Question 1

Tucker Corporation is planning to issue new 20-year bonds. Initially, the plan was to make the bonds non-callable. If the bonds were 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) A) and B)
F) A) and D)

Question 2

Under no circumstances are bondholders allowed to turn in their holdings unless the bonds are retractable.

Accepted Answer

A) True 
 B)False

Question 3

McCue Inc.'s bonds currently 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) C) and D)
F) A) and D)

Question 4

Keenan Industries has a bond outstanding with 15 years to maturity, an 8.75% coupon paid semiannually, and a $1,000 par value. The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,050. What is the bond's nominal yield to call?

Accepted Answer

A)   5.01%
B)   5.27%
C)   5.54%
D)   5.81%E) B) and C)
F) None of the above

Question 5

A 15-year corporate bond was issued 10 years ago. What is it today?

Accepted Answer

A)   a long-term bond with 5 years to maturity
B)   a medium-term bond with 5 years to maturity
C)   a long-term bond with 15 years to maturity
D)   a medium-term bond with 15 years to maturityE) A) and B)
F) B) and D)

Question 6

With no interim interest payment, zero bonds are not a good investment kept in the RRSP account.

Accepted Answer

A) True 
 B)False

Question 7

A 12-year bond has an annual coupon rate of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which of the following statements best bond prices?

Accepted Answer

A)   If market interest rates decline, the price of the bond will also decline.
B)   The bond is currently selling at a price below its par value.
C)   If market interest rates remain unchanged, the bond's price 1 year from now will be lower than it is today.
D)   The bond should currently be selling at its par value.E) A) and C)
F) A) and B)

Question 8

Which of the following statements is correct?

Accepted Answer

A)   All else equal, secured debt is more risky than unsecured debt.
B)   The expected return on a corporate bond must be more than its promised return if the probability of default is greater than zero.
C)   All else equal, senior debt has more default risk than subordinated debt.
D)   A company's bond rating is affected by its financial ratios and provisions in its indenture.E) None of the above
F) All of the above

Question 9

Taussig Corp.'s bonds currently sell for $1,150. They have a 6.75% annual coupon rate and a 15-year maturity, but they can be called in 6 years at $1,067.50. 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. Under these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds, the YTC or the YTM?

Accepted Answer

A)   4.12%
B)   4.34%
C)   4.57%
D)   4.81%E) A) and B)
F) None of the above

Question 10

A "Canada call" in corporate bonds is a design used for calculating what?

Accepted Answer

A)   the maturity date
B)   the default probability
C)   the market risk
D)   the buy-back priceE) B) and D)
F) All of the above

Question 11

Which of the following statements is correct?

Accepted Answer

A)   A bond is likely to be called if its coupon rate is below its YTM.
B)   A bond is likely to be called if its market price is below its par value.
C)   Even if a bond's YTC exceeds its YTM, an investor with an investment horizon longer than the bond's maturity would be worse off if the bond were called.
D)   A bond is likely to be called if its market price is equal to its par value.E) B) and C)
F) A) and B)

Question 12

There is an inverse relationship between bonds' quality ratings and their required rates of return.

Accepted Answer

A) True 
 B)False

Question 13

A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon. Both bonds 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) B) and D)
F) B) and C)

Question 14

If a firm raises capital by selling new bonds, it is called the "issuing firm," and the coupon rate is generally set equal to the required rate on bonds of equal risk.

Accepted Answer

A) True 
 B)False

Question 15

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 over time, but the price of Bond A will increase by more.E) B) and D)
F) C) and D)

Question 16

Which of the following statements best describes sinking funds?

Accepted Answer

A)   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.
B)   Most sinking funds require the issuer to provide funds to a trustee, which saves the money so that it will be available to pay off bondholders when the bonds mature.
C)   A sinking fund provision makes a bond more risky to investors at the time of issuance.
D)   Sinking fund provisions never require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time.E) All of the above
F) A) and D)

Question 17

The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low- coupon bonds, other things held constant.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following statements best describes type of debt?

