Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)   If the maturity risk premium were zero and interest rates were expected to decrease in the future, then the yield curve for U.S. Treasury securities would, other things held constant, have anUpward slope.
B)   Liquidity premiums are generally higher on Treasury than corporateBonds.
C)   The maturity premiums embedded in the interest rates on U.S. Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-Term bonds.
D)   Default risk premiums are generally lower on corporate than onTreasury bonds.
E)   Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds.F) A) and E)
G) A) and C)

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)   Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest ratesDecline after the bond has been issued.
B)   Most sinking funds require the issuer to provide funds to a trustee, who saves the money so that it will be available to payOff bondholders when the bonds mature.
C)   A sinking fund provision makes a bond more risky to investors atThe time of issuance.
D)   Sinking fund provisions never require companies to retire their debt; they only establish "targets" for the company to reduce itsDebt over time.
E)   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.F) B) and E)
G) A) and B)

Question 3

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)   2.78%F) B) and E)
G) A) and E)

Question 4

Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?

Accepted Answer

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.F) A) and E)
G) D) and E)

Question 5

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 is CORRECT?

Accepted Answer

A)   Bond A's current yield will increase each year.
B)   Since the bonds have the same YTM, they should all have the same price, and since interest rates are not expected to change, theirPrices should all remain at their current levels until maturity.
C)   Bond C sells at a premium (its price is greater than par) , and itsPrice is expected to increase over the next year.
D)   Bond A sells at a discount (its price is less than par) , and itsPrice is expected to increase over the next year.
E)   Over the next year, Bond A's price is expected to decrease, Bond B's price is expected to stay the same, and Bond C's price isExpected to increase.F) A) and E)
G) B) and C)

Question 6

Assuming all else is constant, which of the following statements is CORRECT?

Accepted Answer

A)   A 20-year zero coupon bond has more reinvestment rate risk than a 20-year coupon bond.
B)   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 inThe interest rate.
C)   From a corporate borrower's point of view, interest paid on bondsIs not tax-deductible.
D)   Price sensitivity as measured by the percentage change in price due to a given change in the required rate of return decreases as aBond'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 inThe interest rate.F) C) and D)
G) B) and E)

Question 7

Bonds A, B, and C all have a maturity of 10 years and a yield to maturity of 7%. 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)   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 interest rate risk.
C)   If the yield to maturity on the three bonds remains constant, thePrices 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 pricesOf all three bonds will decline.
E)   Bond C sells at a premium over its par value.F) C) and D)
G) B) and C)

Question 8

Keys Corporation's 5-year bonds yield 7.00%, and 5-year T-bonds yield 5.15%. The real risk-free rate is r* = 3.0%, the inflation premium for 5- year bonds is IP = 1.75%, the liquidity premium for Keys' bonds is LP = 0.75% versus zero for T-bonds, 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 default risk premium (DRP)  on Keys' bonds?

Accepted Answer

A)   0.99%
B)   1.10%
C)   1.21%
D)   1.33%
E)   1.46%F) B) and D)
G) A) and B)

Question 9

Which of the following statements is NOT CORRECT?

Accepted Answer

A)   If a bond is selling at a discount to par, its current yield will be less than its yield to maturity.
B)   All else equal, bonds with longer maturities have more interestRate (price)  risk than bonds with shorter maturities.
C)   If a bond is selling at its par value, its current yield equals itsYield to maturity.
D)   If a bond is selling at a premium, its current yield will beGreater than its yield to maturity.
E)   All else equal, bonds with larger coupons have greater interestRate (price)  risk than bonds with smaller coupons.F) A) and B)
G) C) and D)

Question 10

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'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 BondB's price one year from now will be lower than it is today.
D)   If the yield to maturity for both bonds immediately decreases to6%, 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.F) A) and B)
G) A) and C)

Question 11

Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

Accepted Answer

A)   The company's bonds are downgraded.
B)   Market interest rates rise sharply.
C)   Market interest rates decline sharply.
D)   The company's financial situation deteriorates significantly.
E)   Inflation increases significantly.F) A) and B)
G) All of the above

Question 12

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 13

The desire for floating-rate bonds, and consequently their increased usage, arose out of the experience of the early 1980s, when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.

Accepted Answer

A) True 
 B)False

Question 14

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 15

Sadik Inc.'s 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%F) None of the above
G) A) and E)

Question 16

A bond that had a 20-year original maturity with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond
with 1 year left to maturity. (Assume that the bonds have equal default risk and equal coupon rates, and they cannot be called.)

Accepted Answer

A) True 
 B)False

Question 17

Assume that you are considering the purchase of a 15-year bond with an annual coupon rate of 9.5%. The bond has face value of $1,000 and makes semiannual interest payments. If you require an 11.0% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

Accepted Answer

A)   $891.00
B)   $913.27
C)   $936.10
D)   $959.51
E)   $983.49F) A) and E)
G) A) and D)

Question 18

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 19

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 NOT CORRECT?

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)   If the bond's yield to maturity remains constant, the bond willContinue to sell at par.
E)   The bond's current yield exceeds its capital gains yield.F) B) and C)
G) A) and D)

Question 20

Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows:  The differences in rates among these issues were most probably caused primarily by:

Accepted Answer

A)   Real risk-free rate differences.
B)   Tax effects.
C)   Default risk differences.
D)   Maturity risk differences.
E)   Inflation differences.F) A) and D)
G) C) and D)

Exam 5: Bonds, Bond Valuation, and Interest Rates

Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?

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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Which of the following statements is CORRECT?

Correct Answer
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A bond that had a 20-year original maturity with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity. (Assume that the bonds have equal default risk and equal coupon rates, and they cannot be called.)

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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Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows: The differences in rates among these issues were most probably caused primarily by:

Correct Answer
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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?

Correct Answer
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Which of the following statements is NOT CORRECT?

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

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 NOT CORRECT?

Correct Answer
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Correct Answer
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Sadik Inc.'s 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) ?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

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.

Correct Answer
verified

Assuming all else is constant, which of the following statements is CORRECT?

Correct Answer
verified

Bonds A, B, and C all have a maturity of 10 years and a yield to maturity of 7%. 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?

Correct Answer
verified

Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

Correct Answer
verified

The desire for floating-rate bonds, and consequently their increased usage, arose out of the experience of the early 1980s, when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.

Correct Answer
verified

Correct Answer
verified

Exam 5: Bonds, Bond Valuation, and Interest Rates

Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

A bond that had a 20-year original maturity with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity. (Assume that the bonds have equal default risk and equal coupon rates, and they cannot be called.)

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

Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows: The differences in rates among these issues were most probably caused primarily by:

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Which of the following statements is NOT CORRECT?

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

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 NOT CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Sadik Inc.'s 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) ?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Assuming all else is constant, which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Bonds A, B, and C all have a maturity of 10 years and a yield to maturity of 7%. 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?

Correct AnswerverifiedShow Answer

Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

Correct AnswerverifiedShow Answer

The desire for floating-rate bonds, and consequently their increased usage, arose out of the experience of the early 1980s, when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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