Question 1

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

Accepted Answer

A)   An 8-year bond with a 9% coupon.
B)   A 1-year bond with a 15% coupon.
C)   A 3-year bond with a 10% coupon.
D)   A 10-year zero coupon bond.
E)   A 10-year bond with a 10% coupon.F) A) and E)
G) C) and D)

Question 2

In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures to a market value basis. KJM Corporation's balance sheet as of today is as follows: Long-term debt (bonds, at par) Preferred stock 2,000,000
Common stock ($10 par) Retained earnings 4,000,000
Total debt and equity $26,000,000
The bonds have a 4.0% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 12%, so the bonds now sell below par. What is the current market value of the firm's debt?

Accepted Answer

A)   $5,276,731
B)   $5,412,032
C)   $5,547,332
D)   $7,706,000
E)   $7,898,650F) B) and D)
G) B) and C)

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)   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.
B)   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.
C)   A sinking fund provision makes a bond more risky to investors at the time of issuance.
D)   Sinking fund provisions never require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time.
E)   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.F) B) and D)
G) A) and B)

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)   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.
B)   The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.
C)   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.
D)   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.
E)   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.F) D) and E)
G) A) and B)

Question 5

Which of the following statements is CORRECT?

Accepted Answer

A)   One advantage of a zero coupon Treasury bond is that no one who owns the bond has to pay any taxes on it until it matures or is sold.
B)   Long-term bonds have less interest rate price risk but more reinvestment rate risk than short-term bonds.
C)   If interest rates increase, all bond prices will increase, but the increase will be greater for bonds that have less interest rate risk.
D)   Relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more interest rate price risk but less reinvestment rate risk.
E)   Long-term bonds have less interest rate price risk and also less reinvestment rate risk than short-term bonds.F) C) and D)
G) A) and D)

Question 6

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?

Accepted Answer

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

Question 7

A 12-year bond has an annual coupon rate of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which of the following statements is CORRECT?

Accepted Answer

A)   If market interest rates decline, the price of the bond will also decline.
B)   The bond is currently selling at a price below its par value.
C)   If market interest rates remain unchanged, the bond's price one year from now will be lower than it is today.
D)   The bond should currently be selling at its par value.
E)   If market interest rates remain unchanged, the bond's price one year from now will be higher than it is today.F) B) and C)
G) A) and B)

Question 8

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 9

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

Accepted Answer

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 tiers of debt are used (with one senior and one subordinated debt class) , 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.F) A) and E)
G) A) and D)

Question 10

Which of the following statements is CORRECT?

Accepted Answer

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

Question 11

If the required rate of return on a bond (rd) is greater than its coupon interest rate and will remain above that rate, then the market value of the bond will always be below its par value until the bond matures, at which time its market value will equal its par value. (Accrued interest between interest payment dates should not be considered when answering this question.)

Accepted Answer

A) True 
 B)False

Question 12

The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds, other things held constant.

Accepted Answer

A) True 
 B)False

Question 13

Bonds A, B, and C all have a maturity of 10 years and a yield to maturity of 7%. 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)   If the yield to maturity on each bond decreases to 6%, Bond A will have the largest percentage increase in its price.
B)   Bond A has the most interest rate risk.
C)   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.
D)   If the yield to maturity on each bond increases to 8%, the prices of all three bonds will decline.
E)   Bond C sells at a premium over its par value.F) D) and E)
G) A) and E)

Question 14

O'Brien Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 25 years. Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $850. What is the bond's nominal (annual)  coupon interest rate?

Accepted Answer

A)   6.27%
B)   6.60%
C)   6.95%
D)   7.32%
E)   7.70%F) C) and D)
G) None of the above

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A)   A zero coupon bond's current yield is equal to its yield to maturity.
B)   If a bond's yield to maturity exceeds its coupon rate, the bond will sell at par.
C)   All else equal, if a bond's yield to maturity increases, its price will fall.
D)   If a bond's yield to maturity exceeds its coupon rate, the bond will sell at a premium over par.
E)   All else equal, if a bond's yield to maturity increases, its current yield will fall.F) C) and D)
G) D) and E)

Question 16

Listed below are some provisions that are often contained in bond indentures. Which of these provisions, viewed alone, would tend to reduce the yield to maturity that investors would otherwise require on a newly issued bond? 1. Fixed assets are used as security for a bond.
2)  A given bond is subordinated to other classes of debt.
3)  The bond can be converted into the firm's common stock.
4)  The bond has a sinking fund.
5)  The bond has a call provision.
6)  The indenture contains covenants that prevent the use of additional debt.

Accepted Answer

A)   1, 3, 4, 6
B)   1, 4, 6
C)   1, 2, 3, 4, 6
D)   1, 2, 3, 4, 5, 6
E)   1, 3, 4, 5, 6F) B) and D)
G) A) and D)

Question 17

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)   6.20%
B)   6.53%
C)   6.87%
D)   7.24%
E)   7.62%F) B) and D)
G) B) and C)

Question 18

A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon. Both bonds have the same yield to maturity. If the yield to maturity of both bonds increases by the same amount, which of the following statements would be CORRECT?

Accepted Answer

A)   The prices of both bonds will decrease by the same amount.
B)   Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price.
C)   The prices of both bonds would increase by the same amount.
D)   One bond's price would increase, while the other bond's price would decrease.
E)   The prices of the two bonds would remain constant.F) All of the above
G) None of the above

Question 19

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?

Accepted Answer

A)   If the yield to maturity remains constant, the bond's price one year from now will be higher than its current price.
B)   The bond is selling below its par value.
C)   The bond is selling at a discount.
D)   If the yield to maturity remains constant, the bond's price one year from now will be lower than its current price.
E)   The bond's current yield is greater than 9%.F) A) and C)
G) A) and B)

Question 20

Cosmic Communications Inc. is planning two new issues of 25-year bonds. Bond Par will be sold at its $1,000 par value, and it will have a 10% semiannual coupon. Bond OID will be an Original Issue Discount bond, and it will also have a 25-year maturity and a $1,000 par value, but its semiannual coupon will be only 6.25%. If both bonds are to provide investors with the same effective yield, how many of the OID bonds must Cosmic issue to raise $3,000,000? Disregard flotation costs, and round your final answer up to a whole number of bonds.

Accepted Answer

A)   4,228
B)   4,337
C)   4,448
D)   4,562
E)   4,676F) A) and B)
G) A) and C)

Exam 5: Bonds, Bond Valuation, and Interest Rates

Which of the following statements is CORRECT?

Correct Answer
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A 12-year bond has an annual coupon rate of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which of the following statements is CORRECT?

Correct Answer
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A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?

Correct Answer
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The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds, other things held constant.

Correct Answer
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Bonds A, B, and C all have a maturity of 10 years and a yield to maturity of 7%. 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
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Which of the following statements is CORRECT?

Correct Answer
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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
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Which of the following statements is CORRECT?

Correct Answer
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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?

Correct Answer
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A company is planning to raise $1,000,000 to finance a new plant. Which of the following statements is CORRECT?

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

Correct Answer
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A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon. Both bonds have the same yield to maturity. If the yield to maturity of both bonds increases by the same amount, which of the following statements would be CORRECT?

Correct Answer
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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
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Which of the following statements is CORRECT?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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O'Brien Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 25 years. Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $850. What is the bond's nominal (annual) coupon interest rate?

Correct Answer
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Correct Answer
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Exam 5: Bonds, Bond Valuation, and Interest Rates

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

A 12-year bond has an annual coupon rate of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds, other things held constant.

Correct AnswerverifiedShow Answer

Bonds A, B, and C all have a maturity of 10 years and a yield to maturity of 7%. 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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon. Both bonds have the same yield to maturity. If the yield to maturity of both bonds increases by the same amount, which of the following statements would be 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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

O'Brien Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 25 years. Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $850. What is the bond's nominal (annual) coupon interest rate?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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