Exam 5: Bonds, bond Valuation, and Interest Rates

A) Bond A trades at a discount, whereas Bond B trades at a premium.
B) 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.
C) If the yield to maturity for both bonds immediately decreases to 6%, Bond A's bond will have a larger percentage increase in value.
D) Bond A's current yield is greater than that of Bond B.
E) Bond A's capital gains yield is greater than Bond B's capital gains yield.

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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 r_d = 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) If a 10-year, $1,000 par, zero coupon bond were issued at a price that gave investors a 10% yield to maturity, and if interest rates then dropped to the point where r_d = YTM = 5%, the bond would sell at a premium over its $1,000 par value.

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A

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A) $943.98
B) $968.18
C) $993.01
D) $1,017.83
E) $1,043.28

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

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A) $1,077.01
B) $1,104.62
C) $1,132.95
D) $1,162.00
E) $1,191.79

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A) A 10-year, 10% coupon bond has less reinvestment rate risk than a 10-year, 5% coupon bond (assuming all else equal) .
B) The total 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.
C) 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.
D) 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%.
E) 10-year, zero coupon bonds have higher reinvestment rate risk than 10-year, 10% coupon bonds.

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A) The most likely explanation for an inverted yield curve is that investors expect inflation to increase.
B) The most likely explanation for an inverted yield curve is that investors expect inflation to decrease.
C) If the yield curve is inverted, short-term bonds have lower yields than long-term bonds.
D) Inverted yield curves can exist for Treasury bonds, but because of default premiums, the corporate yield curve can never be inverted.
E) The higher the maturity risk premium, the higher the probability that the yield curve will be inverted.

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A) All else equal, long-term bonds have less interest rate price risk than short-term bonds.
B) All else equal, low-coupon bonds have less interest rate price risk than high-coupon bonds.
C) All else equal, short-term bonds have less reinvestment rate risk than long-term bonds.
D) All else equal, long-term bonds have less reinvestment rate risk than short-term bonds.
E) All else equal, high-coupon bonds have less reinvestment rate risk than low-coupon bonds.

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D

A) 1.40%
B) 1.55%
C) 1.71%
D) 1.88%
E) 2.06%

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A) A callable 10-year, 10% bond should sell at a higher price than an otherwise similar noncallable bond.
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) 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.

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A) A 10-year, $1,000 face value, zero coupon bond.
B) A 10-year, $1,000 face value, 10% coupon bond with annual interest payments.
C) All 10-year bonds have the same price risk since they have the same maturity.
D) A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments.

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A) 6.20%
B) 6.53%
C) 6.87%
D) 7.24%
E) 7.62%

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A) If a bond's yield to maturity exceeds its coupon rate, the bond will sell at par.
B) All else equal, if a bond's yield to maturity increases, its price will fall.
C) If a bond's yield to maturity exceeds its coupon rate, the bond will sell at a premium over par.
D) All else equal, if a bond's yield to maturity increases, its current yield will fall.
E) A zero coupon bond's current yield is equal to its yield to maturity.

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A) The total yield on a bond is derived from dividends plus changes in the price of the bond.
B) Bonds are riskier than common stocks and therefore have higher required returns.
C) Bonds issued by larger companies always have lower yields to maturity (less risk) than bonds issued by smaller companies.
D) The market value of a bond will always approach its par value as its maturity date approaches, provided the bond's required return remains constant.
E) If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices.

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