Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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 3

A 25-year,$1,000 par value bond has an 8.5% annual coupon.The bond currently sells for $875.If the yield to maturity remains at its current rate,what will the price be 5 years from now?

Accepted Answer

A)   $839.31
B)   $860.83
C)   $882.90
D)   $904.97
E)   $927.60F) B) and C)
G) A) and B)

Question 4

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

Question 5

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 6

Which of the following statements is CORRECT?

Accepted Answer

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

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

Suppose International Digital Technologies decides to raise a total of $200 million,with $100 million as long-term debt and $100 million as common equity.The debt can be mortgage bonds or debentures,but by an iron-clad provision in its charter,the company can never raise any additional debt beyond the original $100 million.Given these conditions,which of the following statements is CORRECT?

Accepted Answer

A)   If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds, we could be certain that the firm's total interest expense would be lower than if the debt were raised by issuing $100 million of debentures.
B)   In this situation, we cannot tell for sure how, or whether, the firm's total interest expense on the $100 million of debt would be affected by the mix of debentures versus first mortgage bonds. The interest rate on each of the two types of bonds would increase as the percentage of mortgage bonds used was increased, but the result might well be such that the firm's total interest charges would not be affected materially by the mix between the two.
C)   The higher the percentage of debentures, the greater the risk borne by each debenture, and thus the higher the required rate of return on the debentures.
D)   If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds, we could be certain that the firm's total interest expense would be lower than if the debt were raised by issuing $100 million of first mortgage bonds.
E)   The higher the percentage of debt represented by mortgage bonds, the riskier both types of bonds will be and, consequently, the higher the firm's total dollar interest charges will be.F) None of the above
G) A) and D)

Question 9

Cornwall Corporation is planning to raise $1,000,000 to finance a new plant.Which of the following statements is CORRECT?

Accepted Answer

A)   If debt is used to raise the million dollars, but $500,000 is raised as first mortgage bonds on the new plant and $500,000 as debentures, the interest rate on the first mortgage bonds would be lower than it would be if the entire $1 million were raised by selling first mortgage bonds.
B)   If two tiers of debt are used (with one senior and one subordinated debt class) , the subordinated debt will carry a lower interest rate.
C)   If debt is used to raise the million dollars, the cost of the debt would be lower if the debt were in the form of a fixed-rate bond rather than a floating-rate bond.
D)   If debt is used to raise the million dollars, the cost of the debt would be higher if the debt were in the form of a mortgage bond rather than an unsecured term loan.
E)   The company would be especially eager to have a call provision included in the indenture if its management thinks that interest rates are almost certain to rise in the foreseeable future.F) None of the above
G) A) and D)

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)   A bond is likely to be called if its market price is below its par value.
B)   Even if a bond's YTC exceeds its YTM, an investor with an investment horizon longer than the bond's maturity would be worse off if the bond were called.
C)   A bond is likely to be called if its market price is equal to its par value.
D)   A bond is likely to be called if it sells at a discount below par.
E)   A bond is likely to be called if its coupon rate is below its YTM.F) A) and D)
G) C) and D)

Question 11

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

Question 12

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 13

Junk bonds are high risk,high yield debt instruments.They are often used to finance leveraged buyouts and mergers,and to provide financing to companies of questionable financial strength.

Accepted Answer

A) True 
 B)False

Question 14

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) B) and E)

Question 15

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

Question 16

A zero coupon bond is a bond that pays no interest and is offered (and subsequently sells initially)at par.These bonds provide compensation to investors in the form of capital appreciation.

Accepted Answer

A) True 
 B)False

Question 17

"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 18

Noncallable bonds that mature in 10 years were recently issued by Sternglass Inc.They have a par value of $1,000 and an annual coupon of 5.5%.If the current market interest rate is 7.0%,at what price should the bonds sell?

Accepted Answer

A)   $829.21
B)   $850.47
C)   $872.28
D)   $894.65
E)   $917.01F) A) and D)
G) A) and B)

Question 19

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 20

Which of the following statements is CORRECT?

Accepted Answer

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)   Assume that two bonds have equal maturities and are of equal risk, but one bond sells at par while the other sells at a premium above par. The premium bond must have a lower current yield and a higher capital gains yield than the par bond.F) C) and D)
G) A) and E)

Exam 5: Bonds, bond Valuation, and Interest Rates

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
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is CORRECT?

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

A zero coupon bond is a bond that pays no interest and is offered (and subsequently sells initially)at par.These bonds provide compensation to investors in the form of capital appreciation.

Correct Answer
verified

Noncallable bonds that mature in 10 years were recently issued by Sternglass Inc.They have a par value of $1,000 and an annual coupon of 5.5%.If the current market interest rate is 7.0%,at what price should the bonds sell?

Correct Answer
verified

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

Correct Answer
verified

Cornwall Corporation is planning to raise $1,000,000 to finance a new plant.Which of the following statements is CORRECT?

Correct Answer
verified

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

Correct Answer
verified

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

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 25-year,$1,000 par value bond has an 8.5% annual coupon.The bond currently sells for $875.If the yield to maturity remains at its current rate,what will the price be 5 years from now?

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

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
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

Junk bonds are high risk,high yield debt instruments.They are often used to finance leveraged buyouts and mergers,and to provide financing to companies of questionable financial strength.

Correct Answer
verified

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

Correct Answer
verified

Exam 5: Bonds, bond Valuation, and Interest Rates

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 statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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

A zero coupon bond is a bond that pays no interest and is offered (and subsequently sells initially)at par.These bonds provide compensation to investors in the form of capital appreciation.

Correct AnswerverifiedShow Answer

Noncallable bonds that mature in 10 years were recently issued by Sternglass Inc.They have a par value of $1,000 and an annual coupon of 5.5%.If the current market interest rate is 7.0%,at what price should the bonds sell?

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 interest rate risk to companies,it offers no advantages to issuers.

Correct AnswerverifiedShow Answer

Cornwall Corporation is planning to raise $1,000,000 to finance a new plant.Which of the following statements is CORRECT?

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

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

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 25-year,$1,000 par value bond has an 8.5% annual coupon.The bond currently sells for $875.If the yield to maturity remains at its current rate,what will the price be 5 years from now?

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

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

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

Junk bonds are high risk,high yield debt instruments.They are often used to finance leveraged buyouts and mergers,and to provide financing to companies of questionable financial strength.

Correct AnswerverifiedShow Answer

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

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