Question 1

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 2

Which of the following statements is CORRECT?

Accepted Answer

A)   The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.
B)   You hold two bonds. One is a 10-year, zero coupon, bond and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline.
C)   The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates.
D)   The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates.
E)   You hold two bonds. One is a 10-year, zero coupon, issue and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the larger percentage decline.F) A) and B)
G) A) and C)

Question 3

Currently,Bruner Inc.'s bonds sell for $1,250.They pay a $120 annual coupon,have a 15-year maturity,and a $1,000 par value,but they can be called in 5 years at $1,050.Assume that no costs other than the call premium would be incurred to call and refund the bonds,and also assume that the yield curve is horizontal,with rates expected to remain at current levels on into the future.What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM.)

Accepted Answer

A)   2.11%
B)   2.32%
C)   2.55%
D)   2.80%
E)   3.09%F) A) and D)
G) C) and D)

Question 4

Stephenson Co.'s 15-year bond with a face value of $1,000 currently sells for $850.Which of the following statements is CORRECT?

Accepted Answer

A)   The bond's current yield exceeds its yield to maturity.
B)   The bond's yield to maturity is greater than its coupon rate.
C)   The bond's current yield is equal to its coupon rate.
D)   If the yield to maturity stays constant until the bond matures, the bond's price will remain at $850.
E)   The bond's coupon rate exceeds its current yield.F) B) and E)
G) A) and B)

Question 5

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 6

Squire Inc.'s 5-year bonds yield 6.75%,and 5-year T-bonds yield 4.80%.The real risk-free rate is r* = 2.75%,the inflation premium for 5-year bonds is IP = 1.65%,the default risk premium for Squire's bonds is DRP = 1.20% 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 liquidity premium (LP) on Squire's bonds?

Accepted Answer

A)   0.49%
B)   0.55%
C)   0.61%
D)   0.68%
E)   0.75%F) A) and C)
G) A) and B)

Question 7

You are considering three different bonds for your portfolio.Each bond has a 10-year maturity and a yield to maturity of 10%.Bond X has an 8% annual coupon,Bond Y has a 10% annual coupon,and Bond Z has a 12% annual coupon.Which of the following statements is CORRECT?

Accepted Answer

A)   Bond X has the greatest reinvestment rate risk.
B)   If market interest rates decline, all of the bonds will have an increase in price, and Bond Z will have the largest percentage increase in price.
C)   If market interest rates remain at 10%, Bond Z's price will be 10% higher one year from today.
D)   If market interest rates increase, Bond X's price will increase, Bond Z's price will decline, and Bond Y's price will remain the same.
E)   If the bonds' market interest rates remain at 10%, Bond Z's price will be lower one year from now than it is today.F) A) and B)
G) C) and E)

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)   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%.
B)   The price of a discount bond will increase over time, assuming that the bond's yield to maturity remains constant.
C)   For a given firm, its debentures are likely to have a lower yield to maturity than its mortgage bonds.
D)   When large firms are in financial distress, they are almost always liquidated, whereas smaller firms are generally reorganized.
E)   The total return on a bond during a given year consists only of the coupon interest payments received.F) C) and E)
G) All of the above

Question 9

Assume that interest rates on 15-year noncallable Treasury and corporate bonds with different ratings are as follows:   T-6and =7.72% A=9.64%	ext { T-6and =7.72\% } \quad \mathbf { A } = 9.64 \% T-6and =7.72% A=9.64% 
 AAA=8.72%BBB=10.18%\begin{array} { l l } \mathrm { AAA } = 8.72 \% & \mathrm { BBB } = 10.18 \% \end{array}AAA=8.72%​BBB=10.18%​ 
The differences in rates among these issues were most probably caused primarily by:

Accepted Answer

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

Question 10

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

Accepted Answer

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

Question 11

A 15-year bond has an annual coupon rate of 8%.The coupon rate will remain fixed until the bond matures.The bond has a yield to maturity of 6%.Which of the following statements is CORRECT?

Accepted Answer

A)   The bond is currently selling at a price below its par value.
B)   If market interest rates remain unchanged, the bond's price one year from now will be lower than it is today.
C)   The bond should currently be selling at its par value.
D)   If market interest rates remain unchanged, the bond's price one year from now will be higher than it is today.
E)   If market interest rates decline, the price of the bond will also decline.F) D) and E)
G) B) and C)

Question 12

A Treasury bond has an 8% annual coupon and a 7.5% yield to maturity.Which of the following statements is CORRECT?

Accepted Answer

A)   The bond has a current yield greater than 8%.
B)   The bond sells at a discount.
C)   The bond's required rate of return is less than 7.5%.
D)   If the yield to maturity remains constant, the price of the bond will decline over time.
E)   The bond sells at a price below par.F) A) and E)
G) C) and D)

Question 13

CMS Corporation's balance sheet as of today is as follows:   Long-term debt (bonds, at par)   $10,000,00  Preferred stock 2,000,000 Common stock ($10 par)  10,000,000 Retained earning 4,000,000 Tatal debt and equity 26000000\begin{array} { l r } 	ext { Long-term debt (bonds, at par)  } & 	ext { \$10,000,00 } \	ext { Preferred stock } & 2,000,000 \	ext { Common stock (\$10 par)  } & 10,000,000 \	ext { Retained earning } & 4,000,000 \\hline 	ext { Tatal debt and equity } & 26000000\end{array} Long-term debt (bonds, at par)   Preferred stock  Common stock ($10 par)   Retained earning  Tatal debt and equity ​ $10,000,00 2,000,00010,000,0004,000,00026000000​​ 
The bonds have a 4.0% coupon rate,payable semiannually,and a par value of $1,000.They mature exactly 10 years from today.The yield to maturity is 12%,so the bonds now sell below par.What is the current market value of the firm's debt?

