Question 1

Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows: T-bond = 7.72% A = 9.64% AAA = 8.72% BBB = 10.18% The differences in rates among these issues were most probably caused primarily by:

Accepted Answer

A)   Real risk-free rate differences.
B)   Tax effects.
C)   Default and liquidity risk differences.
D)   Maturity risk differences.
E)   Inflation differences.F) C) and D)
G) B) and C)

Question 2

A bond that had a 20-year original maturity with 1 year left to maturity has more 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 3

Grossnickle Corporation issued 20-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 19 years to maturity?

Accepted Answer

A)   $1,113.48
B)   $1,142.03
C)   $1,171.32
D)   $1,201.35
E)   $1,232.15F) B) and E)
G) A) and B)

Question 4

Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, generally be subject to much more price risk if you purchased a 30-day bond than if you bought a 30-year bond.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures from historical book values to market values. KJM Corporation's balance sheet (book values) The bonds have a 7.0% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 11%, so the bonds now sell below par. What is the current market value of the firm's debt?

Accepted Answer

A)   $17,436,237
B)   $17,883,320
C)   $18,330,403
D)   $ 7,706,000
E)   $ 7,898,650F) None of the above
G) A) and E)

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)   The yield to maturity for a coupon bond that sells at a premium consists entirely of a positive capital gains yield; it has a zero current interest yield.
B)   The market value of a bond will always approach its par value as its maturity date approaches. This holds true even if the firm has filed for bankruptcy.
C)   Rising inflation makes the actual yield to maturity on a bond greater than a quoted yield to maturity that is based on market prices.
D)   The yield to maturity on a coupon bond that sells at its par value consists entirely of a current interest yield; it has a zero expected capital gains yield.
E)   The expected capital gains yield on a bond will always be zero or positive because no investor would purchase a bond with an expected capital loss.F) B) and C)
G) C) and D)

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)   You hold two bonds, a 10-year, zero coupon, issue and 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 its current level, the zero coupon bond will experience the larger percentage decline.
B)   The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.
C)   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.
D)   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, other things held constant.
E)   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.F) A) and E)
G) A) and D)

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)   If a bond is selling at a discount, the yield to call is a better measure of return than is the yield to maturity.
B)   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.
C)   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.
D)   If a coupon bond is selling at par, its current yield equals its yield to maturity, and its expected capital gains yield is zero.
E)   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.F) A) and E)
G) C) and D)

Question 10

A bond that is callable has a chance of being retired earlier than its stated term to maturity. Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

Accepted Answer

A) True 
 B)False

Question 11

Restrictive covenants are designed primarily to protect bondholders by constraining the actions of managers. Such covenants are spelled out in bond indentures.

Accepted Answer

A) True 
 B)False

Question 12

Tucker Corporation is planning to issue new 20-year bonds. The current plan is to make the bonds non-callable, but this may be changed. If the bonds are made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

Accepted Answer

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

Question 13

Listed below are some provisions that are often contained in bond indentures. Which of these provisions, viewed alone, would tend to reduce the yield to maturity that investors would otherwise require on a newly issued bond? 1. Fixed assets are used as security for a bond. 2. A given bond is subordinated to other classes of debt. 3. The bond can be converted into the firm's common stock. 4. The bond has a sinking fund. 5. The bond has a call provision. 6. The indenture contains covenants that restrict the use of additional debt.

Accepted Answer

A)   1, 3, 4, 6
B)   1, 4, 6
C)   1, 2, 3, 4, 6
D)   1, 2, 3, 4, 5, 6
E)   1, 3, 4, 5, 6F) A) and B)
G) D) and E)

Question 14

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 15

Under normal conditions, which of the following would be most likely to increase the coupon rate required for a bond to be issued at par?

Accepted Answer

A)   Adding additional restrictive covenants that limit management's actions.
B)   Adding a call provision.
C)   The rating agencies change the bond's rating from Baa to Aaa.
D)   Making the bond a first mortgage bond rather than a debenture.
E)   Adding a sinking fund.F) B) and E)
G) All of the above

Question 16

Assume that you are considering the purchase of a 20-year, noncallable bond with an annual coupon rate of 9.5%. The bond has a face value of $1,000, and it makes semiannual interest payments. If you require an 8.4% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

Accepted Answer

A)   $1,105.69
B)   $1,133.34
C)   $1,161.67
D)   $1,190.71
E)   $1,220.48F) A) and D)
G) A) and B)

Question 17

Kebt Corporation's Class Semi bonds have a 12-year maturity and an 8.75% coupon paid semiannually (4.375% each 6 months) , and those bonds sell at their $1,000 par value. The firm's Class Ann bonds have the same risk, maturity, nominal interest rate, and par value, but these bonds pay interest annually. Neither bond is callable. At what price should the annual payment bond sell?

Accepted Answer

A)   $ 937.56
B)   $ 961.60
C)   $ 986.25
D)   $1,010.91
E)   $1,036.18F) None of the above
G) B) and D)

Question 18

A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon. Neither is callable, and both 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)   The prices of both bonds will decrease by the same amount.
B)   Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price.
C)   The prices of both bonds would increase by the same amount.
D)   One bond's price would increase, while the other bond's price would decrease.
E)   The prices of the two bonds would remain constant.F) A) and B)
G) C) and D)

Question 19

A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, companies call bonds if interest rates rise and do not call them if interest rates decline.

Accepted Answer

A) True 
 B)False  False

Question 20

Which of the following statements is CORRECT?

Accepted Answer

A)   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 rd = YTM = 5%, the bond would sell at a premium over its $1,000 par value.
B)   If a 10-year, $1,000 par, 10% coupon bond were issued at par, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond would sell at a premium above its $1,000 par value.
C)   Other things held constant, including the coupon rate, a corporation would rather issue noncallable bonds than callable bonds.
D)   Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond because it would have a shorter expected life.
E)   Bonds are exposed to both reinvestment risk and price risk. Longer-term low-coupon bonds, relative to shorter-term high-coupon bonds, are generally more exposed to reinvestment risk than price risk.F) All of the above
G) A) and B) B

Exam 7: Bonds

Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows: T-bond = 7.72% A = 9.64% AAA = 8.72% BBB = 10.18% The differences in rates among these issues were most probably caused primarily by:

Correct Answer
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A bond that had a 20-year original maturity with 1 year left to maturity has more 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

Grossnickle Corporation issued 20-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 19 years to maturity?

Correct Answer
verified

Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, generally be subject to much more price risk if you purchased a 30-day bond than if you bought a 30-year bond.

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

Correct Answer
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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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Which of the following statements is CORRECT?

Correct Answer
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A bond that is callable has a chance of being retired earlier than its stated term to maturity. Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

Correct Answer
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Restrictive covenants are designed primarily to protect bondholders by constraining the actions of managers. Such covenants are spelled out in bond indentures.

Correct Answer
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Tucker Corporation is planning to issue new 20-year bonds. The current plan is to make the bonds non-callable, but this may be changed. If the bonds are made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

Correct Answer
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D

Correct Answer
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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
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Under normal conditions, which of the following would be most likely to increase the coupon rate required for a bond to be issued at par?

Correct Answer
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Correct Answer
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A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon. Neither is callable, and both 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
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A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, companies call bonds if interest rates rise and do not call them if interest rates decline.

Correct Answer
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False

Which of the following statements is CORRECT?

Correct Answer
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B

Exam 7: Bonds

Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows: T-bond = 7.72% A = 9.64% AAA = 8.72% BBB = 10.18% The differences in rates among these issues were most probably caused primarily by:

Correct AnswerverifiedShow Answer

A bond that had a 20-year original maturity with 1 year left to maturity has more 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

Grossnickle Corporation issued 20-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 19 years to maturity?

Correct AnswerverifiedShow Answer

Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, generally be subject to much more price risk if you purchased a 30-day bond than if you bought a 30-year bond.

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 price risk to companies, it offers no advantages to corporate issuers.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

A bond that is callable has a chance of being retired earlier than its stated term to maturity. Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

Correct AnswerverifiedShow Answer

Restrictive covenants are designed primarily to protect bondholders by constraining the actions of managers. Such covenants are spelled out in bond indentures.

Correct AnswerverifiedShow Answer

Tucker Corporation is planning to issue new 20-year bonds. The current plan is to make the bonds non-callable, but this may be changed. If the bonds are made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

Correct AnswerverifiedD

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

Under normal conditions, which of the following would be most likely to increase the coupon rate required for a bond to be issued at par?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon. Neither is callable, and both 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

A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, companies call bonds if interest rates rise and do not call them if interest rates decline.

Correct AnswerverifiedFalse

Which of the following statements is CORRECT?

Correct AnswerverifiedB

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D

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False

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B