A) Bond B has a higher price than Bond A today, but one year from now the bonds will have the same price.
B) One year from now, Bond A's price will be higher than it is today.
C) Bond A's current yield is greater than 8%.
D) Bond A has a higher price than Bond B today, but one year from now the bonds will have the same price.
E) Both bonds have the same price today, and the price of each bond is expected to remain constant until the bonds mature.
G) A) and B)
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A) One disadvantage of zero coupon bonds is that the issuing firm cannot realize any tax savings from the use of debt until the bonds mature.
B) Other things held constant, a callable bond should have a lower yield to maturity than a noncallable bond.
C) Once a firm declares bankruptcy, it must be liquidated by the trustee, who uses the proceeds to pay bondholders, unpaid wages, taxes, and legal fees.
D) Income bonds must pay interest only if the company earns the interest. Thus, these securities cannot bankrupt a company prior to their maturity, and this makes them safer to the issuing corporation than "regular" bonds.
E) A firm with a sinking fund that gives it the choice of calling the required bonds at par or buying the bonds in the open market would generally choose the open market purchase if the coupon rate exceeded the going interest rate.
G) A) and E)
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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) A callable 10-year, 10% bond should sell at a higher price than an otherwise similar noncallable bond.
C) 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.
D) 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.
E) 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.
G) C) and D)
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A) Bond A's capital gains yield is greater than Bond B's capital gains yield.
B) Bond A trades at a discount, whereas Bond B trades at a premium.
C) 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.
D) If the yield to maturity for both bonds immediately decreases to 6%, Bond A's bond will have a larger percentage increase in value.
E) Bond A's current yield is greater than that of Bond B.
G) All of the above
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A) A bond is likely to be called if its coupon rate is below its YTM.
B) A bond is likely to be called if its market price is below its par value.
C) Even if a bond's YTC exceeds its YTM, an investor with an investment horizon longer than the bond's maturity would be worse off if the bond were called.
D) A bond is likely to be called if its market price is equal to its par value.
E) A bond is likely to be called if it sells at a discount below par.
G) A) and D)
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B) False
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A) 7.32%
B) 7.71%
C) 8.12%
D) 8.54%
E) 8.99%
G) B) and C)
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A) The total return on a bond during a given year is based only on the coupon interest payments received.
B) 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%.
C) The price of a discount bond will increase over time, assuming that the bond's yield to maturity remains constant.
D) For a given firm, its debentures are likely to have a lower yield to maturity than its mortgage bonds.
E) When large firms are in financial distress, they are almost always liquidated, whereas smaller firms are generally reorganized.
G) All of the above
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A) 10-year, zero coupon bonds have more reinvestment risk than 10-year, 10% coupon bonds.
B) A 10-year, 10% coupon bond has less reinvestment risk than a 10-year, 5% coupon bond (assuming all else equal) .
C) The total (rate of) return on a bond during a given year is the sum of the coupon interest payments received during the year and the change in the value of the bond from the beginning to the end of the year, divided by the bond's price at the beginning of the year.
D) The price of a 20-year, 10% bond is less sensitive to changes in interest rates than the price of a 5-year, 10% bond.
E) A $1,000 bond with $100 annual interest payments that has 5 years to maturity and is not expected to default would sell at a discount if interest rates were below 9% and at a premium if interest rates were greater than 11%.
G) A) and E)
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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) D) and E)
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A) 10-year, zero coupon bond.
B) 20-year, 10% coupon bond.
C) 20-year, 5% coupon bond.
D) 1-year, 10% coupon bond.
E) 20-year, zero coupon bond.
G) B) and D)
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B) False
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A) The bond's current yield is less than 8%.
B) If the yield to maturity remains at 8%, then the bond's price will decline over the next year.
C) The bond's coupon rate is less than 8%.
D) If the yield to maturity increases, then the bond's price will increase.
E) If the yield to maturity remains at 8%, then the bond's price will remain constant over the next year.
G) A) and D)
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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) A) and B)
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A) 7.14%
B) 7.50%
C) 7.88%
D) 8.27%
E) 8.68%
G) B) and D)
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A) Other things held constant, a 20-year zero coupon bond has more reinvestment risk than a 20-year coupon bond.
B) Other things held constant, for any given maturity, a 1.0 percentage point decrease in the market interest rate would cause a smaller dollar capital gain than the capital loss stemming from a 1.0 percentage point increase in the interest rate.
C) From a corporate borrower's point of view, interest paid on bonds is not tax-deductible.
D) Other things held constant, price sensitivity as measured by the percentage change in price due to a given change in the required rate of return decreases as a bond's maturity increases.
E) For a bond of any maturity, a 1.0 percentage point increase in the market interest rate (rd) causes a larger dollar capital loss than the capital gain stemming from a 1.0 percentage point decrease in the interest rate.
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G) B) and E)
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A) The bond's coupon rate exceeds its current yield.
B) The bond's current yield exceeds its yield to maturity.
C) The bond's yield to maturity is greater than its coupon rate.
D) The bond's current yield is equal to its coupon rate.
E) If the yield to maturity stays constant until the bond matures, the bond's price will remain at $850.
G) C) and D)
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A) The coupon rate should be exactly equal to 6%.
B) The coupon rate could be less than, equal to, or greater than 6%, depending on the specific terms set, but in the real world the convertible feature would probably cause the coupon rate to be less than 6%.
C) The rate should be slightly greater than 6%.
D) The rate should be over 7%.
E) The rate should be over 8%.
G) A) and D)
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A) $817.12
B) $838.07
C) $859.56
D) $881.60
E) $903.64
G) A) and D)
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A) The company would be especially eager to have a call provision included in the indenture if its management thinks that interest rates are almost certain to rise in the foreseeable future.
B) If debt is used to raise the million dollars, but $500,000 is raised as first mortgage bonds on the new plant and $500,000 as debentures, the interest rate on the first mortgage bonds would be lower than it would be if the entire $1 million were raised by selling first mortgage bonds.
C) If two classes of debt are used (with one senior and the other subordinated to all other debt) , the subordinated debt will carry a lower interest rate.
D) If debt is used to raise the million dollars, the cost of the debt would be lower if the debt were in the form of a fixed-rate bond rather than a floating-rate bond.
E) If debt is used to raise the million dollars, the cost of the debt would be higher if the debt were in the form of a mortgage bond rather than an unsecured term loan.
G) B) and E)
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