Exam 4: Bond Valuation

A) since the bonds have the same ytm, they should all have the same price, and since interest rates are not expected to change, their prices should all remain at their current levels until maturity.
B) bond c sells at a premium (its price is greater than par) , and its price is expected to increase over the next year.
C) bond a sells at a discount (its price is less than par) , and its price is expected to increase over the next year.
D) over the next year, bond a's price is expected to decrease, bond b's price is expected to stay the same, and bond c's price is expected to increase.
E) bond a's current yield will increase each year.

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A) all else equal, long-term bonds have less interest rate price risk than short-term bonds.
B) all else equal, low-coupon bonds have less interest rate price risk than high-coupon bonds.
C) all else equal, short-term bonds have less reinvestment rate risk than long-term bonds.
D) all else equal, long-term bonds have less reinvestment rate risk than short-term bonds.
E) all else equal, high-coupon bonds have less reinvestment rate risk than low-coupon bonds.

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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.

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A) all else equal, an increase in interest rates will have a greater effect on the prices of short-term than long-term bonds.
B) all else equal, an increase in interest rates will have a greater effect on higher-coupon bonds than it will have on lower-coupon bonds.
C) if a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value.
D) if a bond's yield to maturity exceeds its coupon rate, the bond's current yield must be less than its coupon rate.
E) if two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price regardless of the bond's coupon rates.

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

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A) 6.39%
B) 6.72%
C) 7.08%
D) 7.45%
E) 7.82%

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A) most sinking funds require the issuer to provide funds to a trustee, who saves the money so that it will be available to pay off bondholders when the bonds mature.
B) a sinking fund provision makes a bond more risky to investors at the time of issuance.
C) sinking fund provisions never require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time.
D) if interest rates have increased since a company issued bonds with a sinking fund, the company is less likely to retire the bonds by buying them back in the open market, as opposed to calling them in at the sinking fund call price.
E) sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest rates decline after the bond has been issued.

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

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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.

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A) if rates fall after its issue, a zero coupon bond could trade at a price above its par value.
B) if rates fall rapidly, a zero coupon bond's expected appreciation could become negative.
C) if a firm moves from a position of strength toward financial distress, its bonds' yield to maturity would probably decline.
D) if a bond is selling at a premium, this implies that its yield to maturity exceeds its coupon rate.
E) if a coupon bond is selling at par, its current yield equals its yield to maturity.

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