Question 1

All else being equal, an increase in the yield to maturity of a bond will result in:

Accepted Answer

A)  an increase in the market price of the bond.
B)  a greater interest rate price risk on a long-term bond than on a short-term bond.
C)  an increase in the maturity value of the bond.
D)  a decrease in the rate of return at which the cash flows from the portfolios can be reinvested.
E)  a lower risk of suffering losses in the market values of the bond portfolios. B

Question 2

If a bond is callable and if interest rates in the economy decline, then the company can sell a new issue of low-interest-rate bonds and use the proceeds to "call" the old bonds in and effectively refinance its debt at a lower rate.

Accepted Answer

A) True 
 B)False  True

Question 3

Floating-rate debt is advantageous to investors because the interest rate earned on the debt increases when market rates rise.

Accepted Answer

A) True 
 B)False  True

Question 4

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

Accepted Answer

A)  An increase in interest rates
B)  A decrease in interest rates
C)  A decrease in the price of outstanding convertible bonds
D)  A low call premium
E)  A decrease in the call value

Question 5

The current market price of Smith Corporation's 10-year bonds is $1,297.58. A 10 percent coupon interest rate is paid semiannually, and the par value is equal to $1,000. What is the yield to maturity (YTM), (stated on a simple, or annual, basis) if the bonds mature 10 years from today?

Accepted Answer

A)  8%
B)  6%
C)  4%
D)  2%
E)  1%

Question 6

One of the disadvantages of issuing a zero coupon bond is that any tax shield associated with the bond's price appreciation cannot be claimed until the bond matures.

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

Per Standard & Poor's Corporation (S&P), a bond whose rating is BBB is considered:

Accepted Answer

A)  a junk bond with low investment risk.
B)  high quality with zero investment risk.
C)  investment grade with medium investment risk.
D)  substandard with high investment risk.
E)  speculative with extremely high investment risk.

Question 9

Restrictive covenants are designed to protect both the bondholder and the issuer even though they might constrain the actions of the firm's managers. Such covenants are contained in the bond's indenture.

Accepted Answer

A) True 
 B)False

Question 10

In the event of liquidation, a(n) _____ has a claim on assets only after the senior debt has been paid off.

Accepted Answer

A)  debenture
B)  income bond
C)  indenture
D)  subordinated debenture
E)  mortgage bond

Question 11

The conversion feature of a bond permits a:

Accepted Answer

A)  company to convert a high coupon rate bond into a lower coupon rate bond.
B)  bondholder to exchange his or her bonds for the company's common stock.
C)  bondholder to redeem a small percentage of the bond every year.
D)  company to convert the face value of the bond to the market price of the bond.
E)  company to trade outstanding bonds with a term deposit in a financial institution.

Question 12

Rick bought a bond when it was issued by Macroflex Corporation 14 years ago. The bond, which has a $1,000 face value and a coupon rate equal to 10 percent, matures in six years. Interest is paid every six months; the next interest payment is scheduled for six months from today. Assuming the yield on similar risk investments is 14 percent, calculate the current market value (price) of the bond.

Accepted Answer

A)  $841.15
B)  $1,238.28
C)  $904.67
D)  $757.26
E)  $844.45

Question 13

If a bond is selling for less than its face, or maturity, value and the market interest rate remains unchanged during the life of the bond, then the price (value) of the bond will increase as the maturity date nears.

Accepted Answer

A) True 
 B)False

Question 14

A bond's maturity date is the date on which:

Accepted Answer

A)  the market interest rate equals the coupon rate on a bond.
B)  the principal amount of the debt is due.
C)  investors make no capital gain or loss on an investment.
D)  the interest payment is due.
E)  the market value of the bond is more than its face value.

Question 15

Mortgage bonds are backed by assets of the issuing firm, whereas debentures are not.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following statements is true about a zero coupon bond?

Accepted Answer

A)  A zero coupon bond is taxed as a capital gain at the time the bond matures.
B)  A zero coupon bond is issued at a substantial discount below its par value.
C)  A zero coupon bond is issued at a coupon rate that adjusts for inflation.
D)  The interest received every year on a zero coupon bond is taxed as interest income.
E)  The discount on the issue of a zero coupon bond is written off over its life in the investor's financial statement.

Question 17

Foreign debt is a debt instrument sold in a country other than the one in whose currency the debt is denominated.

Accepted Answer

A) True 
 B)False

Question 18

A call provision for the redemption of a bond:

Accepted Answer

A)  requires an advance payment of all of the interest that would be paid from the call date until the maturity of the bond.
B)  allows the firm to refinance debt.
C)  allows the firm to call the bonds for redemption at any time after the bond has been issued.
D)  requires the redemption of the bonds at their market price.
E)  requires bondholders to convert their bonds into lower coupon rate bonds.

Question 19

Emily is contemplating the purchase of a 20-year bond that pays $50 interest every six months. The face value of the bond is $1,000. She plans to hold the bond for 10 years and sell it. She requires a 12 percent annual return but believes that the market will give only an 8 percent return when she sells the bond 10 years from now. Assuming she is a rational investor, how much should she be willing to pay for the bond today?

Accepted Answer

A)  $1,126.85
B)  $885.30
C)  $737.50
D)  $927.68
E)  $856.91

Question 20

When the market value of debt is the same as its face value, it is said to be selling at the:

Accepted Answer

A)  yield value.
B)  par value.
C)  discounted value.
D)  premium value.
E)  maturity value.

Exam 6: Bonds Debt Characteristics and Valuation

All else being equal, an increase in the yield to maturity of a bond will result in:

If a bond is callable and if interest rates in the economy decline, then the company can sell a new issue of low-interest-rate bonds and use the proceeds to "call" the old bonds in and effectively refinance its debt at a lower rate.

Floating-rate debt is advantageous to investors because the interest rate earned on the debt increases when market rates rise.

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

The current market price of Smith Corporation's 10-year bonds is $1,297.58. A 10 percent coupon interest rate is paid semiannually, and the par value is equal to $1,000. What is the yield to maturity (YTM) , (stated on a simple, or annual, basis) if the bonds mature 10 years from today?

One of the disadvantages of issuing a zero coupon bond is that any tax shield associated with the bond's price appreciation cannot be claimed until the bond matures.

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

Per Standard & Poor's Corporation (S&P) , a bond whose rating is BBB is considered:

Restrictive covenants are designed to protect both the bondholder and the issuer even though they might constrain the actions of the firm's managers. Such covenants are contained in the bond's indenture.

In the event of liquidation, a(n) _____ has a claim on assets only after the senior debt has been paid off.

The conversion feature of a bond permits a:

If a bond is selling for less than its face, or maturity, value and the market interest rate remains unchanged during the life of the bond, then the price (value) of the bond will increase as the maturity date nears.

A bond's maturity date is the date on which:

Mortgage bonds are backed by assets of the issuing firm, whereas debentures are not.

Which of the following statements is true about a zero coupon bond?

Foreign debt is a debt instrument sold in a country other than the one in whose currency the debt is denominated.

A call provision for the redemption of a bond:

When the market value of debt is the same as its face value, it is said to be selling at the: