chapter 7 practice quiz
The Carter Company's bonds mature in 10 years have a par value of $1,000 and an annual coupon payment of $80. The market interest rate for the bonds is 9%. What is the price of these bonds? $941.51 $979.53 $935.82 $958.15 $964.41
$935.82
A 6-year bond, 8% semiannual coupon bond sells at par ($1,000). Another bond of equal risk, maturity, and par value pays an 8% annual coupon. What is the price of the annual coupon bond? $980.43 $992.64 $689.08 $986.72 $712.05
$992.64
Due to numerous lawsuits, a major chemical manufacturer has recently experienced a market reevaluation. The firm has 15-year, 8% semiannual coupon bonds. The required nominal rate on this debt has now risen to 16%. What is the current value of this bond? $ 550 $ 450 $1,273 $7,783 $1,000
$ 550
Semiannual coupon bonds with the same risk (Aaa) and maturity (20 years) as your company's bonds have a nominal (not EAR) yield to maturity of 9%. Your company's treasurer is thinking of issuing, at par, some $1,000 par value, 20-year, quarterly payment bonds. She has asked you to determine what quarterly interest payment, in dollars, the company would have to set in order to provide the same effective annual rate (EAR) as those on the 20-year, semiannual payment bonds. What would the quarterly, dollar interest payment be? $27.50 $45.00 $22.25 $25.00 $23.00
$22.25
Recently, Ohio Hospitals Inc. filed for bankruptcy. The firm was reorganized as American HospitalsInc., and the court permitted a new indenture on an outstanding bond issue to be put into effect. The issue has 10 years to maturity and an annual coupon rate of 10%. The new agreement allows the firm to pay no interest for 5 years. Then, interest payments will be resumed for the next 5 years. Finally, at maturity (Year 10), the principal plus the interest that was not paid during the first 5 years will be paid. However, no interest will be paid on the deferred interest. If the required annual return is 20%, what should the bonds sell for in the market today? $242.26 $813.69 $281.69 $362.44 $578.31
$362.44
You wish to purchase a 20-year, $1,000 face value bond that makes semiannual interest payments of $40. If you require a 10% nominal yield to maturity, what price should you be willing to pay for the bond? $674 $828 $902 $761 $619
$828
A 12-year, $1,000 face value corporate pays a 9% semiannual coupon. The bond has a nominal yield to maturity of 7%, and can be called in three years at a price of $1,045. What is the bond's nominal yield to call? 17.22% 10.32% 2.31% 4.62% 5.16%
4.62%
Consider a $1,000 par value, 7% annual coupon bond. The bond matures in 9 years. Assuming the bond's required return is 10%, what is its current yield? 8.37% 8.46% 7.00% 10.00% 8.52%
8.46%
A 10-year, $1,000 face value bond sells for $925 and has an 8% annual coupon rate. What is the bond's current yield? 8.33% 8.95% 8.00% 7.88% 8.65%
8.65%
Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds will have the largest percentage increase in price? A 1-year bond with a 15% coupon. An 8-year bond with a 9% coupon. A 3-year bond with a 10% coupon. A 10-year zero coupon bond. A 10-year bond with a 10% coupon.
A 10-year zero coupon bond.
If the yield to maturity decreased 1%, which of the following bonds would have the largest percentage increase in value? A 10-year zero coupon bond. A 10-year bond with an 8% coupon. A 1-year zero coupon bond. A 1-year bond with an 8% coupon. A 10-year bond with a 12% coupon
A 10-year zero coupon bond.
Which of the following statements is CORRECT? If a 10-year, $1,000 par, zero coupon bond were issued at a price that gave investors a 10% rate of return, 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 over its $1,000 par value. 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. Other things held constant, a corporation would rather issue noncallable bonds than callable bonds. Longer-term bonds are exposed to more reinvestment rate risk than interest rate price risk. Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond.
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
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 remain the same over the next year. The bond's coupon rate is less than 8%. If the yield to maturity increases, then the bond's price will increase. The bond's current yield is less than 8%. If the yield to maturity remains at 8%, then the bond's price will decline over the next year.
