Chapter 14

The prices of twenty year bonds tend to fluctuate less than bonds with five years to maturity.

False

The prices of zero coupon bonds fluctuate less than bonds with large coupons.

False

The smaller the duration, the more volatile the bond's price.

False

If a bond sells for a discount, the yield to maturity exceeds the current yield.

True

If a bond sells for a premium, the current yield exceeds the yield to maturity.

True

If bond prices rise, the yield to maturity declines.

True

If bond prices were to decline, the current yield would increase.

True

If investors expect interest rates to decline, they are also expecting bond prices to rise.

True

Matching a bond's duration with the time the funds are needed reduces reinvestment risk.

True

Most bonds pay interest semi-annually.

True

Since preferred stock pays a fixed dividend, it is often valued as if it were a bond.

True

The concept of duration stresses when a bond will make its payments to bondholders.

True

The current yield exceeds the yield to maturity if interest rates fall.

True

The prices of low coupon bonds tend to fluctuate more than the prices of high coupon bonds.

True

The smaller a bond's coupon implies a longer duration.

True

The spread (the basis points) between the yields on AAA-rated bonds and B-rated bonds tends to rise when yields increase.

True

The term and duration of a bond are equal for zero coupon bonds.

True

The value of a bond depends on the amount of principal, when it matures, and the interest it pays.

True

Buying a bond with a duration equal to when the funds are needed a. reduces reinvestment rate risk b. increases impact of higher interest rates c. reduces the impact of default d. increases the bond's yield

A

If a bond pays $90 interest annually, matures after ten years, and costs $1,100, the current yield is a. 8.2 percent (=90/1,100) b. 10.1 percent c. 9.0 percent d. 9.6 percent

A

The current yield on a long term bond is the a. coupon interest divided by the price of the bond b. coupon c. interest paid, adjusted for price changes d. going rate of interest

A

The yield to call a. is important if interest rates have fallen b. is important if interest rates have risen c. equals the yield to maturity d. equals the current yield

A

An individual may purchase preferred stock 1. in anticipation of lower interest rates 2. in anticipation of higher interest rates 3. to receive a flow of tax free income 4. to receive a flow of income a. 1 and 3 b. 1 and 4 c. 2 and 3 d. 2 and 4

B

If an investor were to anticipate that interest rates were going to fall, that individual should a. take no action b. buy bonds c. sell bonds d. acquire money market securities

B

If interest rates in general were to fall, 1. the prices of existing bonds would rise 2. the prices of existing bonds would fall 3. yields to maturity would rise 4. yields to maturity would fall a. 1 and 3 b. 1 and 4 c. 2 and 3 d. 2 and 4

B

If interest rates rise, the price of preferred stock a. rises b. falls c. is not affected d. rises or falls

B

Preferred stock and long term bonds are similar because a. they both have voting power b. interest and dividend payments are fixed c. interest and dividend payments are legal obligations d. interest and dividend payments are tax deductible expenses

B

Preferred stock generally pays a. a variable dividend b. a fixed dividend c. a stock dividend d. no dividend

B

While bond prices fluctuate, a. yields are constant b. coupons are constant c. the spread between yields is constant d. short term bond prices fluctuate more

B

If a $100 par value preferred stock pays an annual dividend of $5 and comparable yields are 10 percent, the price of this preferred stock will be a. $100 b. $75 c. $50 ($5/0.1 = $50) d. $25

C

The market price of preferred stock moves directly with changes in interest rates.

False

A bond's call feature may be exercised if 1. the yield to maturity exceeds the current yield 2. the yield to maturity is less than the current yield 3. interest rates have risen 4. interest rates have fallen a. 1 and 3 b. 1 and 4 c. 2 and 3 d. 2 and 4

D

If a $1,000 bond costs $1,000 and pays $50 interest, 1. the current yield is 5 percent 2. the yield to maturity is 5 percent 3. the bond is selling for par a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above

D

The concept of duration considers a. the timing of interest payments b. the timing of principal repayment c. the current rate of interest d. the timing of both interest and principal repayment

D

The value of a bond depends on 1. the coupon rate 2. the terms of the indenture 3. the maturity date a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above

D

A call penalty is a payment made to the firm to encourage early retirement of the bond.

False

As interest rates increase, the prices of existing bonds increase.

False

If a $1,000 bond has a coupon of 8 percent and matures after eight years, the price of the bond will exceed $1,000 if the current interest rate is 9 percent.

False

If interest rates decline after a bond is issued and the investor reinvests the interest payment, the realized yield exceeds the yield to maturity.

False

If interest rates have fallen, a firm may prefer to repurchase the bonds on the market instead of calling and redeeming them.

False

If interest rates increase, a bond may be called.

False

If investors expect interest rates to rise, they should sell preferred stock and buy bonds.

False

If preferred stock is subject to mandatory retirement, its price is more volatile than preferred stock without the retirement feature.

False

If a $1,000 bond with a 7 percent coupon were to sell for $978, the current interest rate exceeds 7 percent.

True

From the viewpoint of the investor, preferred stock is riskier than bonds issued by the same firm.

True

A bond is more likely to be called after interest rates have fallen.

True

A call feature will have no impact on the value of a bond if interest rates rise.

True

A conservative investor will prefer a bond with a smaller duration even though it may have a longer term to maturity.

True

A few bonds called "perpetuals" never mature.

True

An investor may expect a bond to be called if its current yield exceeds the yield to maturity.

True

Bonds that are callable often have a call penalty

True

Fluctuations in yields is one means by which the economy allocates scarce credit.

True