Question 1

O'Brien Ltd.'s outstanding bonds have a $1,000 par value,and they mature in 25 years.Their nominal yield to maturity is 9.25%,they pay interest semiannually,and they sell at a price of $975.What is the bond's nominal coupon interest rate?

Accepted Answer

A)  7.32%
B)  7.71%
C)  8.12%
D)  8.54%
E)  8.99%F) A) and C)
G) C) and D)

Question 2

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 E)
G) D) and E)

Question 3

The desire for floating-rate bonds,and consequently their increased usage,arose out of the experience of the early 1980s,when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.

Accepted Answer

A) True 
 B)False

Question 4

Dyl Inc.'s bonds currently sell for $1,040 and have a par value of $1,000.They pay a $65 annual coupon and have a 15-year maturity,but they can be called in 5 years at $1,100.What is their yield to maturity (YTM) ?

Accepted Answer

A)  5.78%
B)  6.09%
C)  6.39%
D)  6.71%
E)  7.05%F) C) and D)
G) All of the above

Question 5

Keenan Industries has a bond outstanding with 15 years to maturity,an 8.25% nominal coupon,semiannual payments,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 $1,120.What is the bond's nominal yield to call?

Accepted Answer

A)  6.20%
B)  6.53%
C)  6.85%
D)  7.20%
E)  7.55%F) A) and D)
G) C) and D) B

Question 6

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,an 8% yield to maturity,and are noncallable.Which of the following statements 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 remains at 8%, Bond A's price one year from now will be higher than it is today, but Bond B's price one year from now will be lower than it is today.
D)  If the yield to maturity for both bonds immediately decreases to 6%, Bond A's bond will have a larger percentage increase in value.
E)  Bond A's current yield is greater than that of Bond B.F) C) and E)
G) A) and B) E

Question 7

Assuming all else is constant,which of the following statements is CORRECT?

Accepted Answer

A)  Other things held constant, a 20-year zero coupon bond has more reinvestment risk than a 20-year coupon bond.
B)  Other things held constant, for any given maturity, a 1.0 percentage point decrease in the market interest rate would cause a smaller dollar capital gain than the capital loss stemming from a 1.0 percentage point increase in the interest rate.
C)  From a corporate borrower's point of view, interest paid on bonds is not tax-deductible.
D)  Other things held constant, price sensitivity as measured by the percentage change in price due to a given change in the required rate of return decreases as a bond's maturity increases.
E)  For a bond of any maturity, a 1.0 percentage point increase in the market interest rate (rd)  causes a larger dollar capital loss than the capital gain stemming from a 1.0 percentage point decrease in the interest rate.F) A) and B)
G) A) and C)

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)  The total return on a bond during a given year is based only on the coupon interest payments received.
B)  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%.
C)  The price of a discount bond will increase over time, assuming that the bond's yield to maturity remains constant.
D)  For a given firm, its debentures are likely to have a lower yield to maturity than its mortgage bonds.
E)  When large firms are in financial distress, they are almost always liquidated, whereas smaller firms are generally reorganized.F) B) and D)
G) B) and C)

Question 9

Listed below are some provisions that are often contained in bond indentures.Which of these provisions,viewed alone,would tend to reduce the yield to maturity that investors would otherwise require on a newly issued bond?
1) Fixed assets are used as security for a bond.
2) A given bond is subordinated to other classes of debt.
3) The bond can be converted into the firm's common stock.
4) The bond has a sinking fund.
5) The bond has a call provision.
"6) The indenture contains covenants that restrict the use of additional debt.
​"

Accepted Answer

A)  1, 3, 4, 6
B)  1, 4, 6
C)  1, 2, 3, 4, 6
D)  1, 2, 3, 4, 5, 6
E)  1, 3, 4, 5, 6F) B) and C)
G) D) and E)

Question 10

A zero coupon bond is a bond that pays no interest and is offered (and initially sells)at par.These bonds provide compensation to investors in the form of capital appreciation.

Accepted Answer

A) True 
 B)False

Question 11

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 bond will decline over time.F) All of the above
G) B) and D)

Question 12

Grossnickle Corporation issued 20-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 19 years to maturity?

Accepted Answer

A)  $1,113.48
B)  $1,142.03
C)  $1,171.32
D)  $1,201.35
E)  $1,232.15F) B) and E)
G) D) and E)

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)  If a coupon bond is selling at par, its current yield equals its yield to maturity.
B)  If rates fall after its issue, a zero coupon bond could trade at a price above its maturity (or par)  value.
C)  If rates fall rapidly, a zero coupon bond's expected appreciation could become negative.
D)  If a firm moves from a position of strength toward financial distress, its bonds' yield to maturity would probably decline.
E)  If a bond is selling at a premium, this implies that its yield to maturity exceeds its coupon rate.F) All of the above
G) A) and E)

Question 14

Which of the following statements is CORRECT?

Accepted Answer

A)  All else equal, senior debt generally has a lower yield to maturity than subordinated debt.
B)  An indenture is a bond that is less risky than a mortgage bond.
C)  The expected return on a corporate bond will generally exceed the bond's yield to maturity.
D)  If a bond's coupon rate exceeds its yield to maturity, then its expected return to investors will also exceed its yield to maturity.
E)  Under our bankruptcy laws, any firm that is in financial distress will be forced to declare bankruptcy and then be liquidated.F) A) and D)
G) None of the above

Question 15

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) B) and E)
G) A) and C) E

Question 16

A 10-year bond pays an annual coupon,its YTM is 8%,and it currently trades at a premium.Which of the following statements is CORRECT?

