Question 1

Assume that all interest rates in the economy decline from 10% to 9%.Which of the following bonds would have the largest percentage increase in price?

Accepted Answer

A)   An 8-year bond with a 9% coupon.
B)   A 1-year bond with a 15% coupon.
C)   A 3-year bond with a 10% coupon.
D)   A 10-year zero coupon bond.
E)   A 10-year bond with a 10% coupon.F) B) and C)
G) A) and D)

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)   One advantage of a zero coupon Treasury bond is that no one who owns the bond has to pay any taxes on it until it matures or is sold.
B)   Long-term bonds have less price risk but more reinvestment risk than short-term bonds.
C)   If interest rates increase,all bond prices will increase,but the increase will be greater for bonds that have less price risk.
D)   Relative to a coupon-bearing bond with the same maturity,a zero coupon bond has more price risk but less reinvestment risk.
E)   Long-term bonds have less price risk and also less reinvestment risk than short-term bonds.F) D) and E)
G) A) and E)

Question 3

Taussig Corp.'s bonds currently sell for $960.They have a 6.35% annual coupon rate and a 20-year maturity,but they can be called in 5 years at $1,067.50.Assume that no costs other than the call premium would be incurred to call and refund the bonds,and also assume that the yield curve is horizontal,with rates expected to remain at current levels on into the future.Under these conditions,what rate of return should an investor expect to earn if he or she purchases these bonds?

Accepted Answer

A)   5.51%
B)   6.72%
C)   6.52%
D)   5.98%
E)   7.46%F) A) and B)
G) A) and C)

Question 4

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

Question 5

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) C) and D)
G) A) and E)

Question 6

Which of the following bonds would have the greatest percentage increase in value if all interest rates in the economy fall by 1%?

Accepted Answer

A)   10-year,zero coupon bond.
B)   20-year,10% coupon bond.
C)   20-year,5% coupon bond.
D)   1-year,10% coupon bond.
E)   20-year,zero coupon bond.F) B) and C)
G) A) and C)

Question 7

Moon Software Inc.is planning to issue two types of 25-year,noncallable bonds to raise a total of $6 million,$3 million from each type of bond.First,3,000 bonds with a 10% semiannual coupon will be sold at their $1,000 par value to raise $3,000,000.These are called "par" bonds.Second,Original Issue Discount (OID) bonds,also with a 25-year maturity and a $1,000 par value,will be sold,but these bonds will have a semiannual coupon of only 6.75%.The OID bonds must be offered at below par in order to provide investors with the same effective yield as the par bonds.How many OID bonds must the firm issue to raise $3,000,000? Disregard flotation costs,and round your final answer up to a whole number of bonds.

Accepted Answer

A)   3,370
B)   4,906
C)   3,285
D)   4,479
E)   4,266F) B) and D)
G) D) and E)

Question 8

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 9

A 12-year bond has an annual coupon of 9%.The coupon rate will remain fixed until the bond matures.The bond has a yield to maturity of 7%.Which of the following statements is CORRECT?

Accepted Answer

A)   If market interest rates decline,the price of the bond will also decline.
B)   The bond is currently selling at a price below its par value.
C)   If market interest rates remain unchanged,the bond's price one year from now will be lower than it is today.
D)   The bond should currently be selling at its par value.
E)   If market interest rates remain unchanged,the bond's price one year from now will be higher than it is today.F) A) and C)
G) A) and B)

Question 10

You are considering two bonds.Bond A has a 9% annual coupon while Bond B has a 6% annual coupon.Both bonds have a 7% yield to maturity,and the YTM is expected to remain constant.Which of the following statements is CORRECT?

Accepted Answer

A)   The price of Bond B will decrease over time,but the price of Bond A will increase over time.
B)   The prices of both bonds will remain unchanged.
C)   The price of Bond A will decrease over time,but the price of Bond B will increase over time.
D)   The prices of both bonds will increase by 7% per year.
E)   The prices of both bonds will increase over time,but the price of Bond A will increase at a faster rate.F) A) and D)
G) All of the above

Question 11

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

Question 12

McCue Inc.'s bonds currently sell for $1,175.They pay a $90 annual coupon,have a 25-year maturity,and a $1,000 par value,but they can be called in 5 years at $1,050.Assume that no costs other than the call premium would be incurred to call and refund the bonds,and also assume that the yield curve is horizontal,with rates expected to remain at current levels on into the future.What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM;it is possible to get a negative answer. )

Accepted Answer

A)   1.26%
B)   1.47%
C)   1.74%
D)   1.68%
E)   1.88%F) A) and B)
G) A) and E)

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)   Sinking fund provisions sometimes turn out to adversely affect bondholders,and this is most likely to occur if interest rates decline after the bond was issued.
B)   Most sinking funds require the issuer to provide funds to a trustee,who holds the money so that it will be available to pay off bondholders when the bonds mature.
C)   A sinking fund provision makes a bond more risky to investors at the time of issuance.
D)   Sinking fund provisions never require companies to retire their debt;they only establish "targets" for the company to reduce its debt over time.
E)   If interest rates increase after a company has issued bonds with a sinking fund,the company will be less likely to buy bonds on the open market to meet its sinking fund obligation and more likely to call them in at the sinking fund call price.F) C) and D)
G) B) and C)

Question 14

Ryngaert Inc.recently issued noncallable bonds that mature in 15 years.They have a par value of $1,000 and an annual coupon of 5.7%.If the current market interest rate is 7.0%,at what price should the bonds sell?

