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.
G) B) and C)
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A) Other things held constant, a 20-year zero coupon bond has more reinvestment risk than a 20-year coupon bond.
B) Other things held constant, for any given maturity, a 1.0 percentage point decrease in the market interest rate would cause a smaller dollar capital gain than the capital loss stemming from a 1.0 percentage point increase in the interest rate.
C) From a corporate borrower's point of view, interest paid on bonds is not tax-deductible.
D) Other things held constant, price sensitivity as measured by the percentage change in price due to a given change in the required rate of return decreases as a bond's maturity increases.
E) For a bond of any maturity, a 1.0 percentage point increase in the market interest rate (rd) causes a larger dollar capital loss than the capital gain stemming from a 1.0 percentage point decrease in the interest rate.
G) A) and E)
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A) A bond is likely to be called if its coupon rate is below its YTM.
B) A bond is likely to be called if its market price is below its par value.
C) 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.
D) A bond is likely to be called if its market price is equal to its par value.
E) A bond is likely to be called if it sells at a discount below par.
G) B) and C)
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A) 6.20%
B) 6.53%
C) 6.85%
D) 7.20%
E) 7.55%
G) C) and D)
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A) $1,113.48
B) $1,142.03
C) $1,171.32
D) $1,201.35
E) $1,232.15
G) B) and E)
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B) False
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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.
G) A) and C)
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B) False
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A) All else equal, secured debt is more risky than unsecured debt.
B) The expected return on a corporate bond must be greater than its promised return if the probability of default is greater than zero.
C) All else equal, senior debt has more default risk than subordinated debt.
D) A company's bond rating is affected by its financial ratios but not by provisions in its indenture.
E) Under
G) B) and D)
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A) The bond's coupon rate exceeds its current yield.
B) The bond's current yield exceeds its yield to maturity.
C) The bond's yield to maturity is greater than its coupon rate.
D) The bond's current yield is equal to its coupon rate.
E) If the yield to maturity stays constant until the bond matures, the bond's price will remain at $850.
G) A) and E)
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A) $817.12
B) $838.07
C) $859.56
D) $881.60
E) $903.64
G) A) and D)
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A) $ 937.56
B) $ 961.60
C) $ 986.25
D) $1,010.91
E) $1,036.18
G) C) and D)
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A) 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.
B) 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.
C) If two classes of debt are used (with one senior and the other subordinated to all other debt) , the subordinated debt will carry a lower interest rate.
D) 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.
E) 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.
G) B) and D)
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A) 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.
B) 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.
C) If a bond sells at par, then its current yield will be less than its yield to maturity.
D) If a bond sells for less than par, then its yield to maturity is less than its coupon rate.
E) A discount bond's price declines each year until it matures, when its value equals its par value.
G) A) and B)
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A) $1,047.19
B) $1,074.05
C) $1,101.58
D) $1,129.12
E) $1,157.35
G) B) and E)
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A) If a coupon bond is selling at par, its current yield equals its yield to maturity.
B) If rates fall after its issue, a zero coupon bond could trade at a price above its maturity (or par) value.
C) If rates fall rapidly, a zero coupon bond's expected appreciation could become negative.
D) If a firm moves from a position of strength toward financial distress, its bonds' yield to maturity would probably decline.
E) If a bond is selling at a premium, this implies that its yield to maturity exceeds its coupon rate.
G) A) and B)
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B) False
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B) False
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B) False
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A) 2.62%
B) 2.88%
C) 3.17%
D) 3.48%
E) 3.83%
G) A) and E)
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