Question 1

Haswell Enterprises' bonds have a 10-year maturity,a 6.25% semiannual coupon,and a par value of $1,000.The going interest rate (rd)is 4.75%,based on semiannual compounding.What is the bond's price?

Accepted Answer

A)  1,063.09 
B)  1,090.35 
C)  1,118.31 
D)  1,146.27 
E)  1,174.93

Question 2

Income bonds pay interest only if the issuing company actually earns the indicated interest.Thus,these securities cannot bankrupt a company,and this makes them safer from an investor's perspective than regular bonds.

Accepted Answer

A) True 
 B)False

Question 3

Bond A has a 9% annual coupon while Bond B has a 6% annual coupon.Both bonds have a 7% yield to maturity,and the YTM is expected to remain constant.Which of the following statements is CORRECT?

Accepted Answer

A)  The prices of both bonds will remain unchanged. 
B)  The price of Bond A will decrease over time,but the price of Bond B will increase over time. 
C)  The prices of both bonds will increase by 7% per year. 
D)  The prices of both bonds will increase over time,but the price of Bond A will increase by more. 
E)  The price of Bond B will decrease over time,but the price of Bond A will increase over time.

Question 4

Which of the following statements is CORRECT?

Accepted Answer

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

Question 5

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 6

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 7

If 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 8

Which of the following statements is CORRECT?

Accepted Answer

A)  If their maturities and other characteristics were the same,a 5% coupon bond would have more interest rate price risk than a 10% coupon bond. 
B)  A 10-year coupon bond would have more reinvestment rate risk than a 5-year coupon bond,but all 10-year coupon bonds have the same amount of reinvestment rate risk. 
C)  A 10-year coupon bond would have more interest rate price risk than a 5-year coupon bond,but all 10-year coupon bonds have the same amount of interest rate price risk. 
D)  If their maturities and other characteristics were the same,a 5% coupon bond would have less interest rate price risk than a 10% coupon bond. 
E)  A zero coupon bond of any maturity will have more interest rate price risk than any coupon bond,even a perpetuity.

Question 9

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 10

Kessen Inc.'s bonds mature in 7 years,have a par value of $1,000,and make an annual coupon payment of $70.The market interest rate for the bonds is 8.5%.What is the bond's price?

Accepted Answer

A)  $923.22 
B)  $946.30 
C)  $969.96 
D)  $994.21 
E)  $1,019.06

Question 11

A 10-year bond pays an annual coupon,its YTM is 8%,and it currently trades at a premium.Which of the following statements is CORRECT?

Accepted Answer

A)  If the yield to maturity remains at 8%,then the bond's price will decline over the next year. 
B)  The bond's coupon rate is less than 8%. 
C)  If the yield to maturity increases,then the bond's price will increase. 
D)  If the yield to maturity remains at 8%,then the bond's price will remain constant over the next year. 
E)  The bond's current yield is less than 8%.

Question 12

Bond A has a 9% annual coupon,while Bond B has a 7% annual coupon.Both bonds have the same maturity,a face value of $1,000,and an 8% yield to maturity.Which of the following statements is CORRECT?

Accepted Answer

A)  Bond A trades at a discount,whereas Bond B trades at a premium. 
B)  If the yield to maturity for both bonds remains at 8%,Bond A's price one year from now will be higher than it is today,but Bond B's price one year from now will be lower than it is today. 
C)  If the yield to maturity for both bonds immediately decreases to 6%,Bond A's bond will have a larger percentage increase in value. 
D)  Bond A's current yield is greater than that of Bond B. 
E)  Bond A's capital gains yield is greater than Bond B's capital gains yield.

Question 13

Bonds A,B,and C all have a maturity of 15 years and a yield to maturity of 9%.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)  Bond A has the most interest rate risk. 
B)  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. 
C)  If the yield to maturity on each bond increases to 8%,the prices of all three bonds will decline. 
D)  Bond C sells at a premium over its par value. 
E)  If the yield to maturity on each bond decreases to 6%,Bond A will have the largest percentage increase in its price.

Question 14

The 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

Junk 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 16

The Gergen Group's 5-year bonds yield 6.85%,and 5-year T-bonds yield 4.75%.The real risk-free rate is r* = 2.80%,the default risk premium for Gergen's bonds is DRP = 0.85% versus zero for T-bonds,the liquidity premium on Gergen's bonds is LP = 1.25%,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 inflation premium (IP)on 5-year bonds?

