Question 1

Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

Accepted Answer

A)   Market interest rates rise sharply.
B)   Market interest rates decline sharply.
C)   The company's financial situation deteriorates significantly.
D)   Inflation increases significantly.
E)   The company's bonds are downgraded.F) B) and C)
G) A) and C)

Question 2

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

Question 3

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)   $904.97
E)   $927.60F) D) and E)
G) A) and E)

Question 4

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

Question 5

One year ago Lerner and Luckmann Co.issued 15-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000.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)   $1,077.01
B)   $1,104.62
C)   $1,132.95
D)   $1,162.00
E)   $1,191.79F) C) and D)
G) A) and E)

Question 6

Haswell Enterprises' 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) C) and E)
G) B) and C)

Question 7

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

Question 8

You have funds that you want to invest in bonds, and you just noticed in the financial pages of the local newspaper that you can buy a $1,000 par value bond for $800.The coupon rate is 10% (with annual payments), and there are 10 years before the bond will mature and pay off its $1,000 par value.You should buy the bond if your required return on bonds with this risk is 12%.

Accepted Answer

A) True 
 B)False

Question 9

Jerome Corporation's bonds have 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)   6.10%F) B) and C)
G) A) and C)

Question 10

If the required rate of return on a bond (rd) is greater than its coupon interest rate and will remain above that rate, then the market value of the bond will always be below its par value until the bond matures, at which time its market value will equal its par value.(Accrued interest between interest payment dates should not be considered when answering this question.)

Accepted Answer

A) True 
 B)False

Question 11

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 D)
G) B) and E)

Question 12

Sommers Co.'s bonds currently sell for $1,080 and have a par value of $1,000.They pay a $100 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,125.What is their yield to maturity (YTM) ?

Accepted Answer

A)   8.56%
B)   9.01%
C)   9.46%
D)   9.93%
E)   10.43%F) A) and E)
G) A) and D)

Question 13

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 14

Which of the following statements is CORRECT?

Accepted Answer

A)   Most sinking funds require the issuer to provide funds to a trustee, who saves the money so that it will be available to pay off bondholders when the bonds mature.
B)   A sinking fund provision makes a bond more risky to investors at the time of issuance.
C)   Sinking fund provisions never require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time.
D)   If interest rates have increased since a company issued bonds with a sinking fund, the company is less likely to retire the bonds by buying them back in the open market, as opposed to calling them in at the sinking fund call price.
E)   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.F) D) and E)
G) B) and E)

Question 15

The Gergen Group's 5-year bonds yield 6.85%, and 5-year T-bonds yield 4.75%.The real risk-free rate is r* = 2.80%, the default risk premium for Gergen's bonds is DRP = 0.85% versus zero for T-bonds, the liquidity premium on Gergen'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)   2.06%F) D) and E)
G) B) and D)

Question 16

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 C)

Question 17

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

Accepted Answer

A)   The economy is not in a recession.
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)   Inflation is expected to decline in the future.F) B) and E)
G) A) and D)

Question 18

Chandler Co.'s 5-year bonds yield 7.00%, and 5-year T-bonds yield 5.15%.The real risk-free rate is r* = 3.0%, the inflation premium for 5-year bonds is IP = 1.75%, the liquidity premium for Chandler's bonds is LP = 0.75% versus zero for T-bonds, 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 default risk premium (DRP)  on Chandler's bonds?

Accepted Answer

A)   0.99%
B)   1.10%
C)   1.21%
D)   1.33%
E)   1.46%F) B) and C)
G) B) and D)

Question 19

Sentry Corp.bonds have an annual coupon payment of 7.25%.The bonds have a par value of $1,000, a current price of $1,125, and they will mature in 13 years.What is the yield to maturity on these bonds?

Accepted Answer

A)   5.56%
B)   5.85%
C)   6.14%
D)   6.45%
E)   6.77%F) B) and E)
G) B) and C)

Question 20

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

Exam 5: Bonds, Bond Valuation, and Interest Rates

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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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
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Correct Answer
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Which of the following statements is CORRECT?

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

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

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

Correct Answer
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One year ago Lerner and Luckmann Co.issued 15-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000.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

Sommers Co.'s bonds currently sell for $1,080 and have a par value of $1,000.They pay a $100 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,125.What is their yield to maturity (YTM) ?

Correct Answer
verified

Correct Answer
verified

Jerome Corporation's bonds have 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

Which of the following statements is CORRECT?

Correct Answer
verified

Sentry Corp.bonds have an annual coupon payment of 7.25%.The bonds have a par value of $1,000, a current price of $1,125, and they will mature in 13 years.What is the yield to maturity on these bonds?

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
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Correct Answer
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Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

Correct Answer
verified

Exam 5: Bonds, Bond Valuation, and Interest Rates

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

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

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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

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

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

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

Haswell Enterprises' 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

One year ago Lerner and Luckmann Co.issued 15-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000.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

Sommers Co.'s bonds currently sell for $1,080 and have a par value of $1,000.They pay a $100 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,125.What is their yield to maturity (YTM) ?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Jerome Corporation's bonds have 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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Sentry Corp.bonds have an annual coupon payment of 7.25%.The bonds have a par value of $1,000, a current price of $1,125, and they will mature in 13 years.What is the yield to maturity on these bonds?

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

Correct AnswerverifiedShow Answer

Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

Correct AnswerverifiedShow Answer

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

Correct Answer
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Correct Answer
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