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 CORRECT? Bonds are riskier than common stocks and have higher required returns as a result. Bonds from larger companies always have lower yields to maturity (less risk) than bonds from smaller companies. If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices. The market value of a bond will always approach its par value as its maturity date approaches, provided the bond's yield remains constant. The total yield on a bond is derived from its dividends and changes in the price of the bond.
The market value of a bond will always approach its par value as its maturity date approaches, provided the bond's yield remains constant.
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, which is expected to remain constant. Which of the following statements is CORRECT? The prices of both bonds will remain unchanged. The prices of both bonds will increase by 7% per year. The price of Bond B will decrease over time, but the price of Bond A will increase over time. The prices of both bonds will increase over time, but the price of Bond A will increase by more. The price of Bond A will decrease over time, but the price of Bond B will increase over time.
The price of Bond A will decrease over time, but the price of Bond B will increase over time.
Which of the following statements is CORRECT? The total return on a bond for a given year consists only of the coupon interest payments received. When large firms are in financial distress, they are almost always liquidated, whereas smaller firms are generally reorganized. All else equal, a bond that has a coupon rate of 10% will sell at a discount if the required return for bonds of similar risk is 8%. The price of a discount bond will increase over time, assuming that the bond's yield to maturity remains constant over time. For a given firm, its debentures are likely to have a lower yield to maturity relative to its mortgage bonds.
The price of a discount bond will increase over time, assuming that the bond's yield to maturity remains constant over time.
Which of the following statements is CORRECT? You hold a 10-year, zero coupon, bond and a 10-year bond that has 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. 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. You hold a 10-year, zero coupon, bond and a 10-year bond that has 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. The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates. 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
You hold a 10-year, zero coupon, bond and a 10-year bond that has 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.
The Carter Company's bonds mature in 10 years have a par value of $1,000 and an annual coupon payment of $80. The market interest rate for the bonds is 9%. What is the price of these bonds? $941.51 $964.41 $979.53 $935.82 $958.15
$935.82
A 10-year, $1,000 face value bond has an 8% annual coupon and a yield to maturity of 10%. If market interest rates remain at 10%, what will be the bond's price two years from today? $1,023.06 $ 912.55 $1,061.30 $ 893.30 $ 877.11
$ 893.30
A 10-year, $1,000 face value bond sells for $925 and has an 8% annual coupon rate. Assume that the YTM remains constant for the next three years. What will be the price of the bond three years from today? $ 941 $1,000 $ 925 $ 956 $ 977
$ 941
A 10-year, 9% semiannual coupon bond is selling at par ($1,000). A bond of equal maturity and risk pays a 9% annual coupon. If the annual coupon bond has a face value of $1,000, what will be its price? $1,089.84 $1,000.00 $ 471.87 $ 987.12 $ 967.34
$ 987.12
Wald Corporation has outstanding bonds with a 6-year maturity, $1,000 par value, and 7% coupon paid semiannually (3.5% each 6 months), and those bonds sells at their par value. Wald has another bond with the same risk, maturity, and par value, but this second bond pays a 7% annual coupon. What is an estimate of the price of the annual coupon bond? Neither bond is callable. $1,008.30 $ 994.18 $1,002.26 $1,015.89 $ 998.56
$ 994.18
A 15-year, $1,000 face value bond with a 10% semiannual coupon has a nominal yield to maturity of 7.5%. The bond, which may be called after five years, has a nominal yield to call of 5.54%. What is the bond's call price? $1,110 $ 564 $1,100 $1,173 $1,040
$1,040
Kennedy Gas Works has 10-year, $1,000 face value bonds that pay a 10% quarterly coupon. The bonds may be called in five years. The bonds have a nominal yield to maturity of 8% and a yield to call of 7.5%. What is the bonds' call price? $1,025.00 $ 379.27 $1,136.78 $1,048.34 $1,036.77
$1,048.34
