Question 1

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) B) and E)
G) All of the above

Question 2

Which of the following statements is CORRECT?

Accepted Answer

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.F) A) and D)
G) A) and E)

Question 3

Assume that interest rates on 15-year noncallable Treasury and corporate bonds with different ratings are as follows:

The differences in rates among these issues were most probably caused primarily by:

Accepted Answer

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

Question 4

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

Question 5

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) None of the above
G) B) and E)

Question 6

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

Question 7

Kessen Inc.'s bonds mature in 7 years, have a par value of $1, 000, and make an annual coupon payment of $70.The market interest rate for the bonds is 8.5%.What is the bond's price?

Accepted Answer

A)   $923.22
B)   $946.30
C)   $969.96
D)   $994.21
E)   $1, 019.06F) B) and E)
G) C) and E)

Question 8

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) None of the above
G) A) and C)

Question 9

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 10

McCurdy Co.'s Class Q bonds have a 12-year maturity, $1, 000 par value, and a 5.75% coupon paid semiannually (2.875% each 6 months) , and those bonds sell at their par value.McCurdy's Class P bonds have the same risk, maturity, and par value, but the P bonds pay a 5.75% annual coupon.Neither bond is callable.At what price should the annual payment bond sell?

Accepted Answer

A)   $943.98
B)   $968.18
C)   $993.01
D)   $1, 017.83
E)   $1, 043.28F) C) and D)
G) B) and D)

Question 11

Which of the following statements is CORRECT?

Accepted Answer

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.F) A) and B)
G) A) and C)

Question 12

The desire for floating-rate bonds, and consequently their increased usage, arose out of the experience of the early 1980s, when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.

Accepted Answer

A) True 
 B)False

Question 13

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%.Which of the following statements is CORRECT?

Accepted Answer

A)   The bond is selling below its par value.
B)   The bond is selling at a discount.
C)   If the yield to maturity remains constant, the bond's price one year from now will be lower than its current price.
D)   The bond's current yield is greater than 9%.
E)   If the yield to maturity remains constant, the bond's price one year from now will be higher than its current price.F) B) and E)
G) C) and D)

Question 14

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

Question 15

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 interest rate price risk if you purchased a 30-day bond than if you bought a 30-year bond.

Accepted Answer

A) True 
 B)False

Question 16

The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.

Accepted Answer

A) True 
 B)False

Question 17

Bonds A and B are 15-year, $1, 000 face value bonds.Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon.Both bonds have a yield to maturity of 8%, which is expected to remain constant for the next 15 years.Which of the following statements is CORRECT?

Accepted Answer

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.F) B) and D)
G) A) and D)

Question 18

Squire Inc.'s 5-year bonds yield 6.75%, and 5-year T-bonds yield 4.80%.The real risk-free rate is r* = 2.75%, the inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Squire's bonds is DRP = 1.20% 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 liquidity premium (LP) on Squire's bonds?

Accepted Answer

A)   0.49%
B)   0.55%
C)   0.61%
D)   0.68%
E)   0.75%F) B) and E)
G) None of the above

Question 19

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 20

Bond A has a 9% annual coupon, while Bond B has a 7% annual coupon.Both bonds have the same maturity, a face value of $1, 000, and an 8% yield to maturity.Which of the following statements is CORRECT?

Accepted Answer

A)   Bond A trades at a discount, whereas Bond B trades at a premium.
B)   If the yield to maturity for both bonds remains at 8%, Bond A's price one year from now will be higher than it is today, but Bond B's price one year from now will be lower than it is today.
C)   If the yield to maturity for both bonds immediately decreases to 6%, Bond A's bond will have a larger percentage increase in value.
D)   Bond A's current yield is greater than that of Bond B.
E)   Bond A's capital gains yield is greater than Bond B's capital gains yield.F) B) and C)
G) A) and D)

Exam 5: Bonds, bond valuation, and interest rates

Which of the following statements is CORRECT?

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

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
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

The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.

Correct Answer
verified

Assume that interest rates on 15-year noncallable Treasury and corporate bonds with different ratings are as follows: The differences in rates among these issues were most probably caused primarily by:

Correct Answer
verified

Correct Answer
verified

Kessen Inc.'s bonds mature in 7 years, have a par value of $1, 000, and make an annual coupon payment of $70.The market interest rate for the bonds is 8.5%.What is the bond's price?

Correct Answer
verified

Correct Answer
verified

Bonds A and B are 15-year, $1, 000 face value bonds.Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon.Both bonds have a yield to maturity of 8%, which is expected to remain constant for the next 15 years.Which of the following statements is CORRECT?

Correct Answer
verified

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%.Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

The desire for floating-rate bonds, and consequently their increased usage, arose out of the experience of the early 1980s, when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.

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

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 interest rate price risk if you purchased a 30-day bond than if you bought a 30-year bond.

Correct Answer
verified

Bond A has a 9% annual coupon, while Bond B has a 7% annual coupon.Both bonds have the same maturity, a face value of $1, 000, and an 8% yield to maturity.Which of the following statements is CORRECT?

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

Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is CORRECT?

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
verified

Exam 5: Bonds, bond valuation, and interest rates

Which of the following statements is CORRECT?

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

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

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

The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.

Correct AnswerverifiedShow Answer

Assume that interest rates on 15-year noncallable Treasury and corporate bonds with different ratings are as follows: The differences in rates among these issues were most probably caused primarily by:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Kessen Inc.'s bonds mature in 7 years, have a par value of $1, 000, and make an annual coupon payment of $70.The market interest rate for the bonds is 8.5%.What is the bond's price?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Bonds A and B are 15-year, $1, 000 face value bonds.Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon.Both bonds have a yield to maturity of 8%, which is expected to remain constant for the next 15 years.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The desire for floating-rate bonds, and consequently their increased usage, arose out of the experience of the early 1980s, when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.

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

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 interest rate price risk if you purchased a 30-day bond than if you bought a 30-year bond.

Correct AnswerverifiedShow Answer

Bond A has a 9% annual coupon, while Bond B has a 7% annual coupon.Both bonds have the same maturity, a face value of $1, 000, and an 8% yield to maturity.Which of the following statements is CORRECT?

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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

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

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified