Question 1

Crockett Corporation's 5-year bonds yield 6.85%,and 5-year government bonds yield 4.75%.The real risk-free rate is r* = 2.80%,the default risk premium for Crockett's bonds is DRP = 0.85% versus zero for T-bonds,the liquidity premium on Crockett's bonds is LP = 1.25%,and the maturity risk premium for all bonds is found with the formula MRP = (t - 1)  × 0.1%,where t = number of years to maturity.What is the inflation premium (IP)  on 5-year bonds?

Accepted Answer

A)  1.40%
B)  1.55%
C)  1.71%
D)  1.88%E) B) and C)
F) C) and D)

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 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) C) and D)
F) A) and B)

Question 3

Which statement regarding interest rate risk is true?

Accepted Answer

A)  One advantage of a zero coupon Treasury bond is that no one who owns the bond has to pay any taxes on it until it matures or is sold.
B)  Long-term bonds have less interest rate price risk but more reinvestment rate risk than short-term bonds.
C)  If interest rates increase, all bond prices will increase, but the increase will be greater for bonds that have less interest rate risk.
D)  Relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more interest rate price risk but less reinvestment rate risk.E) B) and C)
F) A) and C)

Question 4

The risk in bond prices due to fluctuations in interest rates is called reinvestment risk.

Accepted Answer

A) True 
 B)False

Question 5

Where are bonds mainly sold?

Accepted Answer

A)  in the over-the-counter market
B)  in the auction market
C)  in banks
D)  in the Montreal or Toronto stock marketsE) None of the above
F) B) and C)

Question 6

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

Accepted Answer

A)  Inflation is expected to decline in the future.
B)  Long-term bonds are a better buy than short-term bonds.
C)  Maturity risk premiums could help to explain the yield curve's upward slope.
D)  Long-term interest rates are more volatile than short-term rates.E) All of the above
F) None of the above

Question 7

If its yield to maturity declined by 1%,which bond 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) A) and D)
F) C) and D) D

Question 8

Which event would make it more likely that a company would choose to call its outstanding callable bonds?

Accepted Answer

A)  The company's bonds are downgraded.
B)  Market interest rates decline sharply.
C)  The company's financial situation deteriorates significantly.
D)  Inflation increases significantly.E) None of the above
F) B) and D)

Question 9

A 25-year,$1,000 par value bond has an 8.5% annual coupon.The bond currently sells for $875.If the yield to maturity remains at its current rate,what will the price be 5 years from now?

Accepted Answer

A)  $839.31
B)  $860.83
C)  $882.90
D)  $904.97E) B) and C)
F) C) and D)

Question 10

An investor's return on a strip bond,assuming it is held to maturity,is derived from which of the following?

Accepted Answer

A)  the difference between the price paid by the investor and its par value
B)  the annual coupon payments that are made by the issuer (borrower)  to the creditor (lender) 
C)  the difference between the bonds par value and its future value
D)  the sum of the coupon payments and the gain (loss)  on the price of the bondE) C) and D)
F) B) and D) C

Question 11

Wachowicz Corporation issued 15-year,noncallable,7.5% annual coupon bonds at their par value of $1,000 one year ago.Today,the market interest rate on these bonds is 5.5%.What is the current price of the bonds,given that they now have 14 years to maturity?

Accepted Answer

A)  $1,104.62
B)  $1,132.95
C)  $1,162.00
D)  $1,191.79E) A) and B)
F) A) and C)

Question 12

The market value of any financial asset may be estimated by determining future cash flows and then discounting them back to the present.

Accepted Answer

A) True 
 B)False

Question 13

Which statement regarding bonds is true?

Accepted Answer

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 rd = 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) A) and B)
F) B) and D) A

Question 14

A bond that is callable has a chance of being retired earlier than its stated term to maturity.Therefore,if the yield curve is upward sloping,an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements is correct?

Accepted Answer

A)  If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price regardless of the bond's coupon rates.
B)  All else being equal, an increase in interest rates will have a greater effect on the prices of short-term than long-term bonds.
C)  All else being equal, an increase in interest rates will have a greater effect on higher-coupon bonds than it will have on lower-coupon bonds.
D)  If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value.E) B) and C)
F) A) and B)

Question 16

The following are some provisions that are often found in a bond indenture.Which of these provisions would probably NOT reduce the yield to maturity that investors would otherwise require on a newly issued bond?

Accepted Answer

A)  Assets are used as security for the bond.
B)  The bond has a sinking fund.
C)  The bond is subordinate to other classes of debt.
D)  The indenture contains covenants that prevent the issuance of additional debt.E) None of the above
F) A) and B)

Question 17

Which of the following is considered the dominate law when a firm with liabilities exceeding $5 million is declaring bankruptcy?

