FINANCE - Module 7

18. Which of the following bonds is trading at a premium? A. a five-year bond with a $2000 face value whose yield to maturity is 7.0% APR and coupon rate is 7.2% APR paid semiannually B. a ten-year bond with a $4000 face value whose yield to maturity is 6.0% APR and coupon rate is 5.9% APR paid semiannually C. a 15-year bond with a $10,000 face value whose yield to maturity is 8.0% APR and coupon rate is 7.8% APR paid semiannually D. a two-year bond with a $50,000 face value whose yield to maturity is 5.2% APR and coupon rate is 5.2% APR paid monthly

a

20. Which of the following bonds will have the least percentage change in value if interest rates (YTM not coupon rates since coupon rates are fixed) on all bonds increased by 1%? A. a ten-year bond with a $2000 face value whose coupon rate is 6.8% B. a 15-year bond with a $5000 face value whose coupon rate is 6.2% C. a 20-year bond with a $3000 face value whose coupon rate is 5.4% D. a 30-year bond with a $1000 face value whose coupon rate is 6.4%

a

14. Bonds with a high risk of default generally offer high yields. A. True B. False

a

6. A corporation issues a bond that generates the cash flows below. If the periods shown are 3 months, which of the following best describes that bond? A. a 15-year bond with a notional value of $5000 and a coupon rate of 5% paid quarterly B. a 15-year bond with a notional value of $5000 and a coupon rate of 1.25% paid annually C. a 30-year bond with a notional value of $5000 and a coupon rate of 3.75% paid semiannually D. a 60- year bond with a notional value of $5000 and a coupon rate of 5% paid quarterly

a

21. A 10-year corporate bond has an annual coupon of 9%. The bond is currently selling at par ($1,000). Which of the following statements is NOT CORRECT? A. The bond's expected capital gains yield is positive. B. The bond's yield to maturity is 9%. C. The bond's current yield is 9%. D. If the bond's yield to maturity remains constant, the bond will continue to sell at par. E. The bond's current yield exceeds its capital gains yield.

a

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

a

3. What is a bond's seniority? A. the bondholder's priority in claiming assets in the event of default B. clauses restricting a company from issuing new debt C. the yield to maturity of a bond as compared to bonds of comparable rating D. the issue price of the bond as compared to its face value

a

5. Which of the following statements is FALSE? A. By including more covenants, issuers always increase their costs of borrowing. B. Once bonds are issued, equity holders have an incentive to increase dividends at the expense of debt holders. C. Covenants may restrict the level of further indebtedness and specify that the issuer must maintain a minimum amount of working capital. D. The reduction in the firm's borrowing cost from covenants can more than outweigh the cost of the loss of flexibility associated with covenants.

a

11. Which of the following statements is FALSE? A. The amount of each coupon payment is determined by the coupon rate of the bond and the face value. B. Prior to its maturity date, the price of a zero-coupon bond is always greater than its face value. C. The simplest type of bond is a zero-coupon bond in the sense that it makes one only type of payment. D. Treasury bills are U.S. government bonds with a maturity of up to one year.

b

15. The credit spread of a bond shrinks if the probability of the issuer defaulting increases. A. True B. False

b

17. Given below is information from FINRA regarding one of Bank of America's bonds. How much would the holder of such a bond earn each coupon payment for each $100 in face value if coupons are paid semiannually? ( graph ) A. $1.49 B. $2.15 C. $2.32 D. $4.30

b

23. A corporate bond which receives a BBB rating from Standard and Poor's is considered A. a junk bond. B. an investment grade bond. C. a defaulted bond. D. a high-yield bond.

b

25. 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. 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%, the bond's price will remain constant over the next year.

b

9. Prior to its maturity date, the price of a zero-coupon bond is its face value. A. True B. False

b

10. How are investors in zero-coupon bonds compensated for making such an investment? A. Such bonds are purchased at their face value and sold at a premium at a later date. B. The bond makes regular interest payments. C. Such bonds are purchased at a discount to their face value. D. The face value of these bonds is less than the value of the bond when the bond matures.

