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Field Industries' outstanding bonds have a 25-year maturity and $1,000 par value.Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $850.What is the bond's nominal (annual) coupon interest rate?


A) 6.27%
B) 6.60%
C) 6.95%
D) 7.32%
E) 7.70%

F) A) and C)
G) C) and D)

Correct Answer

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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.

A) True
B) False

Correct Answer

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Currently, Bruner Inc.'s bonds sell for $1,250.They pay a $120 annual coupon, have a 15-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.)


A) 2.11%
B) 2.32%
C) 2.55%
D) 2.80%
E) 3.09%

F) A) and B)
G) None of the above

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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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?


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

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

Correct Answer

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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?


A) The prices of both bonds will remain unchanged.
B) The price of Bond A will decrease over time, but the price of Bond B will increase over time.
C) The prices of both bonds will increase by 7% per year.
D) The prices of both bonds will increase over time, but the price of Bond A will increase by more.
E) The price of Bond B will decrease over time, but the price of Bond A will increase over time.

F) A) and C)
G) A) and D)

Correct Answer

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Which of the following statements is CORRECT?


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

Correct Answer

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If 10-year T-bonds have a yield of 6.2%, 10-year corporate bonds yield 8.5%, the maturity risk premium on all 10-year bonds is 1.3%, and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond?


A) 1.90%
B) 2.09%
C) 2.30%
D) 2.53%
E) 2.78%

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

Correct Answer

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Which of the following statements is CORRECT?


A) Other things held constant, a callable bond should have a lower yield to maturity than a noncallable bond.
B) Once a firm declares bankruptcy, it must then be liquidated by the trustee, who uses the proceeds to pay bondholders, unpaid wages, taxes, and lawyer fees.
C) Income bonds must pay interest only if the company earns the interest.Thus, these securities cannot bankrupt a company prior to their maturity, and this makes them safer to the issuing corporation than "regular" bonds.
D) A firm with a sinking fund that gave it the choice of calling the required bonds at par or buying the bonds in the open market would generally choose the open market purchase if the coupon rate exceeded the going interest rate.
E) One disadvantage of zero coupon bonds is that the issuing firm cannot realize any tax savings from the debt until the bonds mature.

F) A) and B)
G) None of the above

Correct Answer

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Gilligan Co.'s bonds currently sell for $1,150.They have a 6.75% annual coupon rate and a 15-year maturity, and are callable in 6 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, the YTC or the YTM?


A) 3.92%
B) 4.12%
C) 4.34%
D) 4.57%
E) 4.81%

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

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 and thus caused sharp declines in the prices of outstanding bonds.

A) True
B) False

Correct Answer

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Which of the following statements is CORRECT?


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.

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

Correct Answer

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Rogoff Co.'s 15-year bonds have an annual coupon rate of 9.5%.Each 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) $983.49

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

Correct Answer

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A 15-year bond has an annual coupon rate of 8%.The coupon rate will remain fixed until the bond matures.The bond has a yield to maturity of 6%.Which of the following statements is CORRECT?


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

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

Correct Answer

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You are considering three different bonds for your portfolio.Each bond has a 10-year maturity and a yield to maturity of 10%.Bond X has an 8% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a 12% annual coupon.Which of the following statements is CORRECT?


A) Bond X has the greatest reinvestment rate risk.
B) If market interest rates decline, all of the bonds will have an increase in price, and Bond Z will have the largest percentage increase in price.
C) If market interest rates remain at 10%, Bond Z's price will be 10% higher one year from today.
D) If market interest rates increase, Bond X's price will increase, Bond Z's price will decline, and Bond Y's price will remain the same.
E) If the bonds' market interest rates remain at 10%, Bond Z's price will be lower one year from now than it is today.

F) All of the above
G) None of the above

Correct Answer

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Which of the following statements is CORRECT?


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 rd = 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 rd = YTM = 5%, the bond would sell at a premium over its $1,000 par value.

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

Correct Answer

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Assume that a 10-year Treasury bond has a 12% annual coupon, while a 15-year T-bond has an 8% annual coupon.Assume also that the yield curve is flat, and all Treasury securities have a 10% yield to maturity.Which of the following statements is CORRECT?


A) If interest rates decline, the prices of both bonds will increase, but the 10-year bond would have a larger percentage increase in price.
B) The 10-year bond would sell at a discount, while the 15-year bond would sell at a premium.
C) The 10-year bond would sell at a premium, while the 15-year bond would sell at par.
D) If the yield to maturity on both bonds remains at 10% over the next year, the price of the 10-year bond would increase, but the price of the 15-year bond would fall.
E) If interest rates decline, the prices of both bonds will increase, but the 15-year bond would have a larger percentage increase in price.

F) C) and E)
G) None of the above

Correct Answer

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For bonds, price sensitivity to a given change in interest rates is generally greater the longer before the bond matures.

A) True
B) False

Correct Answer

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As a general rule, a company's debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured.

A) True
B) False

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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