A 10-year, $1,000 par value bond pays an 8% coupon with quarterly payments during its first five years (you receive $20 a quarter for the first 20 quarters). During the remaining five years the security has a 10% quarterly coupon (you receive $25 a quarter for the second 20 quarters). After 10 years (40 quarters) you receive the par value. Another 10-year bond has an 8% semiannual coupon. This bond is selling at its par value, $1,000. This bond has the same risk as the security you are thinking of purchasing. Given this information, what should be the price of the security you are considering purchasing? $ 943.22 $1,037.61 $1,145.89 $1,060.72 $ 898.65
$1,060.72
A 12-year bond, $1,000 face value bond pays an 8% annual coupon and a yield to maturity of 7%. If the YTM remains 7%, what will be the price of the bond three years from today? $1,026.24 $ 937.53 $ 963.94 $1,052.68 $1,065.15
$1,065.15
A 12-year bond, $1,000 face value bond pays an 8% annual coupon and a yield to maturity of 7%. If the YTM remains 7%, what will be the price of the bond three years from today? $1,026.24 $ 937.53 $1,065.15 $ 963.94 $1,052.68
$1,065.15
A 12-year, $1,000 face value bond has a 9% annual coupon, and a yield to maturity of 8%. What is the price of the bond? $1,000 $ 928 $1,469 $1,957 $1,075
$1,075
A 12-year, $1,000 face value bond has a 9% annual coupon, and a yield to maturity of 8%. What is the price of the bond? $1,000 $1,469 $1,957 $ 928 $1,075
$1,075
A bond that matures in 12 years has a 9% semiannual coupon and a face value of $1,000. The bond has a nominal yield to maturity of 8%. What is the price of the bond today? $ 928.39 $ 927.52 $1,075.36 $1,073.99 $1,076.23
$1,076.23
A 12-year bond, $1,000 face value bond pays an 8% annual coupon and a yield to maturity of 7%. What is the price of the bond today? $1,079.43 $1,099.21 $1,070.24 $ 924.64 $1,000.00
$1,079.43
A $1,000 par value bond pays interest of $35 each quarter and will mature in 10 years. If your nominal yield to maturity is 12% with quarterly compounding, how much should you be willing to pay for this bond? $1,051.25 $1,115.57 $1,391.00 $ 825.49 $ 941.36
$1,115.57
Assume that a 15-year, $1,000 face value bond pays interest of $37.50 every 3 months. If you require a nominal annual rate of return of 12%, with quarterly compounding, how much should you be willing to pay for this bond? $ 821.92 $1,207.57 $1,120.71 $1,358.24 $ 986.43
$1,207.57
Two firms (A and B) have $1,000 par value bond issues outstanding that have the same maturity (20 years) and risk. Firm A's bond has an 8% annual coupon rate, while Firm B's bond has an 8% semiannual coupon rate. If the nominal required rate of return, rd, is 12%, semiannual basis, for both bonds, what is the difference in current market prices of the two bonds? $17.53 $ 2.20 $ 3.77 $ 6.28 $ 0.50
$17.53
GP&L sold $1,000,000 of 12%, 30-year, semiannual payment bonds 15 years ago. The bonds are not callable, but they do have a sinking fund provision requiring 5% of the original face value to be redeemed each year ($50,000), beginning in Year 11. To date, 25% of the issue has been retired. The company can either call bonds at par for sinking fund purposes or purchase bonds on the open market, spending sufficient money to redeem 5% of the original face value each year. If the nominal yield to maturity on the bonds is currently 14%, what is the least amount of money GP&L must put up to satisfy the sinking fund provision? $37,500 $39,422 $43,856 $50,000 $43,796
$43,796
KJM Corporation's balance sheet as of January 1, 2006 is as follows: Long-term debt (bonds, at par) $10,000,000 Preferred stock 2,000,000 Common stock ($10 par) 10,000,000 Retained earnings 4,000,000 Total debt and equity $26,000,000 The bonds have a 4% semiannual coupon rate and a par value of $1,000. They mature on January 1, 2016. If the yield to maturity is 12%, what is the current market value of the firm's debt? $7,056,000 $7,706,000 $5,412,000 $2,531,000 $5,480,000
$5,412,000
Ken Williams Ventures' recently issued bonds that mature in 15 years. They have a par value of $1,000 and an annual coupon of 6%. If the current market interest rate is 8%, at what price should the bonds sell? $814.74 $847.86 $828.81 $801.80 $830.53
$828.81
Ken Williams Ventures' recently issued bonds that mature in 15 years. They have a par value of $1,000 and an annual coupon of 6%. If the current market interest rate is 8%, at what price should the bonds sell? $814.74 $830.53 $828.81 $847.86 $801.80
$828.81
A 20-year, $1,000 par value bond has a 9% annual coupon. The bond currently sells for $925. If the yield to maturity remains at its current rate, what will the price be 5 years from now? $941.86 $978.40 $933.09 $965.84 $951.87
$933.09
Kholdy Inc's bonds currently sell for $1,275. They pay a $120 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,120. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. What is the difference between the bond's YTM and its YTC? 1.91% 1.54% 1.48% 1.68% 1.82%
1.68%
Kholdy Inc's bonds currently sell for $1,275. They pay a $120 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,120. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. What is the difference between the bond's YTM and its YTC? 1.82% 1.91% 1.48% 1.54% 1.68%
1.68%
Palmer Products has outstanding bonds with an annual 8% coupon. The bonds have a par value of $1,000 and a price of $865. The bonds will mature in 11 years. What is the yield to maturity on the bonds? 10.09% 11.13% 8.00% 9.89% 9.25%
10.09%
Palmer Products has outstanding bonds with an annual 8% coupon. The bonds have a par value of $1,000 and a price of $865. The bonds will mature in 11 years. What is the yield to maturity on the bonds? 11.13% 9.89% 10.09% 9.25% 8.00%
10.09%
Palmer Products has outstanding bonds with an annual 8% coupon. The bonds have a par value of $1,000 and a price of $865. The bonds will mature in 11 years. What is the yield to maturity on the bonds? 11.13% 9.25% 10.09% 8.00% 9.89%
10.09%
You have just been offered a $1,000 par value bond for $847.88. The bond has an annual coupon rate of 8% and annual interest rates on equally risky new issues are 10%. You want to know how many more interest payments you will receive, but the party selling the bond cannot remember. Can you determine how many interest payments remain? 14 10 15 20 12
15
The current price of a 10-year, $1,000 par value bond is $1,158.91. Interest on this bond is paid every six months, and the nominal annual yield is 14%. Given these facts, what is the annual coupon rate on this bond? 21% 12% 17% 14% 10%
17%
Which of the following bonds will have the greatest percentage increase in value if all interest rates decrease by 1%? 10-year, zero coupon bond. 20-year, 5% coupon bond. 1-year, 10% coupon bond. 20-year, zero coupon bond. 20-year, 10% coupon bond.
20-year, zero coupon bond.
Which of the following bonds will have the greatest percentage increase in value if all interest rates decrease by 1%? 20-year, 5% coupon bond. 1-year, 10% coupon bond. 10-year, zero coupon bond. 20-year, 10% coupon bond. 20-year, zero coupon bond.
20-year, zero coupon bond.
Which of the following bonds will have the greatest percentage increase in value if all interest rates decrease by 1%? 20-year, zero coupon bond. 20-year, 10% coupon bond. 1-year, 10% coupon bond. 20-year, 5% coupon bond. 10-year, zero coupon bond.
20-year, zero coupon bond.
Cold Boxes Ltd. has 100 bonds outstanding (maturity value = $1,000). Their nominal required yield to maturity is 10%, and interest is paid semiannually. The bonds mature in 5 years, and their current market value is $768 per bond. What is the annual coupon interest rate? 8% 2% 6% 0% 4%
4%
Moussawi Ltd's outstanding bonds have a $1,000 par value, and they mature in 5 years. Their yield to maturity is 9%, based on semiannual compounding, and the current market price is $853.61. What is the bond's annual coupon interest rate? 5.30% 5.50% 5.10% 5.40% 5.20%
5.30%
A 12-year, $1,000 face value bond pays a 9% annual coupon and has a yield to maturity of 7.5%. The bond can first be called four years from now, at a call price of $1,050. What is the bond's yield to call? 13.45% 7.10% 7.50% 11.86% 6.73%
6.73%
A 12-year, $1,000 face value bond pays a 9% annual coupon and has a yield to maturity of 7.5%. The bond can first be called four years from now, at a call price of $1,050. What is the bond's yield to call? 13.45% 7.10% 7.50% 6.73% 11.86%
6.73%
A 15-year, 10% semiannual coupon bond has a par value of $1,000. The bond has a nominal yield to call of 6.5%, but may be called after 10 years at a price of $1,050. What is the bond's nominal yield to maturity? 7.10% 6.30% 6.95% 6.75% 5.97%
6.95%
Highfield Inc's bonds currently sell for $1,275 and have a par value of $1,000. They pay a $120 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,120. What is their yield to call (YTC)? 7.31% 7.42% 7.13% 7.00% 7.28%
7.31%
Travis Corp.'s bonds currently sell for $1,050. They have an 8% annual coupon rate and a 20-year maturity, but they can be called in 5 years at $1,120. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. Under these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds? 7.51% 7.71% 8.04% 8.74% 8.47%
7.51%
Travis Corp.'s bonds currently sell for $1,050. They have an 8% annual coupon rate and a 20-year maturity, but they can be called in 5 years at $1,120. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. Under these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds? 8.04% 8.47% 7.71% 7.51% 8.74%
7.51%
A 10-year, $1,000 face value bond has an 8.5% annual coupon. The bond has a current yield of 8%. What is the bond's yield to maturity? 8.25% 7.59% 8.86% 8.50% 8.00%
7.59%
Brown Enterprises' bonds currently sell for $1,025. They have a 9-year maturity, an annual coupon of $80, and a par value of $1,000. What is their yield to maturity?
7.61%
A 10-year, $1,000 face value bond sells for $1,075. The bond has a 9% semiannual coupon and is callable in 5 years and a call price is $1,035. What is the bond's nominal yield to call? 8.00% 7.75% 7.90% 7.19% 8.13%
7.75%
Hood Corporation recently issued 20-year, $1,000 par value bonds that have an 8% semiannual coupon rate. The bonds are callable in 6 years at a price equal to 115% of par value. If the yield to maturity is 7%, what is the yield to call? 8.33% 7.00% 9.89% 10.00% 7.75%
7.75%
Brown Enterprises' bonds currently sell for $1,025. They have a 9-year maturity, an annual coupon of $80, and a par value of $1,000. What is their current yield? 7.80% 7.90% 9.00% 9.20% 9.10%
7.80%
Hastings Motors has 12-year, $1,000 par value bonds that carry an 8% annual coupon. Currently, the bonds sell at a price of $1,025. What will be the percentage increase in the bond's price if the yield to maturity were to immediately fall by one percentage point? 6.9% 8.0% 6.0% 5.7% 7.7%
8.0%
You just purchased a $1,000 par value, 9-year, 7% semiannual coupon bond. The bond sells for $920. What is the nominal yield to maturity? 7.28% 4.13% 8.67% 9.60% 8.28%
8.28%
An 11-year, $1,000 face value bond has an annual coupon rate of 8% and its yield to maturity is 7.5%. The bond can be called 3 years from now at a price of $1,060. What is the bond's nominal yield to call? 7.86% 9.82% 8.38% 8.41% 8.54%
8.41%
An 11-year, $1,000 face value bond has an annual coupon rate of 8% and its yield to maturity is 7.5%. The bond can be called 3 years from now at a price of $1,060. What is the bond's nominal yield to call? 8.41% 8.38% 9.82% 7.86% 8.54% 8.41%
8.41%
A $1,000 face value corporate bond pays a $50 coupon every six months. The bond matures in 12 years and sells at a price of $1,080. What is the bond's nominal yield to maturity? 8.28% 10.78% 8.65% 8.90% 9.31%
8.90%
Bauer Inc's bonds currently sell for $1,275 and have a par value of $1,000. They pay a $120 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,120. What is their yield to maturity (YTM)? 9.15% 8.99% 9.41% 8.78% 9.33%
8.99%
A 12-year, 8.5% annual coupon bond has a yield to maturity of 9.5% and a par value of $1,000. What is the bond's current yield? 8.95% 9.14% 6.36% 10.21% 2.15%
9.14%
Which of the following statements is CORRECT? A discount bond's price declines each year until it matures, when its value equals its par value. If a bond sells for less than par, then its yield to maturity is less than its coupon rate. Assuming that both bonds are held to maturity and are of equal risk, a bond selling for more than par with 10 years to maturity will have a lower current yield and higher capital gain relative to a bond that sells at par. If a bond sells at par, then its current yield will be less than its yield to maturity. A bond's current yield must always be between its yield to maturity and its coupon rate.
A bond's current yield must always be between its yield to maturity and its coupon rate.
