Question 1

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 $850. What is the bond's nominal (annual)  coupon interest rate?

Accepted Answer

A)   6.27%
B)   6.60%
C)   6.95%
D)   7.32%
E)   7.70%F) B) and D)
G) B) and C)

Question 2

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, theHigher 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 wereRaised by issuing $100 million of debentures.
C)   In this situation, we cannot tell for sure how, or 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 of the two types of bonds would increase as the percentage of mortgage bonds used was increased, but the result might well be such that the firm's total interest charges would notBe 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 returnOn 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 wereRaised by issuing $100 million of first mortgage bonds.F) A) and B)
G) B) and C)

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)   If a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity.
B)   On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bondWith an expected capital loss.
C)   On an expected yield basis, the expected current yield will always be positive because an investor would not purchase a bond that isNot expected to pay any cash coupon interest.
D)   If a coupon bond is selling at par, its current yield equals itsYield to maturity.
E)   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.F) All of the above
G) D) and E)

Question 4

If its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in value?

Accepted Answer

A)   A 1-year zero coupon bond.
B)   A 1-year bond with an 8% coupon.
C)   A 10-year bond with an 8% coupon.
D)   A 10-year bond with a 12% coupon.
E)   A 10-year zero coupon bond.F) B) and E)
G) A) and E)

Question 5

For 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 6

Which of the following statements is CORRECT?

Accepted Answer

A)   If inflation is expected to increase in the future, and if the maturity risk premium (MRP)  is greater than zero, then the yieldCurve will have an upward slope.
B)   If the maturity risk premium (MRP)  is greater than zero, then theYield curve must have an upward slope.
C)   Because long-term bonds are riskier than short-term bonds, yields on long-term Treasury bonds will always be higher than yields onShort-term T-bonds.
D)   If the maturity risk premium (MRP)  equals zero, the yield curveMust be flat.
E)   The yield curve can never be downward sloping.F) D) and E)
G) C) and E)

Question 7

You have funds that you want to invest in bonds, and you just noticed in the financial pages of the local newspaper that you can buy a $1,000 par value bond for $800. The coupon rate is 10% (with annual payments), and there are 10 years before the bond will mature and pay off its $1,000 par value. You should buy the bond if your required return on bonds with this risk is 12%.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)   The yield to maturity for a coupon bond that sells at a premium consists entirely of a positive capital gains yield; it has a zeroCurrent interest yield.
B)   The market value of a bond will always approach its par value as its maturity date approaches. This holds true even if the firm hasFiled for bankruptcy.
C)   Rising inflation makes the actual yield to maturity on a bond greater than a quoted yield to maturity that is based on marketPrices.
D)   The yield to maturity on a coupon bond that sells at its par value consists entirely of a current interest yield; it has a zeroExpected capital gains yield.
E)   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.F) A) and B)
G) B) and D)

Question 9

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%F) D) and E)
G) C) and D)

Question 10

Which of the following statements is CORRECT?

Accepted Answer

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

Question 11

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 isSold.
B)   Long-term bonds have less interest rate price risk but moreReinvestment 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 rateRisk.
D)   Relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more interest rate price risk but less reinvestmentRate risk.
E)   Long-term bonds have less interest rate price risk and also lessReinvestment rate risk than short-term bonds.F) C) and D)
G) B) and D)

Question 12

Garvin Enterprises' bonds currently sell for $1,150. They have a 6-year maturity, an annual coupon of $85, and a par value of $1,000. What is their current yield?

Accepted Answer

A)   7.39%
B)   7.76%
C)   8.15%
D)   8.56%
E)   8.98%F) C) and E)
G) D) and E)

Question 13

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%F) C) and E)
G) A) and E)

Question 14

Listed below are some provisions that are often contained in bond indentures. Which of these provisions, viewed alone, would tend to reduce the yield to maturity that investors would otherwise require on a newly issued bond? 1.Fixed assets are used as security for a bond.
2) A given bond is subordinated to other classes of debt.
3) The bond can be converted into the firm's common stock.
4) The bond has a sinking fund.
5) The bond has a call provision.
6) The indenture contains covenants that prevent the use of additional debt.

Accepted Answer

A)   1, 3, 4, 6
B)   1, 4, 6
C)   1, 2, 3, 4, 6
D)   1, 2, 3, 4, 5, 6
E)   1, 3, 4, 5, 6F) B) and D)
G) A) and E)

Question 15

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 16

Which of the following statements is CORRECT?

Accepted Answer

A)   All else equal, high-coupon bonds have less reinvestment rate risk than low-coupon bonds.
B)   All else equal, long-term bonds have less interest rate price riskThan short-term bonds.
C)   All else equal, low-coupon bonds have less interest rate price riskThan high-coupon bonds.
D)   All else equal, short-term bonds have less reinvestment rate riskThan long-term bonds.
E)   All else equal, long-term bonds have less reinvestment rate riskThan short-term bonds.F) A) and B)
G) None of the above

Question 17

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 18

A bond that is callable has a chance of being retired earlier than its stated term to maturity. Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following bonds has the greatest interest rate 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 interestPayments.
D)   All 10-year bonds have the same price risk since they have the sameMaturity.
E)   A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments.F) A) and E)
G) A) and D)

Question 20

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?

Accepted Answer

A)   If the yield to maturity remains constant, the bond's price one year from now will be higher than its current price.
B)   The bond is selling below its par value.
C)   The bond is selling at a discount.
D)   If the yield to maturity remains constant, the bond's price oneYear from now will be lower than its current price.
E)   The bond's current yield is greater than 9%.F) None of the above
G) B) and C)

Exam 5: Bonds, Bond Valuation, and Interest Rates

If its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in value?

Correct Answer
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Which of the following statements is CORRECT?

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

Correct Answer
verified

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

Correct Answer
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Correct Answer
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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 $850. What is the bond's nominal (annual) coupon interest rate?

Correct Answer
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Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Garvin Enterprises' bonds currently sell for $1,150. They have a 6-year maturity, an annual coupon of $85, and a par value of $1,000. What is their current yield?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

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.

Correct Answer
verified

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?

Correct Answer
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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?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
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A bond that is callable has a chance of being retired earlier than its stated term to maturity. Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

Correct Answer
verified

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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Exam 5: Bonds, Bond Valuation, and Interest Rates

If its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in value?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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 $850. What is the bond's nominal (annual) coupon interest rate?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Garvin Enterprises' bonds currently sell for $1,150. They have a 6-year maturity, an annual coupon of $85, and a par value of $1,000. What is their current yield?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

A bond that is callable has a chance of being retired earlier than its stated term to maturity. Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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