Exam 5: Bonds, Bond Valuation, and Interest Rates

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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.

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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.

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A) If the Treasury yield curve is downward sloping, Long's bonds must under all conditions have the lower yield.
B) If the yield curve for Treasury securities is upward sloping, Long's bonds must under all conditions have a higher yield than Short's bonds.
C) If the yield curve for Treasury securities is flat, Short's bond must under all conditions have the same yield as Long's bonds.
D) If Long's and Short's bonds have the same default risk, their yields must under all conditions be equal.
E) If the Treasury yield curve is upward sloping and Short has less default risk than Long, then Short's bonds must under all conditions have the lower yield.

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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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A) The bond's yield to maturity is 9%.
B) The bond's current yield is 9%.
C) If the bond's yield to maturity remains constant, the bond will continue to sell at par.
D) The bond's current yield exceeds its capital gains yield.
E) The bond's expected capital gains yield is positive.

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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) 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.

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

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A) Adding a call provision.
B) The rating agencies change the bond's rating from Baa to Aaa.
C) Making the bond a first mortgage bond rather than a debenture.
D) Adding a sinking fund.
E) Adding additional restrictive covenants that limit management's actions.

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

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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.

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A) If interest rates decline, the prices of both bonds will increase, but the 10-year bond would have a larger percentage increase in price.
B) The 10-year bond would sell at a discount, while the 15-year bond would sell at a premium.
C) The 10-year bond would sell at a premium, while the 15-year bond would sell at par.
D) If the yield to maturity on both bonds remains at 10% over the next year, the price of the 10-year bond would increase, but the price of the 15-year bond would fall.
E) If interest rates decline, the prices of both bonds will increase, but the 15-year bond would have a larger percentage increase in price.

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A) 6.39%
B) 6.72%
C) 7.08%
D) 7.45%
E) 7.82%

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A) A 1-year bond with an 8% coupon.
B) A 10-year bond with an 8% coupon.
C) A 10-year bond with a 12% coupon.
D) A 10-year zero coupon bond.
E) A 1-year zero coupon bond.

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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.

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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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