Accepted Answer

A)   $5,276,731
B)   $5,412,032
C)   $5,547,332
D)   $7,706,000
E)   $7,898,650 F) B) and C)
G) A) and E)

Question 14

There is an inverse relationship between bonds' quality ratings and their required rates of return.Thus,the required return is lowest for AAA-rated bonds,and required returns increase as the ratings get lower.

Accepted Answer

A) True 
 B)False

Question 15

Chandler Co.'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 Chandler's 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 Chandler's bonds?

Accepted Answer

A)   0.99%
B)   1.10%
C)   1.21%
D)   1.33%
E)   1.46%F) None of the above
G) A) and B)

Question 16

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

Accepted Answer

A)   20-year, 10% coupon bond.
B)   20-year, 5% coupon bond.
C)   1-year, 10% coupon bond.
D)   20-year, zero coupon bond.
E)   10-year, zero coupon bond.F) A) and C)
G) All of the above

Question 17

As a general rule,a company's debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following statements is CORRECT?

Accepted Answer

A)   All else equal, an increase in interest rates will have a greater effect on the prices of short-term than long-term bonds.
B)   All else equal, an increase in interest rates will have a greater effect on higher-coupon bonds than it will have on lower-coupon bonds.
C)   If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value.
D)   If a bond's yield to maturity exceeds its coupon rate, the bond's current yield must be less than its coupon rate.
E)   If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price regardless of the bond's coupon rates.F) C) and D)
G) A) and B)

Question 19

Field Industries' outstanding bonds have a 25-year maturity and $1,000 par value.Their nominal yield to maturity is 9.25%,they pay interest semiannually,and they sell at a price of $850.What is the bond's nominal (annual) coupon interest rate?

Accepted Answer

A)   6.27%
B)   6.60%
C)   6.95%
D)   7.32%
E)   7.70%F) C) and E)
G) A) and C)

Question 20

Which of the following statements is CORRECT?

Accepted Answer

A)   If a coupon bond is selling at a discount, then the bond's expected capital gains yield is negative.
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)   If a coupon bond is selling at a premium, then the bond's current yield is zero.F) B) and E)
G) All of the above

Exam 5: Bonds, bond Valuation, and Interest Rates

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

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
verified

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
verified

Field Industries' outstanding bonds have a 25-year maturity and $1,000 par value.Their nominal yield to maturity is 9.25%,they pay interest semiannually,and they sell at a price of $850.What is the bond's nominal (annual) coupon interest rate?

Correct Answer
verified

Correct Answer
verified

A 15-year bond has an annual coupon rate of 8%.The coupon rate will remain fixed until the bond matures.The bond has a yield to maturity of 6%.Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

There is an inverse relationship between bonds' quality ratings and their required rates of return.Thus,the required return is lowest for AAA-rated bonds,and required returns increase as the ratings get lower.

Correct Answer
verified

As a general rule,a company's debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured.

Correct Answer
verified

Correct Answer
verified

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

Correct Answer
verified

A Treasury bond has an 8% annual coupon and a 7.5% yield to maturity.Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

Stephenson Co.'s 15-year bond with a face value of $1,000 currently sells for $850.Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

You are considering three different bonds for your portfolio.Each bond has a 10-year maturity and a yield to maturity of 10%.Bond X has an 8% annual coupon,Bond Y has a 10% annual coupon,and Bond Z has a 12% annual coupon.Which of the following statements is CORRECT?

Correct Answer
verified

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

Which of the following statements is CORRECT?

Correct Answer
verified

Exam 5: Bonds, bond Valuation, and Interest Rates

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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

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

Field Industries' outstanding bonds have a 25-year maturity and $1,000 par value.Their nominal yield to maturity is 9.25%,they pay interest semiannually,and they sell at a price of $850.What is the bond's nominal (annual) coupon interest rate?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A 15-year bond has an annual coupon rate of 8%.The coupon rate will remain fixed until the bond matures.The bond has a yield to maturity of 6%.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

There is an inverse relationship between bonds' quality ratings and their required rates of return.Thus,the required return is lowest for AAA-rated bonds,and required returns increase as the ratings get lower.

Correct AnswerverifiedShow Answer

As a general rule,a company's debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A Treasury bond has an 8% annual coupon and a 7.5% yield to maturity.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Stephenson Co.'s 15-year bond with a face value of $1,000 currently sells for $850.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

You are considering three different bonds for your portfolio.Each bond has a 10-year maturity and a yield to maturity of 10%.Bond X has an 8% annual coupon,Bond Y has a 10% annual coupon,and Bond Z has a 12% annual coupon.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified