Question 1

Amram Inc. can issue a 20-year bond with a 6% annual coupon. This bond is not convertible, is not callable, and has no sinking fund. Alternatively, Amram could issue a 20-year bond that is convertible into common equity, may be called, and has a sinking fund. What is the coupon rate that Amram would have to pay on the convertible, callable bond?

Accepted Answer

A)   It could be less than, equal to, or greater than 6%.
B)   It is greater than 6%.
C)   It is exactly equal to 6%.
D)   It is less than 6%.E) All of the above
F) A) and C)

Question 2

Five-year Treasury bonds yield 5.5%. The inflation premium (IP)  is 1.9%, and the maturity risk premium (MRP)  on 5-year bonds is 0.4%. What is the real risk-free rate, r*?

Accepted Answer

A)   2.59%
B)   2.88%
C)   3.20%
D)   3.52%E) A) and D)
F) A) and C)

Question 3

A bond that is callable has a chance of being retired earlier than its stated term to maturity. Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

Accepted Answer

A) True 
 B)False

Question 4

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 5

Which of the following statements is correct?

Accepted Answer

A)   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.
B)   All else being equal, an increase in interest rates will have a greater effect on the prices of short-term than long-term bonds.
C)   All else being equal, an increase in interest rates will have a greater effect on higher-coupon bonds than it will have on lower-coupon bonds.
D)   If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value.E) All of the above
F) B) and C)

Question 6

Ezzell Enterprises' noncallable bonds currently sell for $1,165. They have a 15-year maturity, an annual coupon of $95, and a par value of $1,000. What is their yield to maturity?

Accepted Answer

A)   6.53%
B)   6.87%
C)   7.24%
D)   7.62%E) B) and C)
F) B) and D)

Question 7

Keys Corporation's 5-year bonds yield 7.00%, and 5-year T-bonds yield 5.15%. The real risk-free rate is r* = 3.00%, the inflation premium for 5-year bonds is IP = 1.75%, the liquidity premium for Keys' 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)   ×	imes×  0.1%, where t = number of years to maturity. What is the default risk premium (DRP)  on Keys' bonds?

Accepted Answer

A)   0.99%
B)   1.10%
C)   1.21%
D)   1.33% E) B) and C)
F) C) and D)

Question 8

Which statement regarding bonds is true?

Accepted Answer

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

Question 9

Assume that all interest rates in the economy decline from 10% to 9%. Which bond would have the largest percentage increase in price?

Accepted Answer

A)   a 1-year bond with a 15% coupon
B)   a 3-year bond with a 10% coupon
C)   an 8-year bond with a 9% coupon
D)   a 10-year zero coupon bondE) A) and D)
F) All of the above

Question 10

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

Accepted Answer

A)   Inflation is expected to decline in the future.
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) C) and D)
F) A) and C)

Question 11

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

Accepted Answer

A)   1.40%
B)   1.55%
C)   1.71%
D)   1.88% E) C) and D)
F) B) and D)

Question 12

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)   $904.97E) A) and B)
F) C) and D)

Question 13

A bond rating agency will rely exclusively on quantitative data to determine the risk that a firm may default on its debt servicing obligations.

Accepted Answer

A) True 
 B)False

Question 14

Bond X has an 8% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a 12% annual coupon. Each of the bonds has a maturity of 10 years and a yield to maturity of 10%. Which statement regarding bonds is true?

Accepted Answer

A)   If the bonds' market interest rate remains at 10%, Bond Z's price will be lower 1 year from now than it is today.
B)   Bond X has the greatest reinvestment rate risk.
C)   If market interest rates remain at 10%, Bond Z's price will be 10% higher 1 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) B) and C)
F) C) and D)

Question 15

Although Maple bonds are foreign bonds, they have no currency risk.

Accepted Answer

A) True 
 B)False

Question 16

The following are some provisions that are often found in a bond indenture. Which of these provisions would probably NOT reduce the yield-to-maturity that investors would otherwise require on a newly issued bond?

Accepted Answer

A)   Assets are used as security for the bond.
B)   The bond has a sinking fund.
C)   The bond is subordinate to other classes of debt.
D)   The indenture contains covenants that prevent the issuance of additional debt.E) A) and C)
F) A) and B)

Question 17

Which statement regarding bonds is true?

