A) 4,228
B) 4,337
C) 4,448
D) 4,562
E) 4,676
G) B) and C)
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D
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A) The market value of a bond will always approach its par value as its maturity date approaches. This holds true even if the firm has filed for bankruptcy.
B) Rising inflation makes the actual yield to maturity on a bond greater than a quoted yield to maturity that is based on market prices.
C) The yield to maturity on a coupon bond that sells at its par value consists entirely of a current interest yield; it has a zero expected capital gains yield.
D) On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss.
E) The yield to maturity for a coupon bond that sells at a premium consists entirely of a positive capital gains yield; it has a zero current interest yield.
G) A) and E)
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A) 6.27%
B) 6.60%
C) 6.95%
D) 7.32%
E) 7.70%
G) B) and D)
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E
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A) Most sinking funds require the issuer to provide funds to a trustee, who saves the money so that it will be available to pay off bondholders when the bonds mature.
B) A sinking fund provision makes a bond more risky to investors at the time of issuance.
C) Sinking fund provisions never require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time.
D) 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.
E) Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest rates decline after the bond has been issued.
G) D) and E)
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A) The bond is selling below its par value.
B) The bond is selling at a discount.
C) If the yield to maturity remains constant, the bond's price one year from now will be lower than its current price.
D) The bond's current yield is greater than 9%.
E) If the yield to maturity remains constant, the bond's price one year from now will be higher than its current price.
G) All of the above
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A) Bond A has the most interest rate risk.
B) If the yield to maturity on the three bonds remains constant, the prices of the three bonds will remain the same over the next year.
C) If the yield to maturity on each bond increases to 8%, the prices of all three bonds will decline.
D) Bond C sells at a premium over its par value.
E) If the yield to maturity on each bond decreases to 6%, Bond A will have the largest percentage increase in its price.
G) D) and E)
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A) It could be less than, equal to, or greater than 6%.
B) Greater than 6%.
C) Exactly equal to 8%.
D) Less than 6%.
E) Exactly equal to 6%.
G) B) and D)
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A) 0.99%
B) 1.10%
C) 1.21%
D) 1.33%
E) 1.46%
G) D) and E)
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A) 2.59%
B) 2.88%
C) 3.20%
D) 3.52%
E) 3.87%
G) B) and E)
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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.
G) B) and C)
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A) If a coupon bond is selling at a discount, its price will continue to decline until it reaches its par value at maturity.
B) 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.
C) If a bond's yield to maturity exceeds its annual coupon, then the bond will trade at a premium.
D) If a coupon bond is selling at a premium, its current yield equals its yield to maturity.
E) If a coupon bond is selling at par, its current yield equals its yield to maturity.
G) C) and D)
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E
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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.
G) B) and E)
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B) False
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B) False
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B) False
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A) All else equal, bonds with longer maturities have more interest rate (price) risk than bonds with shorter maturities.
B) If a bond is selling at its par value, its current yield equals its yield to maturity.
C) If a bond is selling at a premium, its current yield will be greater than its yield to maturity.
D) All else equal, bonds with larger coupons have greater interest rate (price) risk than bonds with smaller coupons.
E) If a bond is selling at a discount to par, its current yield will be less than its yield to maturity.
G) A) and D)
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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) Assume that two bonds have equal maturities and are of equal risk, but one bond sells at par while the other sells at a premium above par. The premium bond must have a lower current yield and a higher capital gains yield than the par bond.
G) A) and C)
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A) Subordinated debt has less default risk than senior debt.
B) Convertible bonds have lower coupon rates than non-convertible bonds of similar default risk because they offer the possibility of capital gains.
C) Junk bonds typically provide a lower yield to maturity than investment-grade bonds.
D) A debenture is a secured bond that is backed by some or all of the firm's fixed assets.
E) Junior debt is debt that has been more recently issued, and in bankruptcy it is paid off after senior debt because the senior debt was issued first.
G) A) and D)
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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.
G) B) and E)
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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.
G) C) and D)
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