Question 1

Which of the following statements best describes bond yields?

Accepted Answer

A)   If a coupon bond is selling at a premium, then the bond's current yield is zero.
B)   If a bond is selling at a discount, the yield to call is a better measure of the expected return than the yield to maturity.
C)   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.
D)   If a coupon bond is selling at par, its current yield equals its yield to maturity.E) None of the above
F) A) and C)

Question 2

Which of the following statements best describes callable bonds?

Accepted Answer

A)   Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is below the coupon rate than if it is above the coupon rate.
B)   Corporate treasurers dislike issuing callable bonds because these bonds may require the company to raise additional funds earlier than would be true if noncallable bonds with the same maturity were used.
C)   Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is above the coupon rate than if it is below the coupon rate.
D)   The actual life of a callable bond will always be equal to or less than the actual life of a noncallable bond with the same maturity. Therefore, if the yield curve is upward sloping, the required rate of return will be lower on the callable bond.E) None of the above
F) A) and B)

Question 3

Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise.
Since floating-rate debt shifts interest rate risk to companies, it offers no advantages to issuers.

Accepted Answer

A) True 
 B)False

Question 4

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, 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 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 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) B) and C)
F) B) and D)

Question 5

Which of the following statements best describes bonds?

Accepted Answer

A)   If a coupon bond is selling at par, its current yield equals its yield to maturity.
B)   If a coupon bond is selling at a discount, its price will continue to decline until it reaches its par value at maturity.
C)   If interest rates increase, the price of a 10-year coupon bond will decline by a greater percentage than the price of a 10-year zero coupon bond.
D)   If a bond's yield to maturity exceeds its annual coupon, then the bond will trade at a premium.E) B) and C)
F) A) and D)

Question 6

Which of the following is true regarding bond maturity?

Accepted Answer

A)   Any maturity is legally permissible.
B)   The longest term of maturity for corporate bonds is 50 years.
C)   Real return bonds have the shortest term of maturity.
D)   Perpetuity bonds must have a specified maturity date.E) A) and B)
F) A) and C)

Question 7

The market value of any financial asset may be estimated by determining future cash flows and then discounting them back to the present.

Accepted Answer

A) True 
 B)False

Question 8

A zero coupon bond is a bond that pays no interest and is offered (and subsequently sells initially) at par. These bonds provide compensation to investors in the form of capital appreciation.

Accepted Answer

A) True 
 B)False

Question 9

Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows: T-bond = 7.72% A = 9.64% AAA = 8.72% BBB = 10.18%
What were the differences in rates among these issues most probably caused by?

Accepted Answer

A)   real risk-free rate differences
B)   default risk differences
C)   maturity risk differences
D)   inflation differencesE) C) and D)
F) B) and C)

Question 10

A 10-year corporate bond has an annual coupon of 9%. The bond is currently selling at par ($1,000) . Which of the following statements is INCORRECT?

Accepted Answer

A)   The bond's expected capital gains yield is positive.
B)   The bond's yield to maturity is 9%.
C)   The bond's current yield is 9%.
D)   The bond's current yield exceeds its capital gains yield.E) B) and D)
F) C) and D)

Question 11

Other things equal, a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following statements best describes yield?

Accepted Answer

A)   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.
B)   If a bond sells at par, then its current yield will be less than its yield to maturity.
C)   If a bond sells for less than par, then its yield to maturity is less than its coupon rate.
D)   A discount bond's price declines each year until it matures, when its value equals its par value.E) A) and C)
F) C) and D)

Question 13

Crockett Corporation's 5-year bonds yield 6.85%, and 5-year government-bonds yield 4.75%. The real risk-free rate is r* = 2.80%, the default risk premium for Crockett's bonds is DRP = 0.85% versus zero for T-bonds, the liquidity premium on Crockett'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) All of the above
F) C) and D)

Question 14

If 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) B) and C)
F) C) and D)

Question 15

Three $1,000 face value bonds that mature in 10 years have the same level of risk, hence their YTMs are equal. Bond A has an 8% annual coupon, Bond B has a 10% annual coupon, and Bond C has a 12% annual coupon. Bond B sells at par. Assuming interest rates remain constant for the next 10 years, which of the following statements best describes bonds?

Accepted Answer

A)   Bond A's current yield will increase each year.
B)   Bond C sells at a premium (its price is greater than par) , and its price is expected to increase over the next year.
C)   Bond A sells at a discount (its price is less than par) , and its price is expected to increase over the next year.
D)   Over the next year, prices of Bond A, B, and C are expected to decrease, stay the same, and increase, respectively.E) A) and D)
F) A) and B)

Question 16

A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

Accepted Answer

A) True 
 B)False

Question 17

Zumwalt Corporation's Class S 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. Zumwalt's Class A bonds have the same risk, maturity, and par value, but the A 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)   $1,017.83E) C) and D)
F) B) and C)

Question 18

Short Corp. just issued bonds that will mature in 10 years, and Long Corp. issued bonds that will mature in 20 years. Both bonds promise to pay a semiannual coupon, they are not callable or convertible, and they are equally liquid. Further, assume that the yield curve is based only on expectations about future inflation, i.e., that the maturity risk premium is zero for government bonds. Under these conditions, which of the following statements is correct?