c

16. Given below is information from FINRA regarding one of Caterpillar Financial Services' bonds. How much would the holder of such a bond earn each coupon payment for each $100 in face value if coupons are paid annually? ( graph ) A. $2.00 B. $3.95 C. $4.00 D. $4.36

c

2. Athelstone Realty issues debt with a maturity of 20 years. In the case of bankruptcy, holders of this debt may claim the property held by Athelstone Realty. Which of the following best describes this type of corporate debt? A. a note B. a debenture C. a mortgage bond D. an asset-backed bond

c

22. Which of the following statements is CORRECT? 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.

c

24. You are considering two bonds. Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT? A. The price of Bond B will decrease over time, but the price of Bond A will increase over time. B. The prices of both bonds will remain unchanged. C. The price of Bond A will decrease over time, but the price of Bond B will increase over time. D. The prices of both bonds will increase by 7% per year. E. The prices of both bonds will increase over time, but the price of Bond A will increase by more.

c

26. A 15-year bond with a face value of $1,000 currently sells for $850. Which of the following statements is CORRECT? 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.

c

30. A 12-year bond has an annual coupon rate of 9%. The bond has a yield to maturity of 7%. Which of the following statements is CORRECT? 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 exactly 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 exactly one year from now will be higher than it is today.

c

7. An investor holds a Ford bond with a face value of $5000, a coupon rate of 4%, and semiannual payments that matures on 01/15/2009. How much will the investor receive on 01/15/2009 (interest and principal combined)? A. $200 B. $5000 C. $5100 D. $5200

c

8. A university issues a bond with a face value of $10,000 and a coupon rate of 5.65% that matures on 07/15/2015. The holder of such a bond receives coupon payments of $282.50. How frequently are coupon payments made in this case? A. monthly B. quarterly C. semiannually D. annually

c

Which of the following is usually a form of public debt? A. a private placement B. a bank loan C. a bond issue D. a revolving line of credit

c

12. Which of the following statements is FALSE? A. Zero-coupon bonds are also called pure discount bonds. B. One advantage of quoting the yield to maturity rather than the price is that the yield is independent of the face value of the bond. C. The yield to maturity for a zero-coupon bond is the return you will earn as an investor from holding the bond to maturity and receiving the promised face value payment. D. When prices are quoted in the bond market, they are conventionally quoted assuming the face value is $1000. E. Because we can convert any bond price into a yield, and vice versa, bond prices and yields are often used interchangeably

d

13. A company releases a five-year bond with a face value of $1000 and coupons paid semiannually. If market interest rates imply a YTM of 6%, which of the following coupon rates will cause the bond to be issued at a premium? A. 3% B. 4% C. 6% D. 8%

d

28. Three $1,000 face value bonds that mature in 10 years have the same level of risk, hence their YTMs are equal. Bond A has an 8% annual coupon, Bond B has a 10% annual coupon, and Bond C has a 12% annual coupon. Bond B sells at par. Assuming interest rates remain constant for the next 10 years, which of the following statements is CORRECT? A. Bond A's current yield will increase each year. B. Since the bonds have the same YTM, they should all have the same price, and since interest rates are not expected to change, their prices should all remain at their current levels until maturity. C. Bond C sells at a premium (its price is greater than par), and its price is expected to increase as the bond approaches maturity. D. Bond A sells at a discount (its price is less than par), and its price is expected to increase as the bond approaches maturity. E. As the bond approaches maturity, Bond A's price is expected to decrease, Bond B's price is expected to stay the same, and Bond C's price is expected to increase.

d

4. Which of the following is true about the face value of a bond? A. It is the notional amount we use to compute coupon payments. B. It is the amount that is generally repaid at maturity. C. It is usually denominated in standard increments, such as $1,000. D. All of the above are true.

d

19. Which of the following bonds would have the greatest percentage increase in value if all interest rates (YTM not coupon rates since coupon rates are fixed) fall by 1%? 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.

e

27. Which of the following statements is CORRECT? A. Junior debt has less default risk than senior debt. B. Junk bonds typically provide a lower yield to maturity than investment-grade bonds. C. The total return on a bond during a given year consists only of the coupon interest payments received. D. All the above are correct E. None of the above is correct

e