Exam 4: Bond Valuation

A) $829.21
B) $850.47
C) $872.28
D) $894.65
E) $917.01

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

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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.

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A) $839.31
B) $860.83
C) $882.90
D) $904.97
E) $927.60

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A) 0.49%
B) 0.55%
C) 0.61%
D) 0.68%
E) 0.75%

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A) If the maturity risk premium (MRP) is greater than zero, then the yield curve must have an upward slope.
B) Because long-term bonds are riskier than short-term bonds, yields on long-term Treasury bonds will always be higher than yields on short-term T-bonds.
C) If the maturity risk premium (MRP) equals zero, the yield curve must be flat.
D) The yield curve can never be downward sloping.
E) If inflation is expected to increase in the future, and if the maturity risk premium (MRP) is greater than zero, then the yield curve will have an upward slope.

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A) One year from now, Bond A's price will be higher than it is today.
B) Bond A's current yield is greater than 8%.
C) Bond A has a higher price than Bond B today, but one year from now the bonds will have the same price.
D) Both bonds have the same price today, and the price of each bond is expected to remain constant until the bonds mature.
E) Bond B has a higher price than Bond A today, but one year from now the bonds will have the same price.

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A) 1.40%
B) 1.55%
C) 1.71%
D) 1.88%
E) 2.06%

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

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A) A bond is likely to be called if its market price is below its par value.
B) Even if a bond's YTC exceeds its YTM, an investor with an investment horizon longer than the bond's maturity would be worse off if the bond were called.
C) A bond is likely to be called if its market price is equal to its par value.
D) A bond is likely to be called if it sells at a discount below par.
E) A bond is likely to be called if its coupon rate is below its YTM.

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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.

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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.

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A) If a 10-year, $1,000 par, 10% coupon bond were issued at par, and if interest rates then dropped to the point where r_d = YTM = 5%, we could be sure that the bond would sell at a premium above its $1,000 par value.
B) Other things held constant, a corporation would rather issue noncallable bonds than callable bonds.
C) Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond.
D) Reinvestment rate risk is worse from an investor's standpoint than interest rate price risk if the investor has a short investment time horizon.
E) If a 10-year, $1,000 par, zero coupon bond were issued at a price that gave investors a 10% yield to maturity, and if interest rates then dropped to the point where r_d = YTM = 5%, the bond would sell at a premium over its $1,000 par value.

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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.

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A) If debt is used to raise the million dollars, but $500,000 is raised as first mortgage bonds on the new plant and $500,000 as debentures, the interest rate on the first mortgage bonds would be lower than it would be if the entire $1 million were raised by selling first mortgage bonds.
B) If two tiers of debt are used (with one senior and one subordinated debt class) , the subordinated debt will carry a lower interest rate.
C) If debt is used to raise the million dollars, the cost of the debt would be lower if the debt were in the form of a fixed-rate bond rather than a floating-rate bond.
D) If debt is used to raise the million dollars, the cost of the debt would be higher if the debt were in the form of a mortgage bond rather than an unsecured term loan.
E) The company would be especially eager to have a call provision included in the indenture if its management thinks that interest rates are almost certain to rise in the foreseeable future.

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