Accepted Answer

A)  The bond's current yield is less than 8%.
B)  If the yield to maturity remains at 8%, then the bond's price will decline over the next year.
C)  The bond's coupon rate is less than 8%.
D)  If the yield to maturity increases, then the bond's price will increase.
E)  If the yield to maturity remains at 8%, then the bond's price will remain constant over the next year.F) B) and C)
G) A) and D)

Question 17

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) A) and B)
G) A) and C)

Question 18

There is an inverse relationship between bonds' quality ratings and their required rates of return.Thus,the required return is lowest for AAA-rated bonds,and required returns increase as the ratings get lower.

Accepted Answer

A) True 
 B)False

Question 19

Morin Company's bonds mature in 8 years,have a par value of $1,000,and make an annual coupon interest payment of $65.The market requires an interest rate of 8.2% on these bonds.What is the bond's price?

Accepted Answer

A)  $903.04
B)  $925.62
C)  $948.76
D)  $972.48
E)  $996.79F) A) and C)
G) C) and D)

Question 20

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 their coupon rates.
B)  All else equal, an increase in interest rates will have a greater effect on the prices of short-term than long-term bonds.
C)  All else 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)  If a bond's yield to maturity exceeds its coupon rate, the bond's current yield must be less than its coupon rate.F) B) and D)
G) A) and B)

Exam 7: Bonds and Their Valuation

O'Brien Ltd.'s outstanding bonds have a $1,000 par value,and they mature in 25 years.Their nominal yield to maturity is 9.25%,they pay interest semiannually,and they sell at a price of $975.What is the bond's nominal coupon interest rate?

Correct Answer
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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

The desire for floating-rate bonds,and consequently their increased usage,arose out of the experience of the early 1980s,when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.

Correct Answer
verified

Dyl Inc.'s bonds currently sell for $1,040 and have a par value of $1,000.They pay a $65 annual coupon and have a 15-year maturity,but they can be called in 5 years at $1,100.What is their yield to maturity (YTM) ?

Correct Answer
verified

Keenan Industries has a bond outstanding with 15 years to maturity,an 8.25% nominal coupon,semiannual payments,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 $1,120.What is the bond's nominal yield to call?

Correct Answer
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B

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,an 8% yield to maturity,and are noncallable.Which of the following statements is CORRECT?

Correct Answer
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E

Assuming all else is constant,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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Correct Answer
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A zero coupon bond is a bond that pays no interest and is offered (and initially sells)at par.These bonds provide compensation to investors in the form of capital appreciation.

Correct Answer
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A Treasury bond has an 8% annual coupon and a 7.5% yield to maturity.Which of the following statements is CORRECT?

Correct Answer
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Grossnickle Corporation issued 20-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 19 years to maturity?

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

Correct Answer
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E

A 10-year bond pays an annual coupon,its YTM is 8%,and it currently trades at a premium.Which of the following statements is CORRECT?

Correct Answer
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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

There is an inverse relationship between bonds' quality ratings and their required rates of return.Thus,the required return is lowest for AAA-rated bonds,and required returns increase as the ratings get lower.

Correct Answer
verified

Morin Company's bonds mature in 8 years,have a par value of $1,000,and make an annual coupon interest payment of $65.The market requires an interest rate of 8.2% on these bonds.What is the bond's price?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Exam 7: Bonds and Their Valuation

O'Brien Ltd.'s outstanding bonds have a $1,000 par value,and they mature in 25 years.Their nominal yield to maturity is 9.25%,they pay interest semiannually,and they sell at a price of $975.What is the bond's nominal coupon interest rate?

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

The desire for floating-rate bonds,and consequently their increased usage,arose out of the experience of the early 1980s,when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.

Correct AnswerverifiedShow Answer

Dyl Inc.'s bonds currently sell for $1,040 and have a par value of $1,000.They pay a $65 annual coupon and have a 15-year maturity,but they can be called in 5 years at $1,100.What is their yield to maturity (YTM) ?

Correct AnswerverifiedShow Answer

Keenan Industries has a bond outstanding with 15 years to maturity,an 8.25% nominal coupon,semiannual payments,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 $1,120.What is the bond's nominal yield to call?

Correct AnswerverifiedB

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,an 8% yield to maturity,and are noncallable.Which of the following statements is CORRECT?

Correct AnswerverifiedE

Assuming all else is constant,which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A zero coupon bond is a bond that pays no interest and is offered (and initially sells)at par.These bonds provide compensation to investors in the form of capital appreciation.

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

Grossnickle Corporation issued 20-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 19 years to maturity?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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 AnswerverifiedE

A 10-year bond pays an annual coupon,its YTM is 8%,and it currently trades at a premium.Which of the following statements is CORRECT?

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

There is an inverse relationship between bonds' quality ratings and their required rates of return.Thus,the required return is lowest for AAA-rated bonds,and required returns increase as the ratings get lower.

Correct AnswerverifiedShow Answer

Morin Company's bonds mature in 8 years,have a par value of $1,000,and make an annual coupon interest payment of $65.The market requires an interest rate of 8.2% on these bonds.What is the bond's price?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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B

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E

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E

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