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.
G) A) and B)
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B) False
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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.
G) A) and C)
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A) Liquidity premiums are generally higher on Treasury than corporate bonds.
B) The maturity premiums embedded in the interest rates on U.S.Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-term bonds.
C) Default risk premiums are generally lower on corporate than on Treasury bonds.
D) Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds.
E) If the maturity risk premium were zero and interest rates were expected to decrease in the future, then the yield curve for U.S.Treasury securities would, other things held constant, have an upward slope.
G) B) and D)
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B) False
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A) A callable 10-year, 10% bond should sell at a higher price than an otherwise similar noncallable bond.
B) Corporate treasurers dislike issuing callable bonds because these bonds may require the company to raise additional funds earlier than would be true if noncallable bonds with the same maturity were used.
C) Two bonds have the same maturity and the same coupon rate.However, one is callable and the other is not.The difference in prices between the bonds will be greater if the current market interest rate is above the coupon rate than if it is below the coupon rate.
D) The actual life of a callable bond will always be equal to or less than the actual life of a noncallable bond with the same maturity.Therefore, if the yield curve is upward sloping, the required rate of return will be lower on the callable bond.
E) Two bonds have the same maturity and the same coupon rate.However, one is callable and the other is not.The difference in prices between the bonds will be greater if the current market interest rate is below the coupon rate than if it is above the coupon rate.
G) A) and B)
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A) Adding a call provision.
B) The rating agencies change the bond's rating from Baa to Aaa.
C) Making the bond a first mortgage bond rather than a debenture.
D) Adding a sinking fund.
E) Adding additional restrictive covenants that limit management's actions.
G) A) and D)
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B) False
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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.
G) A) and B)
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B) False
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B) False
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A) All else equal, an increase in interest rates will have a greater effect on the prices of short-term than long-term bonds.
B) 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.
C) If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value.
D) If a bond's yield to maturity exceeds its coupon rate, the bond's current yield must be less than its coupon rate.
E) 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.
G) A) and E)
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B) False
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A) All else equal, long-term bonds have less interest rate price risk than short-term bonds.
B) All else equal, low-coupon bonds have less interest rate price risk than high-coupon bonds.
C) All else equal, short-term bonds have less reinvestment rate risk than long-term bonds.
D) All else equal, long-term bonds have less reinvestment rate risk than short-term bonds.
E) All else equal, high-coupon bonds have less reinvestment rate risk than low-coupon bonds.
G) D) and E)
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A) On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss.
B) On an expected yield basis, the expected current yield will always be positive because an investor would not purchase a bond that is not expected to pay any cash coupon interest.
C) If a coupon bond is selling at par, its current yield equals its yield to maturity.
D) The current yield on Bond A exceeds the current yield on Bond B; therefore, Bond A must have a higher yield to maturity than Bond B.
E) If a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity.
G) A) and B)
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A) 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%.
B) The price of a discount bond will increase over time, assuming that the bond's yield to maturity remains constant.
C) For a given firm, its debentures are likely to have a lower yield to maturity than its mortgage bonds.
D) When large firms are in financial distress, they are almost always liquidated, whereas smaller firms are generally reorganized.
E) The total return on a bond during a given year consists only of the coupon interest payments received.
G) A) and B)
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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.
G) A) and E)
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A) 5.01%
B) 5.27%
C) 5.54%
D) 5.81%
E) 6.10%
G) A) and D)
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B) False
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A) 5.56%
B) 5.85%
C) 6.14%
D) 6.45%
E) 6.77%
G) C) and D)
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