Question 1

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. None of the bonds can be called. 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, the prices 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 prices of all three bonds will decline.
E)   Bond C sells at a premium over its par value.F) A) and C)
G) A) and B)

Question 2

Malko Enterprises' bonds currently sell for $1,050. They have a 6-year maturity, an annual coupon of $75, and a par value of $1,000. What is their current yield?

Accepted Answer

A)   7.14%
B)   7.50%
C)   7.88%
D)   8.27%
E)   8.68%F) A) and C)
G) A) and E)

Question 3

A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon. Neither is callable, and both have the same yield to maturity. If the yield to maturity of both bonds increases by the same amount, which of the following statements would be CORRECT?

Accepted Answer

A)   The prices of both bonds will decrease by the same amount.
B)   Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price.
C)   The prices of both bonds would increase by the same amount.
D)   One bond's price would increase, while the other bond's price would decrease.
E)   The prices of the two bonds would remain constant.F) None of the above
G) B) and D)

Question 4

Sadik Inc.'s bonds currently sell for $1,180 and have a par value of $1,000. They pay a $105 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to call (YTC) ?

Accepted Answer

A)   6.63%
B)   6.98%
C)   7.35%
D)   7.74%
E)   8.12%F) C) and D)
G) B) and D)

Question 5

A 25-year, $1,000 par value bond has an 8.5% annual payment coupon. The bond currently sells for $925. If the yield to maturity remains at its current rate, what will the price be 5 years from now?

Accepted Answer

A)   $884.19
B)   $906.86
C)   $930.11
D)   $953.36
E)   $977.20F) A) and E)
G) C) and E)

Question 6

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 7

Adams Enterprises' noncallable bonds currently sell for $1,120. They have a 15-year maturity, an annual coupon of $85, and a par value of $1,000. What is their yield to maturity?

Accepted Answer

A)   5.84%
B)   6.15%
C)   6.47%
D)   6.81%
E)   7.17%F) A) and E)
G) A) and C)

Question 8

If its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in value?

Accepted Answer

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

Question 9

Moerdyk Corporation's bonds have a 15-year maturity, a 7.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd)  is 6.20%, based on semiannual compounding. What is the bond's price?

Accepted Answer

A)   $1,047.19
B)   $1,074.05
C)   $1,101.58
D)   $1,129.12
E)   $1,157.35F) A) and E)
G) C) and E)

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)   If a bond is selling at a discount, the yield to call is a better measure of return than is the yield to maturity.
B)   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.
C)   On an expected yield basis, the expected current yield will always be positive because an investor would not purchase a bond that is not expected to pay any cash coupon interest.
D)   If a coupon bond is selling at par, its current yield equals its yield to maturity, and its expected capital gains yield is zero.
E)   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.F) A) and E)
G) None of the above

Question 11

Tucker Corporation is planning to issue new 20-year bonds. The current plan is to make the bonds non-callable, but this may be changed. If the bonds are made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

Accepted Answer

A)   Because of the call premium, the required rate of return would decline.
B)   There is no reason to expect a change in the required rate of return.
C)   The required rate of return would decline because the bond would then be less risky to a bondholder.
D)   The required rate of return would increase because the bond would then be more risky to a bondholder.
E)   It is impossible to say without more information.F) B) and E)
G) A) and B)

Question 12

Assume that the current corporate bond yield curve is upward sloping. Under this condition, then we could be sure that

Accepted Answer

A)   Inflation is expected to decline in the future.
B)   The economy is not in a recession.
C)   Long-term bonds are a better buy than short-term bonds.
D)   Maturity risk premiums could help to explain the yield curve's upward slope.
E)   Long-term interest rates are more volatile than short-term rates.F) A) and E)
G) C) and D)

Question 13

Three $1,000 face value, 10-year, noncallable, bonds have the same amount of risk, hence their YTMs are equal. Bond 8 has an 8% annual coupon, Bond 10 has a 10% annual coupon, and Bond 12 has a 12% annual coupon. Bond 10 sells at par. Assuming that interest rates remain constant for the next 10 years, which of the following statements is CORRECT?

Accepted Answer

A)   Bond 8'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, their prices should all remain at their current levels until maturity.
C)   Bond 12 sells at a premium (its price is greater than par) , and its price is expected to increase over the next year.
D)   Bond 8 sells at a discount (its price is less than par) , and its price is expected to increase over the next year.
E)   Over the next year, Bond 8's price is expected to decrease, Bond 10's price is expected to stay the same, and Bond 12's price is expected to increase.F) A) and E)
G) None of the above

Question 14

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 CORRECT?

Accepted Answer

A)   The bond's expected capital gains yield is zero.
B)   The bond's yield to maturity is above 9%.
C)   The bond's current yield is above 9%.
D)   If the bond's yield to maturity declines, the bond will sell at a discount.
E)   The bond's current yield is less than its expected capital gains yield.F) A) and E)
G) A) and D)

Question 15

In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures from historical book values to market values. KJM Corporation's balance sheet (book values) The bonds have a 7.0% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 11%, so the bonds now sell below par. What is the current market value of the firm's debt?

Accepted Answer

A)   $17,436,237
B)   $17,883,320
C)   $18,330,403
D)   $7,706,000
E)   $7,898,650F) A) and C)
G) All of the above

Question 16

Restrictive covenants are designed primarily to protect bondholders by constraining the actions of managers. Such covenants are spelled out in bond indentures.

Accepted Answer

A) True 
 B)False

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

If the required rate of return on a bond (rd) is greater than its coupon interest rate and will remain above that rate, then the market value of the bond will always be below its par value until the bond matures, at which time its market value will equal its par value. (Accrued interest between interest payment dates should not be considered when answering this question.)

Accepted Answer

A) True 
 B)False

Question 19

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 corporate issuers.

Accepted Answer

A) True 
 B)False

Question 20

You are considering two bonds. Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT?

Accepted Answer

A)   The price of Bond B will decrease over time, but the price of Bond A will increase over time.
B)   The prices of both bonds will remain unchanged.
C)   The price of Bond A will decrease over time, but the price of Bond B will increase over time.
D)   The prices of both bonds will increase by 7% per year.
E)   The prices of both bonds will increase over time, but the price of Bond A will increase at a faster rate.F) C) and D)
G) A) and E)

Exam 7: Bonds and Their Valuation

If its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in value?

Correct Answer
verified

Moerdyk Corporation's bonds have a 15-year maturity, a 7.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 6.20%, based on semiannual compounding. What is the bond's price?

Correct Answer
verified

A 25-year, $1,000 par value bond has an 8.5% annual payment coupon. The bond currently sells for $925. If the yield to maturity remains at its current rate, what will the price be 5 years from now?

Correct Answer
verified

Adams Enterprises' noncallable bonds currently sell for $1,120. They have a 15-year maturity, an annual coupon of $85, and a par value of $1,000. What is their yield to maturity?

Correct Answer
verified

You are considering two bonds. Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT?

Correct Answer
verified

Malko Enterprises' bonds currently sell for $1,050. They have a 6-year maturity, an annual coupon of $75, and a par value of $1,000. What is their current yield?

Correct Answer
verified

Correct Answer
verified

Sadik Inc.'s bonds currently sell for $1,180 and have a par value of $1,000. They pay a $105 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to call (YTC) ?

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

Assume that the current corporate bond yield curve is upward sloping. Under this condition, then we could be sure that

Correct Answer
verified

A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon. Neither is callable, and both have the same yield to maturity. If the yield to maturity of both bonds increases by the same amount, which of the following statements would be CORRECT?

Correct Answer
verified

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 CORRECT?

Correct Answer
verified

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Restrictive covenants are designed primarily to protect bondholders by constraining the actions of managers. Such covenants are spelled out in bond indentures.

Correct Answer
verified

Correct Answer
verified

Tucker Corporation is planning to issue new 20-year bonds. The current plan is to make the bonds non-callable, but this may be changed. If the bonds are made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

Correct Answer
verified

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 corporate issuers.

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

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. None of the bonds can be called. Which of the following statements is CORRECT?

Correct Answer
verified

Exam 7: Bonds and Their Valuation

If its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in value?

Correct AnswerverifiedShow Answer

Moerdyk Corporation's bonds have a 15-year maturity, a 7.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 6.20%, based on semiannual compounding. What is the bond's price?

Correct AnswerverifiedShow Answer

A 25-year, $1,000 par value bond has an 8.5% annual payment coupon. The bond currently sells for $925. If the yield to maturity remains at its current rate, what will the price be 5 years from now?

Correct AnswerverifiedShow Answer

Adams Enterprises' noncallable bonds currently sell for $1,120. They have a 15-year maturity, an annual coupon of $85, and a par value of $1,000. What is their yield to maturity?

Correct AnswerverifiedShow Answer

You are considering two bonds. Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Malko Enterprises' bonds currently sell for $1,050. They have a 6-year maturity, an annual coupon of $75, and a par value of $1,000. What is their current yield?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Sadik Inc.'s bonds currently sell for $1,180 and have a par value of $1,000. They pay a $105 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to call (YTC) ?

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

Assume that the current corporate bond yield curve is upward sloping. Under this condition, then we could be sure that

Correct AnswerverifiedShow Answer

A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon. Neither is callable, and both have the same yield to maturity. If the yield to maturity of both bonds increases by the same amount, which of the following statements would be CORRECT?

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 CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Restrictive covenants are designed primarily to protect bondholders by constraining the actions of managers. Such covenants are spelled out in bond indentures.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Tucker Corporation is planning to issue new 20-year bonds. The current plan is to make the bonds non-callable, but this may be changed. If the bonds are made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

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 corporate issuers.

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

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. None of the bonds can be called. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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