14

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

Question 15

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 16

Which of the following statements is CORRECT?

Accepted Answer

A)  Most sinking funds require the issuer to provide funds to a trustee, who saves the money so that it will be available to pay off bondholders when the bonds mature. 
B)  A sinking fund provision makes a bond more risky to investors at the time of issuance. 
C)  Sinking fund provisions never require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time. 
D)  If interest rates have increased since a company issued bonds with a sinking fund, the company is less likely to retire the bonds by buying them back in the open market, as opposed to calling them in at the sinking fund call price. 
E)  Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest rates decline after the bond has been issued.

Question 17

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

Question 18

year ago Lerner and Luckmann Coissued 15-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000Today, 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 19

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%

Question 20

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

Exam 4: Bonds

Which of the following bonds has the greatest interest rate price risk?

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?

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

a firm raises capital by selling new bonds, it is called the "issuing firm," and the coupon rate is generally set equal to the required rate on bonds of equal risk.

Which of the following statements is CORRECT?

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.

Ranger Incwould like 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?

Stephenson Co.'s 15-year bond with a face value of $1,000 currently sells for $850 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?

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.

Rogoff Co.'s 15-year bonds havean annual coupon rate of 9.5% Each bond has face value of $1,000 and makes semiannual interest payments If you require an 11.0% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

Noncallable bonds that mature in 10 years were recently issued by Sternglass Inc 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?

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.

Which of the following statements is CORRECT?

year ago Lerner and Luckmann Coissued 15-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000Today, 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?

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?

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.