Accepted Answer

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) All of the above
F) C) and D)

Question 18

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 19

Which of the following statements is correct?

Accepted Answer

A)   One disadvantage of zero coupon bonds is that the issuing firm cannot realize any tax savings from the debt until the bonds mature.
B)   Other things held constant, a callable bond should have a lower yield to maturity than a noncallable bond.
C)   Once a firm declares bankruptcy, it must then be liquidated by the trustee, which uses the proceeds to pay bondholders, unpaid wages, taxes, and lawyer fees.
D)   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.E) B) and C)
F) A) and D)

Question 20

Niendorf Corporation's 5-year bonds yield 6.75%, and 5-year T-bonds yield 4.80%. The real risk-free rate is r* = 2.75%, the inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Niendorf's bonds is DRP = 1.20% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1)   ×	imes×  0.1%, where t = number of years to maturity. What is the liquidity premium (LP)  on Niendorf's bonds?

Accepted Answer

A)   0.49%
B)   0.55%
C)   0.68%
D)   0.75% E) A) and B)
F) A) and C)

Exam 6: Bonds, Bond Valuation, and Interest Rates

Which statement regarding bonds is true?

Correct Answer
verified

A bond that is callable has a chance of being retired earlier than its stated term to maturity. Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

Correct Answer
verified

Correct Answer
verified

Although Maple bonds are foreign bonds, they have no currency risk.

Correct Answer
verified

A bond rating agency will rely exclusively on quantitative data to determine the risk that a firm may default on its debt servicing obligations.

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

Correct Answer
verified

Five-year Treasury bonds yield 5.5%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year bonds is 0.4%. What is the real risk-free rate, r*?

Correct Answer
verified

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

Correct Answer
verified

The following are some provisions that are often found in a bond indenture. Which of these provisions would probably NOT reduce the yield-to-maturity that investors would otherwise require on a newly issued bond?

Correct Answer
verified

Bond X has an 8% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a 12% annual coupon. Each of the bonds has a maturity of 10 years and a yield to maturity of 10%. Which statement regarding bonds is true?

Correct Answer
verified

Correct Answer
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Assume that all interest rates in the economy decline from 10% to 9%. Which bond would have the largest percentage increase in price?

Correct Answer
verified

Which statement regarding bonds is true?

Correct Answer
verified

Which of the following statements is correct?

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

Which of the following statements is correct?

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

Correct Answer
verified

Ezzell Enterprises' noncallable bonds currently sell for $1,165. They have a 15-year maturity, an annual coupon of $95, and a par value of $1,000. What is their yield to maturity?

Correct Answer
verified

Exam 6: Bonds, Bond Valuation, and Interest Rates

Which statement regarding bonds is true?

Correct AnswerverifiedShow Answer

A bond that is callable has a chance of being retired earlier than its stated term to maturity. Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Although Maple bonds are foreign bonds, they have no currency risk.

Correct AnswerverifiedShow Answer

A bond rating agency will rely exclusively on quantitative data to determine the risk that a firm may default on its debt servicing obligations.

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

Correct AnswerverifiedShow Answer

Five-year Treasury bonds yield 5.5%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year bonds is 0.4%. What is the real risk-free rate, r*?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The following are some provisions that are often found in a bond indenture. Which of these provisions would probably NOT reduce the yield-to-maturity that investors would otherwise require on a newly issued bond?

Correct AnswerverifiedShow Answer

Bond X has an 8% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a 12% annual coupon. Each of the bonds has a maturity of 10 years and a yield to maturity of 10%. Which statement regarding bonds is true?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Assume that all interest rates in the economy decline from 10% to 9%. Which bond would have the largest percentage increase in price?

Correct AnswerverifiedShow Answer

Which statement regarding bonds is true?

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

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

Which of the following statements is correct?

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 AnswerverifiedShow Answer

Ezzell Enterprises' noncallable bonds currently sell for $1,165. They have a 15-year maturity, an annual coupon of $95, and a par value of $1,000. What is their yield to maturity?

Correct AnswerverifiedShow Answer

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