Question 1

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) None of the above
G) All of the above

Question 2

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

Question 3

You are considering 2 bonds that will be issued tomorrow.Both are rated triple B (BBB, the lowest investment-grade rating), both mature in 20 years, both have a 10% coupon, neither can be called except for sinking fund purposes, and both are offered to you at their $1,000 par values.However, Bond SF has a sinking fund while Bond NSF does not.Under the sinking fund, the company must call and pay off 5% of the bonds at par each year.The yield curve at the time is upward sloping.The bond's prices, being equal, are probably not in equilibrium, as Bond SF, which has the sinking fund, would generally be expected to have a higher yield than Bond NSF.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)   The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.
B)   You hold two bonds.One is a 10-year, zero coupon, bond and the other is a 10-year bond that pays a 6% annual coupon.The same market rate, 6%, applies to both bonds.If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline.
C)   The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates.
D)   The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates.
E)   You hold two bonds.One is a 10-year, zero coupon, issue and the other is a 10-year bond that pays a 6% annual coupon.The same market rate, 6%, applies to both bonds.If the market rate rises from the current level, the zero coupon bond will experience the larger percentage decline.F) A) and C)
G) A) and E)

Question 5

Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise.Since floating-rate debt shifts interest rate risk to companies, it offers no advantages to issuers.

Accepted Answer

A) True 
 B)False

Question 6

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

Question 7

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) C) and E)
G) D) and E)

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)   Subordinated debt has less default risk than senior debt.
B)   Convertible bonds have lower coupon rates than non-convertible bonds of similar default risk because they offer the possibility of capital gains.
C)   Junk bonds typically provide a lower yield to maturity than investment-grade bonds.
D)   A debenture is a secured bond that is backed by some or all of the firm's fixed assets.
E)   Junior debt is debt that has been more recently issued, and in bankruptcy it is paid off after senior debt because the senior debt was issued first.F) All of the above
G) B) and D)

Question 9

Other things 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 10

A bond that had a 20-year original maturity with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity.(Assume that the bonds have equal default risk and equal coupon rates, and they cannot be called.)

Accepted Answer

A) True 
 B)False

Question 11

Meacham Enterprises' bonds currently sell for $1,280 and have a par value of $1,000.They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050.What is their yield to call (YTC) ?

Accepted Answer

A)   6.39%
B)   6.72%
C)   7.08%
D)   7.45%
E)   7.82%F) B) and D)
G) B) and E)

Question 12

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 13

Which of the following statements is NOT CORRECT?

Accepted Answer

A)   All else equal, bonds with longer maturities have more interest rate (price)  risk than bonds with shorter maturities.
B)   If a bond is selling at its par value, its current yield equals its yield to maturity.
C)   If a bond is selling at a premium, its current yield will be greater than its yield to maturity.
D)   All else equal, bonds with larger coupons have greater interest rate (price)  risk than bonds with smaller coupons.
E)   If a bond is selling at a discount to par, its current yield will be less than its yield to maturity.F) A) and E)
G) C) and D)

Question 14

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 15

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

Question 16

Bonds A, B, and C all have a maturity of 15 years and a yield to maturity of 9%.Bond A's price exceeds its par value, Bond B's price equals its par value, and Bond C's price is less than its par value.Which of the following statements is CORRECT?

Accepted Answer

A)   Bond A has the most interest rate risk.
B)   If the yield to maturity on the three bonds remains constant, the prices of the three bonds will remain the same over the next year.
C)   If the yield to maturity on each bond increases to 8%, the prices of all three bonds will decline.
D)   Bond C sells at a premium over its par value.
E)   If the yield to maturity on each bond decreases to 6%, Bond A will have the largest percentage increase in its price.F) A) and B)
G) A) and C)

Question 17

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

Exam 5: Bonds, Bond Valuation, and Interest Rates

Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is NOT CORRECT?

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

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

Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

A bond that had a 20-year original maturity with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity.(Assume that the bonds have equal default risk and equal coupon rates, and they cannot be called.)

Correct Answer
verified

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

Bonds A, B, and C all have a maturity of 15 years and a yield to maturity of 9%.Bond A's price exceeds its par value, Bond B's price equals its par value, and Bond C's price is less than its par value.Which of the following statements is CORRECT?

Correct Answer
verified

Meacham Enterprises' bonds currently sell for $1,280 and have a par value of $1,000.They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050.What is their yield to call (YTC) ?

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

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

Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise.Since floating-rate debt shifts interest rate risk to companies, it offers no advantages to issuers.

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

Which of the following statements is CORRECT?

Correct Answer
verified

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

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 NOT CORRECT?

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

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A bond that had a 20-year original maturity with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity.(Assume that the bonds have equal default risk and equal coupon rates, and they cannot be called.)

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

Bonds A, B, and C all have a maturity of 15 years and a yield to maturity of 9%.Bond A's price exceeds its par value, Bond B's price equals its par value, and Bond C's price is less than its par value.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Meacham Enterprises' bonds currently sell for $1,280 and have a par value of $1,000.They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050.What is their yield to call (YTC) ?

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

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

Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise.Since floating-rate debt shifts interest rate risk to companies, it offers no advantages to issuers.

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified