B) False
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B) False
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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.
G) All of the above
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A) If the yield to maturity on each bond decreases to 6%,Bond A will have the largest percentage increase in its price.
B) Bond A has the most price risk.
C) 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.
D) If the yield to maturity on each bond increases to 8%,the prices of all three bonds will decline.
E) Bond C sells at a premium over its par value.
G) C) and D)
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A) Real risk-free rate differences.
B) Tax effects.
C) Default risk and liquidity differences.
D) Maturity risk differences.
E) Inflation differences.
G) A) and B)
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B) False
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True
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B) False
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A) Senior debt is debt that has been more recently issued,and in bankruptcy it is paid off after junior debt because the junior debt was issued first.
B) A company's subordinated debt has less default risk than its senior debt.
C) Convertible bonds generally have lower coupon rates than non-convertible bonds of similar default risk because they offer the possibility of capital gains.
D) Junk bonds typically provide a lower yield to maturity than investment-grade bonds.
E) A debenture is a secured bond that is backed by some or all of the firm's fixed assets.
G) A) and B)
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A) $1,281.57
B) $1,000.85
C) $1,013.05
D) $1,220.55
E) $1,196.13
G) D) and E)
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A) If interest rates decline,the prices of both bonds would increase,but the 15-year bond would have a larger percentage increase in price.
B) If interest rates decline,the prices of both bonds would increase,but the 10-year bond would have a larger percentage increase in price.
C) The 10-year bond would sell at a discount,while the 15-year bond would sell at a premium.
D) The 10-year bond would sell at a premium,while the 15-year bond would sell at par.
E) If the yield to maturity on both bonds remains at 10% over the next year,the price of the 10-year bond would increase,but the price of the 15-year bond would fall.
G) B) and C)
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A) If a coupon bond is selling at par,its current yield equals its yield to maturity.
B) If rates fall after its issue,a zero coupon bond could trade at a price above its maturity (or par) value.
C) If rates fall rapidly,a zero coupon bond's expected appreciation could become negative.
D) If a firm moves from a position of strength toward financial distress,its bonds' yield to maturity would probably decline.
E) If a bond is selling at a premium,this implies that its yield to maturity exceeds its coupon rate.
G) B) and E)
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B) False
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A) If the Federal Reserve unexpectedly announces that it expects inflation to increase,then we would probably observe an immediate increase in bond prices.
B) The total yield on a bond is derived from dividends plus changes in the price of the bond.
C) Bonds are generally regarded as being riskier than common stocks,and therefore bonds have higher required returns.
D) Bonds issued by larger companies always have lower yields to maturity (due to less risk) than bonds issued by smaller companies.
E) The market price of a bond will always approach its par value as its maturity date approaches,provided the bond's required return remains constant.
G) A) and D)
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E
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A) Adding additional restrictive covenants that limit management's actions.
B) Adding a call provision.
C) The rating agencies change the bond's rating from Baa to Aaa.
D) Making the bond a first mortgage bond rather than a debenture.
E) Adding a sinking fund.
G) C) and D)
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B) False
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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.
G) A) and C)
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A) 6.77%
B) 5.09%
C) 4.42%
D) 5.54%
E) 5.59%
G) D) and E)
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B) False
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B) False
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True
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A) Assume that two bonds have equal maturities and are of equal risk,but one bond sells at par while the other sells at a premium above par.The premium bond must have a lower current yield and a higher capital gains yield than the par bond.
B) A bond's current yield must always be either equal to its yield to maturity or between its yield to maturity and its coupon rate.
C) If a bond sells at par,then its current yield will be less than its yield to maturity.
D) If a bond sells for less than par,then its yield to maturity is less than its coupon rate.
E) A discount bond's price declines each year until it matures,when its value equals its par value.
G) B) and E)
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