Accepted Answer

A)  1.40% 
B)  1.55% 
C)  1.71% 
D)  1.88% 
E)  2.06%

Question 17

The 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 18

Which of the following statements is CORRECT?

Accepted Answer

A)  All else equal,a bond that has a coupon rate of 10% will sell at a discount if the required return for bonds of similar risk is 8%. 
B)  The price of a discount bond will increase over time,assuming that the bond's yield to maturity remains constant. 
C)  For a given firm,its debentures are likely to have a lower yield to maturity than its mortgage bonds. 
D)  When large firms are in financial distress,they are almost always liquidated,whereas smaller firms are generally reorganized. 
E)  The total return on a bond during a given year consists only of the coupon interest payments received.

Question 19

Meacham Enterprises' 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 20

Nicholas Industries can issue a 20-year bond with a 6% annual coupon.This bond is not convertible,is not callable,and has no sinking fund.Alternatively,Nicholas could issue a 20-year bond that is convertible into common equity,may be called,and has a sinking fund.Which of the following most accurately describes the coupon rate that Nicholas would have to pay on the convertible,callable bond?

Accepted Answer

A)  It could be less than,equal to,or greater than 6%. 
B)  Greater than 6%. 
C)  Exactly equal to 8%. 
D)  Less than 6%. 
E)  Exactly equal to 6%.

Exam 5: Bonds, Bond Valuation, and Interest Rates

Haswell Enterprises' bonds have a 10-year maturity,a 6.25% semiannual coupon,and a par value of $1,000.The going interest rate (r_d) is 4.75%,based on semiannual compounding.What is the bond's price?

Income bonds pay interest only if the issuing company actually earns the indicated interest.Thus,these securities cannot bankrupt a company,and this makes them safer from an investor's perspective than regular bonds.

Bond A has a 9% annual coupon while Bond B has a 6% annual coupon.Both bonds have a 7% yield to maturity,and the YTM is expected to remain constant.Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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?

If 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?

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.

Kessen Inc.'s bonds mature in 7 years,have a par value of $1,000,and make an annual coupon payment of $70.The market interest rate for the bonds is 8.5%.What is the bond's price?

A 10-year bond pays an annual coupon,its YTM is 8%,and it currently trades at a premium.Which of the following statements is CORRECT?

Bond A has a 9% annual coupon,while Bond B has a 7% annual coupon.Both bonds have the same maturity,a face value of $1,000,and an 8% yield to maturity.Which of the following statements is CORRECT?

Bonds A,B,and C all have a maturity of 15 years and a yield to maturity of 9%.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?

The 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.

Junk 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.

The 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.

Which of the following statements is CORRECT?

Meacham Enterprises' 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) ?

Exam 5: Bonds, Bond Valuation, and Interest Rates

Haswell Enterprises' bonds have a 10-year maturity,a 6.25% semiannual coupon,and a par value of $1,000.The going interest rate (rd) is 4.75%,based on semiannual compounding.What is the bond's price?

Income bonds pay interest only if the issuing company actually earns the indicated interest.Thus,these securities cannot bankrupt a company,and this makes them safer from an investor's perspective than regular bonds.

Bond A has a 9% annual coupon while Bond B has a 6% annual coupon.Both bonds have a 7% yield to maturity,and the YTM is expected to remain constant.Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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?

If 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?

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.

Kessen Inc.'s bonds mature in 7 years,have a par value of $1,000,and make an annual coupon payment of $70.The market interest rate for the bonds is 8.5%.What is the bond's price?

A 10-year bond pays an annual coupon,its YTM is 8%,and it currently trades at a premium.Which of the following statements is CORRECT?

Bond A has a 9% annual coupon,while Bond B has a 7% annual coupon.Both bonds have the same maturity,a face value of $1,000,and an 8% yield to maturity.Which of the following statements is CORRECT?

Bonds A,B,and C all have a maturity of 15 years and a yield to maturity of 9%.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?

The 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.

Junk 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.

The 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.

Which of the following statements is CORRECT?

Meacham Enterprises' 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) ?

Haswell Enterprises' bonds have a 10-year maturity,a 6.25% semiannual coupon,and a par value of $1,000.The going interest rate (r_d) is 4.75%,based on semiannual compounding.What is the bond's price?