Module 7

Which of the following is true about the face value of a bond?

All of the above are true.

A corporate bond which receives a BBB rating from Standard and Poor's is considered _____.

an investment grade bond

What is a bond's seniority?

the bondholder's priority in claiming assets in the event of default

An investor holds a Ford bond with a face value of $5,000, 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)?

$5,100

A company releases a five-year bond with a face value of $1,000 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? 3,4,6,8

8%

Which of the following statements is CORRECT? -A zero coupon bond's current yield is equal to its yield to maturity. -All else equal, if a bond's yield to maturity increases, its current yield will fall. - If a bond's yield to maturity exceeds its coupon rate, the bond will sell at a premium over par. -All else equal, if a bond's yield to maturity increases, its price will fall. -If a bond's yield to maturity exceeds its coupon rate, the bond will sell at par.

All else equal, if a bond's yield to maturity increases, its price will fall.

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?

Bond A sells at a discount (its price is less than par), and its price is expected to increase as the bond approaches maturity.

Which of the following statements is FALSE?

By including more covenants, issuers always increase their costs of borrowing.

Prior to its maturity date, the price of a zero-coupon bond is its face value.

False

The credit spread of a bond shrinks if the probability of the issuer defaulting increases.

False

Which of the following statements is CORRECT?

If a coupon bond is selling at par, its current yield equals its yield to maturity.

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?

If market interest rates remain unchanged, the bond's price exactly one year from now will be lower than it is today.

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?

If the yield to maturity remains at 8%, then the bond's price will decline over the next year.

Which of the following statements is FALSE?

Prior to its maturity date, the price of a zero-coupon bond is always greater than its face value.

How are investors in zero-coupon bonds compensated for making such an investment?

Such bonds are purchased at a discount to their face value.

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?

The bond's expected capital gains yield is positive.

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

The bond's yield to maturity is greater than its coupon rate.

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?

The price of Bond A will decrease over time, but the price of Bond B will increase over time.

Suppose a seven-year, $1,000 bond with an 6% coupon rate and semiannual coupons is trading with a yield to maturity of 4.5%.

This bond trades at a discount because the coupon rate is larger than the YTM.

Bonds with a high risk of default generally offer high yields.

True

Which of the following statements is FALSE?

When prices are quoted in the bond market, they are conventionally quoted assuming the face value is $1,000.

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 20-year bond with a $3,000 face value whose coupon rate is 5.4%

Which of the following is usually a form of public debt?

a bond issue

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 mortgage bond

Which of the following bonds is trading at a premium?

a ten-year bond with a $4,000 face value whose yield to maturity is 6.0% APR and coupon rate is 5.9% APR paid semiannually

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?

semiannually