Question 1

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

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)  A 10-year, 10% coupon bond has less reinvestment rate risk than a 10-year, 5% coupon bond (assuming all else equal) .
B)  The total return on a bond during a given year is the sum of the coupon interest payments received during the year and the change in the value of the bond from the beginning to the end of the year.
C)  The price of a 20-year, 10% bond is less sensitive to changes in interest rates than the price of a 5-year, 10% bond.
D)  A $1,000 bond with $100 annual interest payments that has 5 years to maturity and is not expected to default would sell at a discount if interest rates were below 9% and at a premium if interest rates were greater than 11%.
E)  10-year, zero coupon bonds have higher reinvestment rate risk than 10-year, 10% coupon bonds.F) B) and C)
G) B) and E)

Question 3

Perry Inc.'s bonds currently sell for $1,150.They have a 6-year maturity,an annual coupon of $85,and a par value of $1,000.What is their current yield?

Accepted Answer

A)  7.39%
B)  7.76%
C)  8.15%
D)  8.56%
E)  8.98%F) C) and E)
G) C) and D)

Question 4

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 5

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

Question 6

Which of the following statements is CORRECT?

Accepted Answer

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

Question 7

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

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)  If their maturities and other characteristics were the same, a 5% coupon bond would have more interest rate price risk than a 10% coupon bond.
B)  A 10-year coupon bond would have more reinvestment rate risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of reinvestment rate risk.
C)  A 10-year coupon bond would have more interest rate price risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of interest rate price risk.
D)  If their maturities and other characteristics were the same, a 5% coupon bond would have less interest rate price risk than a 10% coupon bond.
E)  A zero coupon bond of any maturity will have more interest rate price risk than any coupon bond, even a perpetuity.F) C) and D)
G) B) and E)

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

Which of the following statements is CORRECT?

Accepted Answer

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

Question 11

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 12

Which of the following statements is CORRECT?

Accepted Answer

A)  The total yield on a bond is derived from dividends plus changes in the price of the bond.
B)  Bonds are riskier than common stocks and therefore have higher required returns.
C)  Bonds issued by larger companies always have lower yields to maturity (less risk)  than bonds issued by smaller companies.
D)  The market value of a bond will always approach its par value as its maturity date approaches, provided the bond's required return remains constant.
E)  If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices.F) B) and C)
G) A) and E)

Question 13

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 14

If 10-year T-bonds have a yield of 6.2%,10-year corporate bonds yield 8.5%,the maturity risk premium on all 10-year bonds is 1.3%,and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds,what is the default risk premium on the corporate bond?

Accepted Answer

A)  1.90%
B)  2.09%
C)  2.30%
D)  2.53%
E)  2.78%F) A) and C)
G) D) and E)

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A)  The most likely explanation for an inverted yield curve is that investors expect inflation to increase.
B)  The most likely explanation for an inverted yield curve is that investors expect inflation to decrease.
C)  If the yield curve is inverted, short-term bonds have lower yields than long-term bonds.
D)  Inverted yield curves can exist for Treasury bonds, but because of default premiums, the corporate yield curve can never be inverted.
E)  The higher the maturity risk premium, the higher the probability that the yield curve will be inverted.F) None of the above
G) All of the above

Question 16

Suppose International Digital Technologies decides to raise a total of $200 million,with $100 million as long-term debt and $100 million as common equity.The debt can be mortgage bonds or debentures,but by an iron-clad provision in its charter,the company can never raise any additional debt beyond the original $100 million.Given these conditions,which of the following statements is CORRECT?

Accepted Answer

A)  If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds, we could be certain that the firm's total interest expense would be lower than if the debt were raised by issuing $100 million of debentures.
B)  In this situation, we cannot tell for sure how, or whether, the firm's total interest expense on the $100 million of debt would be affected by the mix of debentures versus first mortgage bonds. The interest rate on each of the two types of bonds would increase as the percentage of mortgage bonds used was increased, but the result might well be such that the firm's total interest charges would not be affected materially by the mix between the two.
C)  The higher the percentage of debentures, the greater the risk borne by each debenture, and thus the higher the required rate of return on the debentures.
D)  If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds, we could be certain that the firm's total interest expense would be lower than if the debt were raised by issuing $100 million of first mortgage bonds.
E)  The higher the percentage of debt represented by mortgage bonds, the riskier both types of bonds will be and, consequently, the higher the firm's total dollar interest charges will be.F) B) and D)
G) A) and B)

Question 17

Bonds for two companies were just issued: Short Corp.'s bonds will mature in 5 years,and Long Corp.'s bonds will mature in 15 years.Both bonds promise to pay a semiannual coupon,they are not callable or convertible,and they are equally liquid.Further,assume that the Treasury yield curve is based only on expectations about future inflation,i.e.,that the maturity risk premium is zero for T-bonds.Under these conditions,which of the following statements is correct?

Accepted Answer

A)  If the Treasury yield curve is downward sloping, Long's bonds must under all conditions have the lower yield.
B)  If the yield curve for Treasury securities is upward sloping, Long's bonds must under all conditions have a higher yield than Short's bonds.
C)  If the yield curve for Treasury securities is flat, Short's bond must under all conditions have the same yield as Long's bonds.
D)  If Long's and Short's bonds have the same default risk, their yields must under all conditions be equal.
E)  If the Treasury yield curve is upward sloping and Short has less default risk than Long, then Short's bonds must under all conditions have the lower yield.F) All of the above
G) A) and C)

Question 18

Curtis Corporation's 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 19

An 8-year Treasury bond has a 10% coupon,and a 10-year Treasury bond has an 8% 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)  Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price.
B)  The prices of both bonds would increase by the same amount.
C)  One bond's price would increase, while the other bond's price would decrease.
D)  The prices of the two bonds would remain constant.
E)  The prices of both bonds will decrease by the same amount.F) All of the above
G) B) and E)

Question 20

Which of the following bonds has the greatest interest rate price risk?

Accepted Answer

A)  A 10-year, $1,000 face value, zero coupon bond.
B)  A 10-year, $1,000 face value, 10% coupon bond with annual interest payments.
C)  All 10-year bonds have the same price risk since they have the same maturity.
D)  A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments.E) All of the above
F) C) and D)

Exam 4: Bond Valuation

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

Which of the following statements is CORRECT?

Correct Answer
verified

Ranger Inc.would like 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

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

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

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

Curtis Corporation's 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

Perry Inc.'s bonds currently sell for $1,150.They have a 6-year maturity,an annual coupon of $85,and a par value of $1,000.What is their current yield?

Correct Answer
verified

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

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

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

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

If 10-year T-bonds have a yield of 6.2%,10-year corporate bonds yield 8.5%,the maturity risk premium on all 10-year bonds is 1.3%,and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds,what is the default risk premium on the corporate bond?

Correct Answer
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Which of the following bonds has the greatest interest rate price risk?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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An 8-year Treasury bond has a 10% coupon,and a 10-year Treasury bond has an 8% 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

Exam 4: Bond Valuation

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Ranger Inc.would like 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

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

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

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

Curtis Corporation's 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

Perry Inc.'s bonds currently sell for $1,150.They have a 6-year maturity,an annual coupon of $85,and a par value of $1,000.What is their current yield?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

If 10-year T-bonds have a yield of 6.2%,10-year corporate bonds yield 8.5%,the maturity risk premium on all 10-year bonds is 1.3%,and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds,what is the default risk premium on the corporate bond?

Correct AnswerverifiedShow Answer

Which of the following bonds has the greatest interest rate price risk?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

An 8-year Treasury bond has a 10% coupon,and a 10-year Treasury bond has an 8% 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

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