Accepted Answer

A)  Canadian Criminal Code
B)  Bankruptcy and Insolvency Act
C)  Statute of Frauds
D)  Companies Creditors Arrangements ActE) C) and D)
F) B) and D)

Question 18

Which of the following statements is correct?

Accepted Answer

A)  If the maturity risk premium were zero and interest rates were expected to decrease in the future, then the yield curve for government securities would, other things held constant, have an upward slope.
B)  Liquidity premiums are generally higher on government than corporate bonds.
C)  Default risk premiums are generally lower on corporate than on government bonds.
D)  Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds.E) None of the above
F) All of the above

Question 19

Other things being equal,a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

Accepted Answer

A) True 
 B)False

Question 20

Junk bonds are high-risk,high-yield debt instruments.They are often used to finance leveraged buyouts and mergers,and to provide financing to companies of questionable financial strength.

Accepted Answer

A) True 
 B)False

Exam 6: Bonds, Bond Valuation, and Interest Rates

Correct Answer
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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
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Which statement regarding interest rate risk is true?

Correct Answer
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The risk in bond prices due to fluctuations in interest rates is called reinvestment risk.

Correct Answer
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Where are bonds mainly sold?

Correct Answer
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Assume that the current corporate bond yield curve is upward sloping.Under this condition,what could we be sure of?

Correct Answer
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If its yield to maturity declined by 1%,which bond would have the largest percentage increase in value?

Correct Answer
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D

Which event would make it more likely that a company would choose to call its outstanding callable bonds?

Correct Answer
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A 25-year,$1,000 par value bond has an 8.5% annual coupon.The bond currently sells for $875.If the yield to maturity remains at its current rate,what will the price be 5 years from now?

Correct Answer
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An investor's return on a strip bond,assuming it is held to maturity,is derived from which of the following?

Correct Answer
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C

Wachowicz Corporation issued 15-year,noncallable,7.5% annual coupon bonds at their par value of $1,000 one year ago.Today,the market interest rate on these bonds is 5.5%.What is the current price of the bonds,given that they now have 14 years to maturity?

Correct Answer
verified

The market value of any financial asset may be estimated by determining future cash flows and then discounting them back to the present.

Correct Answer
verified

Which statement regarding bonds is true?

Correct Answer
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A

A bond that is callable has a chance of being retired earlier than its stated term to maturity.Therefore,if the yield curve is upward sloping,an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

Correct Answer
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Which of the following statements is correct?

Correct Answer
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The following are some provisions that are often found in a bond indenture.Which of these provisions would probably NOT reduce the yield to maturity that investors would otherwise require on a newly issued bond?

Correct Answer
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Which of the following is considered the dominate law when a firm with liabilities exceeding $5 million is declaring bankruptcy?

Correct Answer
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Which of the following statements is correct?

Correct Answer
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Other things being equal,a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

Correct Answer
verified

Junk bonds are high-risk,high-yield debt instruments.They are often used to finance leveraged buyouts and mergers,and to provide financing to companies of questionable financial strength.

Correct Answer
verified

Exam 6: Bonds, Bond Valuation, and Interest Rates

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

Which statement regarding interest rate risk is true?

Correct AnswerverifiedShow Answer

The risk in bond prices due to fluctuations in interest rates is called reinvestment risk.

Correct AnswerverifiedShow Answer

Where are bonds mainly sold?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedD

Which event would make it more likely that a company would choose to call its outstanding callable bonds?

Correct AnswerverifiedShow Answer

A 25-year,$1,000 par value bond has an 8.5% annual coupon.The bond currently sells for $875.If the yield to maturity remains at its current rate,what will the price be 5 years from now?

Correct AnswerverifiedShow Answer

An investor's return on a strip bond,assuming it is held to maturity,is derived from which of the following?

Correct AnswerverifiedC

Wachowicz Corporation issued 15-year,noncallable,7.5% annual coupon bonds at their par value of $1,000 one year ago.Today,the market interest rate on these bonds is 5.5%.What is the current price of the bonds,given that they now have 14 years to maturity?

Correct AnswerverifiedShow Answer

The market value of any financial asset may be estimated by determining future cash flows and then discounting them back to the present.

Correct AnswerverifiedShow Answer

Which statement regarding bonds is true?

Correct AnswerverifiedA

A bond that is callable has a chance of being retired earlier than its stated term to maturity.Therefore,if the yield curve is upward sloping,an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

The following are some provisions that are often found in a bond indenture.Which of these provisions would probably NOT reduce the yield to maturity that investors would otherwise require on a newly issued bond?

Correct AnswerverifiedShow Answer

Which of the following is considered the dominate law when a firm with liabilities exceeding $5 million is declaring bankruptcy?

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Other things being equal,a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

Correct AnswerverifiedShow Answer

Junk bonds are high-risk,high-yield debt instruments.They are often used to finance leveraged buyouts and mergers,and to provide financing to companies of questionable financial strength.

Correct AnswerverifiedShow Answer

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D

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C

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A

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