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Which of the following statements is CORRECT?


A) A 10-year, 10% coupon bond has less reinvestment rate risk than a 10-year, 5% coupon bond (assuming all else equal) .
B) The total return on a bond during a given year is the sum of the coupon interest payments received during the year and the change in the value of the bond from the beginning to the end of the year.
C) The price of a 20-year, 10% bond is less sensitive to changes in interest rates than the price of a 5-year, 10% bond.
D) A $1,000 bond with $100 annual interest payments that has 5 years to maturity and is not expected to default would sell at a discount if interest rates were below 9% and at a premium if interest rates were greater than 11%.
E) 10-year, zero coupon bonds have higher reinvestment rate risk than 10-year, 10% coupon bonds.

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

Correct Answer

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Which of the following statements is CORRECT?


A) The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.
B) You hold two bonds. One is a 10-year, zero coupon, bond and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline.
C) The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates.
D) The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates.
E) You hold two bonds. One is a 10-year, zero coupon, issue and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the larger percentage decline.

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

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Ranger Inc. would like to issue new 20-year bonds. Initially, the plan was to make the bonds non-callable. If the bonds were made callable after 5 years at a 5% call premium, how would this affect their required rate of return?


A) There is no reason to expect a change in the required rate of return.
B) The required rate of return would decline because the bond would then be less risky to a bondholder.
C) The required rate of return would increase because the bond would then be more risky to a bondholder.
D) It is impossible to say without more information.
E) Because of the call premium, the required rate of return would decline.

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

Correct Answer

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Which of the following bonds has the greatest interest rate price risk?


A) A 10-year, $1,000 face value, zero coupon bond.
B) A 10-year, $1,000 face value, 10% coupon bond with annual interest payments.
C) All 10-year bonds have the same price risk since they have the same maturity.
D) A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments.

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

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Which of the following statements is CORRECT?


A) If their maturities and other characteristics were the same, a 5% coupon bond would have more interest rate price risk than a 10% coupon bond.
B) A 10-year coupon bond would have more reinvestment rate risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of reinvestment rate risk.
C) A 10-year coupon bond would have more interest rate price risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of interest rate price risk.
D) If their maturities and other characteristics were the same, a 5% coupon bond would have less interest rate price risk than a 10% coupon bond.
E) A zero coupon bond of any maturity will have more interest rate price risk than any coupon bond, even a perpetuity.

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

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A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT?


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

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

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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 C)

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Which of the following statements is CORRECT?


A) An indenture is a bond that is less risky than a mortgage bond.
B) The expected return on a corporate bond will generally exceed the bond's yield to maturity.
C) If a bond's coupon rate exceeds its yield to maturity, then its expected return to investors exceeds the yield to maturity.
D) Under our bankruptcy laws, any firm that is in financial distress will be forced to declare bankruptcy and then be liquidated.
E) All else equal, senior debt generally has a lower yield to maturity than subordinated debt.

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

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The Gergen Group's 5-year bonds yield 6.85%, and 5-year T-bonds yield 4.75%. The real risk-free rate is r* = 2.80%, the default risk premium for Gergen's bonds is DRP = 0.85% versus zero for T-bonds, the liquidity premium on Gergen's bonds is LP = 1.25%, and the maturity risk premium for all bonds is found with the formula MRP = (t − 1) × 0.1%, where t = number of years to maturity. What is the inflation premium (IP) on 5-year bonds?


A) 1.40%
B) 1.55%
C) 1.71%
D) 1.88%
E) 2.06%

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

Correct Answer

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McCurdy Co.'s Class Q bonds have a 12-year maturity, $1,000 par value, and a 5.75% coupon paid semiannually (2.875% each 6 months) , and those bonds sell at their par value. McCurdy's Class P bonds have the same risk, maturity, and par value, but the P bonds pay a 5.75% annual coupon. Neither bond is callable. At what price should the annual payment bond sell?


A) $943.98
B) $968.18
C) $993.01
D) $1,017.83
E) $1,043.28

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

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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.

A) True
B) False

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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

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Assume that the current corporate bond yield curve is upward sloping. Under this condition, then we could be sure that


A) The economy is not in a recession.
B) Long-term bonds are a better buy than short-term bonds.
C) Maturity risk premiums could help to explain the yield curve's upward slope.
D) Long-term interest rates are more volatile than short-term rates.
E) Inflation is expected to decline in the future.

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

Correct Answer

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Chandler Co.'s 5-year bonds yield 7.00%, and 5-year T-bonds yield 5.15%. The real risk-free rate is r* = 3.0%, the inflation premium for 5-year bonds is IP = 1.75%, the liquidity premium for Chandler's bonds is LP = 0.75% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t − 1) × 0.1%, where t = number of years to maturity. What is the default risk premium (DRP) on Chandler's bonds?


A) 0.99%
B) 1.10%
C) 1.21%
D) 1.33%
E) 1.46%

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

Correct Answer

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Bond A has a 9% annual coupon, while Bond B has a 7% annual coupon. Both bonds have the same maturity, a face value of $1,000, and an 8% yield to maturity. Which of the following statements is CORRECT?


A) Bond A trades at a discount, whereas Bond B trades at a premium.
B) If the yield to maturity for both bonds remains at 8%, Bond A's price one year from now will be higher than it is today, but Bond B's price one year from now will be lower than it is today.
C) If the yield to maturity for both bonds immediately decreases to 6%, Bond A's bond will have a larger percentage increase in value.
D) Bond A's current yield is greater than that of Bond B.
E) Bond A's capital gains yield is greater than Bond B's capital gains yield.

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

Correct Answer

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Which of the following statements is CORRECT?


A) If a coupon bond is selling at a discount, its price will continue to decline until it reaches its par value at maturity.
B) 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.
C) If a bond's yield to maturity exceeds its annual coupon, then the bond will trade at a premium.
D) If a coupon bond is selling at a premium, its current yield equals its yield to maturity.
E) If a coupon bond is selling at par, its current yield equals its yield to maturity.

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

Correct Answer

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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.

A) True
B) False

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


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

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

Correct Answer

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Which of the following statements is CORRECT?


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.

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

Correct Answer

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Which of the following statements is CORRECT?


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

Correct Answer

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