Question 1

A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if interest rates are below 10% and at a discount if interest rates are greater than 10%.

Accepted Answer

A) True 
 B)False

Question 2

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 BondB 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 ofBond A will increase by more.F) B) and E)
G) A) and D)

Question 3

The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.

Accepted Answer

A) True 
 B)False

Question 4

A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

Accepted Answer

A) True 
 B)False

Question 5

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 haveThe 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 wouldDecrease.
E)   The prices of the two bonds would remain constant.F) A) and B)
G) C) and D)

Question 6

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'sUpward slope.
E)   Long-term interest rates are more volatile than short-term rates.F) B) and C)
G) None of the above

Question 7

Moerdyk Corporation's bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd)  is 4.75%, based on semiannual compounding. What is the bond's price?

Accepted Answer

A)   1,063.09
B)   1,090.35
C)   1,118.31
D)   1,146.27
E)   1,174.93F) A) and B)
G) All of the above

Question 8

5-year Treasury bonds yield 5.5%. The inflation premium (IP)  is 1.9%, and the maturity risk premium (MRP)  on 5-year bonds is 0.4%. What is the real risk-free rate, r*?

Accepted Answer

A)   2.59%
B)   2.88%
C)   3.20%
D)   3.52%
E)   3.87%F) D) and E)
G) A) and E)

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)   One disadvantage of zero coupon bonds is that the issuing firm cannot realize any tax savings from the debt until the bondsMature.
B)   Other things held constant, a callable bond should have a lowerYield to maturity than a noncallable bond.
C)   Once a firm declares bankruptcy, it must then be liquidated by the trustee, who uses the proceeds to pay bondholders, unpaid wages,Taxes, and lawyer fees.
D)   Income bonds must pay interest only if the company earns the interest. Thus, these securities cannot bankrupt a company prior to their maturity, and this makes them safer to the issuingCorporation than "regular" bonds.
E)   A firm with a sinking fund that gave it the choice of calling the required bonds at par or buying the bonds in the open market would generally choose the open market purchase if the coupon rate exceeded the going interest rate.F) A) and E)
G) A) and B)

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)   A zero coupon bond's current yield is equal to its yield to maturity.
B)   If a bond's yield to maturity exceeds its coupon rate, the bondWill sell at par.
C)   All else equal, if a bond's yield to maturity increases, its priceWill fall.
D)   If a bond's yield to maturity exceeds its coupon rate, the bondWill sell at a premium over par.
E)   All else equal, if a bond's yield to maturity increases, itsCurrent yield will fall.F) C) and E)
G) A) and B)

Question 11

Which of the following statements is CORRECT?

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 debtWas 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 ofCapital gains.
D)   Junk bonds typically provide a lower yield to maturity thanInvestment-grade bonds.
E)   A debenture is a secured bond that is backed by some or all of theFirm's fixed assets.F) A) and C)
G) A) and D)

Question 12

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 parValue.
C)   Even if a bond's YTC exceeds its YTM, an investor with an investment horizon longer than the bond's maturity would be worseOff if the bond were called.
D)   A bond is likely to be called if its market price is equal to itsPar value.
E)   A bond is likely to be called if it sells at a discount below par.F) A) and E)
G) A) and C)

Question 13

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

Question 14

Assume that a 10-year Treasury bond has a 12% annual coupon, while a 15- year T-bond has an 8% annual coupon. Assume also that the yield curve is flat, and all Treasury securities have a 10% yield to maturity. Which of the following statements is CORRECT?

Accepted Answer

A)   If interest rates decline, the prices of both bonds will increase, but the 15-year bond would have a larger percentage increase inPrice.
B)   If interest rates decline, the prices of both bonds will increase, but the 10-year bond would have a larger percentage increase inPrice.
C)   The 10-year bond would sell at a discount, while the 15-year bondWould sell at a premium.
D)   The 10-year bond would sell at a premium, while the 15-year bondWould sell at par.
E)   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.F) A) and B)
G) None of the above

Question 15

Ezzell Enterprises' noncallable bonds currently sell for $1,165. They have a 15-year maturity, an annual coupon of $95, and a par value of $1,000. What is their yield to maturity?

Accepted Answer

A)   6.20%
B)   6.53%
C)   6.87%
D)   7.24%
E)   7.62%F) A) and D)
G) A) and E)

Question 16

Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price?

Accepted Answer

A)   An 8-year bond with a 9% coupon.
B)   A 1-year bond with a 15% coupon.
C)   A 3-year bond with a 10% coupon.
D)   A 10-year zero coupon bond.
E)   A 10-year bond with a 10% coupon.F) A) and C)
G) A) and B)

Question 17

In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures to a market value basis. KJM Corporation's balance sheet as of today is as follows:  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)   $7,898,650F) A) and B)
G) B) and E)

Question 18

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 19

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)   3.09%F) None of the above
G) A) and E)

Question 20

Under normal conditions, which of the following would be most likely to increase the coupon rate required to enable a bond to be issued at par?

Accepted Answer

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

Exam 5: Bonds, Bond Valuation, and Interest Rates

Which of the following statements is CORRECT?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

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

A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if interest rates are below 10% and at a discount if interest rates are greater than 10%.

Correct Answer
verified

The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.

Correct Answer
verified

Correct Answer
verified

5-year Treasury bonds yield 5.5%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year bonds is 0.4%. What is the real risk-free rate, r*?

Correct Answer
verified

Under normal conditions, which of the following would be most likely to increase the coupon rate required to enable a bond to be issued at par?

Correct Answer
verified

Ezzell Enterprises' noncallable bonds currently sell for $1,165. They have a 15-year maturity, an annual coupon of $95, and a par value of $1,000. What is their yield to maturity?

Correct Answer
verified

Assume that a 10-year Treasury bond has a 12% annual coupon, while a 15- year T-bond has an 8% annual coupon. Assume also that the yield curve is flat, and all Treasury securities have a 10% yield to maturity. Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Moerdyk Corporation's bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 4.75%, based on semiannual compounding. What is the bond's price?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

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

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

Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price?

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

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

Exam 5: Bonds, Bond Valuation, and Interest Rates

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

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

A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if interest rates are below 10% and at a discount if interest rates are greater than 10%.

Correct AnswerverifiedShow Answer

The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

5-year Treasury bonds yield 5.5%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year bonds is 0.4%. What is the real risk-free rate, r*?

Correct AnswerverifiedShow Answer

Under normal conditions, which of the following would be most likely to increase the coupon rate required to enable a bond to be issued at par?

Correct AnswerverifiedShow Answer

Ezzell Enterprises' noncallable bonds currently sell for $1,165. They have a 15-year maturity, an annual coupon of $95, and a par value of $1,000. What is their yield to maturity?

Correct AnswerverifiedShow Answer

Assume that a 10-year Treasury bond has a 12% annual coupon, while a 15- year T-bond has an 8% annual coupon. Assume also that the yield curve is flat, and all Treasury securities have a 10% yield to maturity. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Moerdyk Corporation's bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 4.75%, based on semiannual compounding. What is the bond's price?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

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

Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price?

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

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 Answer
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