Accepted Answer

A)   $1,040.28
B)   $802.25
C)   $1,013.84
D)   $775.81
E)   $881.60F) A) and E)
G) B) and C)

Question 15

Which of the following events would make it more likely that a company would call its outstanding callable bonds?

Accepted Answer

A)   The company's bonds are downgraded.
B)   Market interest rates rise sharply.
C)   Market interest rates decline sharply.
D)   The company's financial situation deteriorates significantly.
E)   Inflation increases significantly.F) C) and D)
G) A) and B)

Question 16

Sadik Inc.'s bonds currently sell for $1,300 and have a par value of $1,000.They pay a $105 annual coupon and have a 15-year maturity,but they can be called in 5 years at $1,100.What is their yield to call (YTC) ?

Accepted Answer

A)   5.10%
B)   5.31%
C)   4.94%
D)   6.00%
E)   4.30%F) C) and D)
G) B) and E)

Question 17

Morin Company's bonds mature in 8 years,have a par value of $1,000,and make an annual coupon interest payment of $65.The market requires an interest rate of 6.1% on these bonds.What is the bond's price?

Accepted Answer

A)   $1,024.74
B)   $1,147.71
C)   $1,116.97
D)   $1,096.47
E)   $1,280.93F) All of the above
G) A) and B)

Question 18

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

Question 19

If the required rate of return on a bond (rd)is greater than its coupon interest rate and will remain above that rate,then the market value of the bond will always be below its par value until the bond matures,at which time its market value will equal its par value.(Accrued interest between interest payment dates should not be considered when answering this question. )

Accepted Answer

A) True 
 B)False

Question 20

Malko Enterprises' bonds currently sell for $1,020.They have a 6-year maturity,an annual coupon of $75,and a par value of $1,000.What is their current yield?

Accepted Answer

A)   6.91%
B)   6.62%
C)   8.46%
D)   6.40%
E)   7.35%F) A) and D)
G) A) and C)

Exam 7: Bonds and Their Valuation

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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Which of the following statements is 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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Which of the following events would make it more likely that a company would call its outstanding callable bonds?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Morin Company's bonds mature in 8 years,have a par value of $1,000,and make an annual coupon interest payment of $65.The market requires an interest rate of 6.1% on these bonds.What is the bond's price?

Correct Answer
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A 12-year bond has an annual coupon of 9%.The coupon rate will remain fixed until the bond matures.The bond has a yield to maturity of 7%.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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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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Sadik Inc.'s bonds currently sell for $1,300 and have a par value of $1,000.They pay a $105 annual coupon and have a 15-year maturity,but they can be called in 5 years at $1,100.What is their yield to call (YTC) ?

Correct Answer
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Ryngaert Inc.recently issued noncallable bonds that mature in 15 years.They have a par value of $1,000 and an annual coupon of 5.7%.If the current market interest rate is 7.0%,at what price should the bonds sell?

Correct Answer
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You are considering two bonds.Bond A has a 9% annual coupon while Bond B has a 6% annual coupon.Both bonds have a 7% yield to maturity,and the YTM is expected to remain constant.Which of the following statements is CORRECT?

Correct Answer
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Which of the following bonds would have the greatest percentage increase in value if all interest rates in the economy fall by 1%?

Correct Answer
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Assume that all interest rates in the economy decline from 10% to 9%.Which of the following bonds would have the largest percentage increase in price?

Correct Answer
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Malko Enterprises' bonds currently sell for $1,020.They have a 6-year maturity,an annual coupon of $75,and a par value of $1,000.What is their current yield?

Correct Answer
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Exam 7: Bonds and Their Valuation

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 AnswerverifiedShow Answer

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,companies call bonds if interest rates rise and do not call them if interest rates decline.

Correct AnswerverifiedShow Answer

Which of the following events would make it more likely that a company would call its outstanding callable bonds?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Morin Company's bonds mature in 8 years,have a par value of $1,000,and make an annual coupon interest payment of $65.The market requires an interest rate of 6.1% on these bonds.What is the bond's price?

Correct AnswerverifiedShow Answer

A 12-year bond has an annual coupon of 9%.The coupon rate will remain fixed until the bond matures.The bond has a yield to maturity of 7%.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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

Sadik Inc.'s bonds currently sell for $1,300 and have a par value of $1,000.They pay a $105 annual coupon and have a 15-year maturity,but they can be called in 5 years at $1,100.What is their yield to call (YTC) ?

Correct AnswerverifiedShow Answer

Ryngaert Inc.recently issued noncallable bonds that mature in 15 years.They have a par value of $1,000 and an annual coupon of 5.7%.If the current market interest rate is 7.0%,at what price should the bonds sell?

Correct AnswerverifiedShow Answer

You are considering two bonds.Bond A has a 9% annual coupon while Bond B has a 6% annual coupon.Both bonds have a 7% yield to maturity,and the YTM is expected to remain constant.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following bonds would have the greatest percentage increase in value if all interest rates in the economy fall by 1%?

Correct AnswerverifiedShow Answer

Assume that all interest rates in the economy decline from 10% to 9%.Which of the following bonds would have the largest percentage increase in price?

Correct AnswerverifiedShow Answer

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Malko Enterprises' bonds currently sell for $1,020.They have a 6-year maturity,an annual coupon of $75,and a par value of $1,000.What is their current yield?

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