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Which of the following statements is correct?


A) If the maturity risk premium were zero and interest rates were expected to decrease in the future, then the yield curve for government securities would, other things held constant, have an upward slope.
B) Liquidity premiums are generally higher on government than corporate bonds.
C) Default risk premiums are generally lower on corporate than on government bonds.
D) Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds.

E) A) and B)
F) A) and C)

Correct Answer

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A 15-year bond with a face value of $1,000 currently sells for $850. Which statement regarding the bond's yield is true?


A) The bond's coupon rate exceeds its current yield.
B) The bond's current yield exceeds its yield to maturity.
C) The bond's yield to maturity is greater than its coupon rate.
D) The bond's current yield is equal to its coupon rate.

E) None of the above
F) B) and D)

Correct Answer

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Which statement regarding bond prices is true?


A) If a coupon bond is selling at par, its current yield equals its yield to maturity.
B) If a coupon bond is selling at a discount, its price will continue to decline until it reaches its par value at maturity.
C) If interest rates increase, the price of a 10-year coupon bond will decline by a greater percentage than the price of a 10-year zero coupon bond.
D) If a bond's yield to maturity exceeds its annual coupon, then the bond will trade at a premium.

E) B) and D)
F) A) and B)

Correct Answer

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What is the semiannual coupon payment for a 12% bond with a $1,000 par?


A) $60
B) $120
C) $600
D) $1,200

E) All of the above
F) A) and C)

Correct Answer

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Assume that you are considering the purchase of a 15-year bond with an annual coupon rate of 9.5%. The bond has face value of $1,000 and makes semiannual interest payments. If you require an 11.0% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?


A) $891.00
B) $913.27
C) $936.10
D) $959.51

E) B) and C)
F) A) and B)

Correct Answer

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Bonds A, B, and C all have a maturity of 10 years and a yield to maturity of 7%. 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 statement regarding bonds is true?


A) If the yield to maturity on each bond decreases to 6%, Bond A will have the largest percentage increase in its price.
B) Bond A has the most interest rate risk.
C) 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.
D) If the yield to maturity on each bond increases to 8%, the prices of all three bonds will decline.

E) B) and C)
F) A) and B)

Correct Answer

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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.

A) True
B) False

Correct Answer

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A 10-year corporate bond has an annual coupon of 9%. The bond is currently selling at par ($1,000) . Which of the following statements is NOT correct?


A) The bond's expected capital gains yield is positive.
B) The bond's yield to maturity is 9%.
C) The bond's current yield is 9%.
D) The bond's current yield exceeds its capital gains yield.

E) A) and C)
F) A) and B)

Correct Answer

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A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if interest rates are below 10% and at a discount if interest rates are greater than 10%.

A) True
B) False

Correct Answer

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Which statement regarding yield is true?


A) A bond's current yield must always be either equal to its yield to maturity or between its yield to maturity and its coupon rate.
B) If a bond sells at par, then its current yield will be less than its yield to maturity.
C) If a bond sells for less than par, then its yield to maturity is less than its coupon rate.
D) A discount bond's price declines each year until it matures, when its value equals its par value.

E) A) and B)
F) A) and C)

Correct Answer

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A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which statement regarding the bond's yield is true?


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

E) B) and D)
F) B) and C)

Correct Answer

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Cosmic Communications Inc. is planning two new issues of 25-year bonds. Bond Par will be sold at its $1,000 par value, and it will have a 10% semiannual coupon. Bond OID will be an Original Issue Discount bond, and it will also have a 25-year maturity and a $1,000 par value, but its semiannual coupon will be only 6.25%. If both bonds are to provide investors with the same effective yield, how many of the OID bonds must Cosmic issue to raise $3,000,000? Disregard flotation costs, and round your final answer up to a whole number of bonds.


A) 4,228
B) 4,337
C) 4,448
D) 4,562

E) A) and D)
F) C) and D)

Correct Answer

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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% What most probably caused the differences in rates among these issues?


A) real risk-free rate differences
B) default risk differences
C) maturity risk differences
D) inflation differences

E) B) and D)
F) A) and D)

Correct Answer

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Sinking funds are devices used to force companies to retire bonds on a scheduled basis prior to their maturity. Many bond indentures allow the company to acquire bonds for a sinking fund by either purchasing bonds in the market or selecting the bonds to be acquired by a lottery administered by the trustee through a call at face value.

A) True
B) False

Correct Answer

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Which statement regarding bond maturity is true?


A) Any maturity is legally permissible.
B) The longest term of maturity for corporate bonds is 50 years.
C) Real return bonds have the shortest term of maturity.
D) Perpetuity bonds must have a specified maturity date.

E) A) and B)
F) A) and C)

Correct Answer

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Which statement regarding callable bonds is true?


A) 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.
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) A) and C)
F) All of the above

Correct Answer

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Under no circumstances are bondholders allowed to turn in their holdings unless the bonds are retractable.

A) True
B) False

Correct Answer

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Suppose you are considering two 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.

A) True
B) False

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.

A) True
B) False

Correct Answer

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Which statement regarding bond yields is true?


A) A zero coupon bond's current yield is equal to its yield to maturity.
B) If a bond's yield to maturity exceeds its coupon rate, the bond will sell at par.
C) All else being equal, if a bond's yield to maturity increases, its price will fall.
D) If a bond's yield to maturity exceeds its coupon rate, the bond will sell at a premium over par.

E) B) and C)
F) C) and D)

Correct Answer

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