Accepted Answer

A)   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.
B)   Subordinated debt has less default risk than senior debt.
C)   Convertible bonds have lower coupon rates than non-convertible bonds of similar default risk because they offer the possibility of capital gains.
D)   Junk bonds typically provide a lower yield to maturity than investment-grade bonds.E) C) and D)
F) B) and C)

Question 19

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 zero coupon bondE) B) and C)
F) A) and D)

Question 20

Bond A has a 9% annual coupon, while Bond B has a 7% annual coupon. Both bonds have the same maturity, a face value of $1,000, and an 8% yield to maturity. Which of the following is correct?

Accepted Answer

A)   Bond A's capital gains yield is greater than Bond B's capital gains yield.
B)   Bond A trades at a discount, whereas Bond B trades at a premium.
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) C) and D)
F) All of the above

Exam 6: Bonds, Bond Valuation, and Interest Rates

Under no circumstances are bondholders allowed to turn in their holdings unless the bonds are retractable.

Correct Answer
verified

There is an inverse relationship between bonds' quality ratings and their required rates of return.

Correct Answer
verified

A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon. Both bonds 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

Tucker Corporation is planning to issue new 20-year bonds. Initially, the plan was to make the bonds non-callable. If the bonds were made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

Correct Answer
verified

The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low- coupon bonds, other things held constant.

Correct Answer
verified

Correct Answer
verified

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

Keenan Industries has a bond outstanding with 15 years to maturity, an 8.75% coupon paid semiannually, and a $1,000 par value. The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,050. What is the bond's nominal yield to call?

Correct Answer
verified

A 15-year corporate bond was issued 10 years ago. What is it today?

Correct Answer
verified

Which of the following statements is correct?

Correct Answer
verified

If a firm raises capital by selling new bonds, it is called the "issuing firm," and the coupon rate is generally set equal to the required rate on bonds of equal risk.

Correct Answer
verified

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

Correct Answer
verified

Which of the following statements is correct?

Correct Answer
verified

Which of the following statements best describes sinking funds?

Correct Answer
verified

A "Canada call" in corporate bonds is a design used for calculating what?

Correct Answer
verified

With no interim interest payment, zero bonds are not a good investment kept in the RRSP account.

Correct Answer
verified

Which of the following statements best describes type of debt?

Correct Answer
verified

Bond A has a 9% annual coupon, while Bond B has a 7% annual coupon. Both bonds have the same maturity, a face value of $1,000, and an 8% yield to maturity. Which of the following is correct?

Correct Answer
verified

A 12-year bond has an annual coupon rate of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which of the following statements best bond prices?

Correct Answer
verified

Exam 6: Bonds, Bond Valuation, and Interest Rates

Under no circumstances are bondholders allowed to turn in their holdings unless the bonds are retractable.

Correct AnswerverifiedShow Answer

There is an inverse relationship between bonds' quality ratings and their required rates of return.

Correct AnswerverifiedShow Answer

A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon. Both bonds 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

Tucker Corporation is planning to issue new 20-year bonds. Initially, the plan was to make the bonds non-callable. If the bonds were made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

Correct AnswerverifiedShow Answer

The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low- coupon bonds, other things held constant.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Keenan Industries has a bond outstanding with 15 years to maturity, an 8.75% coupon paid semiannually, and a $1,000 par value. The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,050. What is the bond's nominal yield to call?

Correct AnswerverifiedShow Answer

A 15-year corporate bond was issued 10 years ago. What is it today?

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

If a firm raises capital by selling new bonds, it is called the "issuing firm," and the coupon rate is generally set equal to the required rate on bonds of equal risk.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Which of the following statements best describes sinking funds?

Correct AnswerverifiedShow Answer

A "Canada call" in corporate bonds is a design used for calculating what?

Correct AnswerverifiedShow Answer

With no interim interest payment, zero bonds are not a good investment kept in the RRSP account.

Correct AnswerverifiedShow Answer

Which of the following statements best describes type of debt?

Correct AnswerverifiedShow Answer

Bond A has a 9% annual coupon, while Bond B has a 7% annual coupon. Both bonds have the same maturity, a face value of $1,000, and an 8% yield to maturity. Which of the following is correct?

Correct AnswerverifiedShow Answer

A 12-year bond has an annual coupon rate of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which of the following statements best bond prices?

Correct AnswerverifiedShow Answer

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