Accepted Answer

A)   If the yield curve is upward sloping and Short has less default risk than Long, then Short's bonds must under all conditions have the lower yield.
B)   If the yield curve is downward sloping, Long's bonds must under all conditions have the lower yield.
C)   If the yield curve is flat, Short's bond must under all conditions have the same yield as Long's bonds.
D)   If Long's and Short's bonds have the same default risk, their yields must under all conditions be equal.E) B) and D)
F) A) and C)

Question 19

Quigley Inc.'s bonds currently sell for $1,080 and have a par value of $1,000. They pay a $100 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,125. What is their yield to maturity (YTM) ?

Accepted Answer

A)   8.56%
B)   9.01%
C)   9.46%
D)   9.93%E) None of the above
F) A) and B)

Question 20

Which of the following statements best describes bonds?

Accepted Answer

A)   If a 10-year, $1,000 par, 10% coupon bond were issued at par, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond would sell at a premium above its $1,000 par value.
B)   Other things held constant, a corporation would rather issue noncallable bonds than callable bonds.
C)   Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond.
D)   Reinvestment rate risk is worse from an investor's standpoint than interest rate price risk if the investor has a short investment time horizon.E) A) and C)
F) None of the above

Exam 6: Bonds, Bond Valuation, and Interest Rates

Which of the following is true regarding bond maturity?

Correct Answer
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Which of the following statements best describes yield?

Correct Answer
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Which of the following statements best describes bonds?

Correct Answer
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Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows: T-bond = 7.72% A = 9.64% AAA = 8.72% BBB = 10.18% What were the differences in rates among these issues most probably caused by?

Correct Answer
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Which of the following statements best describes callable bonds?

Correct Answer
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The market value of any financial asset may be estimated by determining future cash flows and then discounting them back to the present.

Correct Answer
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Correct Answer
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A zero coupon bond is a bond that pays no interest and is offered (and subsequently sells initially) at par. These bonds provide compensation to investors in the form of capital appreciation.

Correct Answer
verified

A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

Correct Answer
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Correct Answer
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Which of the following statements best describes bonds?

Correct Answer
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A 10-year corporate bond has an annual coupon of 9%. The bond is currently selling at par ($1,000) . Which of the following statements is INCORRECT?

Correct Answer
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Quigley Inc.'s bonds currently sell for $1,080 and have a par value of $1,000. They pay a $100 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,125. What is their yield to maturity (YTM) ?

Correct Answer
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Correct Answer
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Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise. Since floating-rate debt shifts interest rate risk to companies, it offers no advantages to issuers.

Correct Answer
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If 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?

Correct Answer
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Correct Answer
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Other things equal, a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

Correct Answer
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Which of the following statements best describes bond yields?

Correct Answer
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Correct Answer
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Exam 6: Bonds, Bond Valuation, and Interest Rates

Which of the following is true regarding bond maturity?

Correct AnswerverifiedShow Answer

Which of the following statements best describes yield?

Correct AnswerverifiedShow Answer

Which of the following statements best describes bonds?

Correct AnswerverifiedShow Answer

Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows: T-bond = 7.72% A = 9.64% AAA = 8.72% BBB = 10.18% What were the differences in rates among these issues most probably caused by?

Correct AnswerverifiedShow Answer

Which of the following statements best describes callable bonds?

Correct AnswerverifiedShow Answer

The market value of any financial asset may be estimated by determining future cash flows and then discounting them back to the present.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A zero coupon bond is a bond that pays no interest and is offered (and subsequently sells initially) at par. These bonds provide compensation to investors in the form of capital appreciation.

Correct AnswerverifiedShow Answer

A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements best describes bonds?

Correct AnswerverifiedShow Answer

A 10-year corporate bond has an annual coupon of 9%. The bond is currently selling at par ($1,000) . Which of the following statements is INCORRECT?

Correct AnswerverifiedShow Answer

Quigley Inc.'s bonds currently sell for $1,080 and have a par value of $1,000. They pay a $100 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,125. What is their yield to maturity (YTM) ?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise. Since floating-rate debt shifts interest rate risk to companies, it offers no advantages to issuers.

Correct AnswerverifiedShow Answer

If 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?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Other things equal, a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

Correct AnswerverifiedShow Answer

Which of the following statements best describes bond yields?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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