Which of the following statements is CORRECT? If a bond sells at par, then its current yield will be less than its yield to maturity. Assuming that both bonds are held to maturity and are of equal risk, a bond selling for more than par with 10 years to maturity will have a lower current yield and higher capital gain relative to a bond that sells at par. If a bond sells for less than par, then its yield to maturity is less than its coupon rate. A discount bond's price declines each year until it matures, when its value equals its par value. A bond's current yield must always be between its yield to maturity and its coupon rate.
A bond's current yield must always be between its yield to maturity and its coupon rate.
Which of the following would be most likely to increase the coupon rate that is required to enable a bond to be issued at par? The rating agencies change the bond's rating from Baa to Aaa. Adding a call provision. Adding additional restrictive covenants that limit management's actions. Adding a sinking fund. Making the bond a first mortgage bond rather than a debenture.
Adding a call provision.
Which of the following statements is CORRECT? If a bond's required rate of return exceeds its coupon rate, the bond will sell at a premium. 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. 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.
All else equal, if a bond's yield to maturity increases, its price will fall.
Which of the following statements is NOT CORRECT? . All else equal, high-coupon bonds have more reinvestment rate risk than lowcoupon bonds. All else equal, long-term bonds have more reinvestment rate risk than short-term bonds. All else equal, low-coupon bonds have more interest rate risk than high-coupon bonds. All else equal, long-term bonds have more interest rate risk than short-term bonds. All else equal, short-term bonds have more reinvestment rate risk than do longterm bonds.
All else equal, long-term bonds have more reinvestment rate risk than short-term bonds
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? Over the next year, 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. Bond A's current yield will increase each year. 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. Bond C sells at a premium (its price is greater than par), and its price is expected to increase over the next year. Bond A sells at a discount (its price is less than par), and its price is expected to increase over the next year.
Bond A sells at a discount (its price is less than par), and its price is expected to increase over the next year.
Bond A has a 9% annual coupon, while Bond B has a 7% annual coupon. Both bonds have the same maturity, a face value of $1,000, and an 8% yield to maturity. Which of the following statements is CORRECT? Bond A's capital gains yield is greater than Bond B's capital gains yield. Bond A trades at a discount, whereas Bond B trades at a premium. If the yield to maturity for both bonds immediately decreases to 6%, Bond A's bond will have a larger percentage increase in value. Bond A's current yield is greater than Bond B's current yield. If the yield to maturity for both bonds remains at 8%, Bond A's price one year from now will be higher than it is today, but Bond B's price one year from now will be lower than it is today.
Bond A's current yield is greater than Bond B's current yield.
Which of the following statements is CORRECT? Convertible bonds have lower coupon rates than non-convertible bonds of similar default risk because they offer the possibility of capital gains. Subordinated debt has less default risk than senior debt. Junk bonds typically provide a lower yield to maturity than investment grade bonds. A debenture is a secured bond that is backed by some or all of the firm's fixed assets. Senior debt is debt that has been more recently issued, and in bankruptcy it is paid off after junior debt because the junior debt was issued first.
Convertible bonds have lower coupon rates than non-convertible bonds of similar default risk because they offer the possibility of capital gains.
A 12-year, 8% annual coupon bond has a face value of $1,000 and sells for $985. What is the bond's current yield and yield to maturity? Current yield = 8.12%; YTM = 8.20% Current yield = 8.20%; YTM = 8.37% Current yield = 8.12%; YTM = 7.92% Current yield = 8.00%; YTM = 7.92% Current yield = 8.12%; YTM = 8.37%
Current yield = 8.12%; YTM = 8.20%
Meade Corporation has 6-year, $1,000 par value bonds that have a yield to maturity of 8.5% and a 10% annual coupon rate. What are the current and capital gains yields on the bonds for this year? Current yield = 8.50%; capital gains yield = 1.50% Current yield = 9.35%; capital gains yield = 0.65% Current yield = 10.00%; capital gains yield = 0.00% Current yield = 9.36%; capital gains yield = -0.86% Current yield = 10.50%; capital gains yield = -1.50%
Current yield = 9.36%; capital gains yield = -0.86%
A company is planning to raise $1,000,000 to finance a new plant. Which of the following statements is CORRECT? If debt is used to raise the million dollars, but $500,000 is raised as a first mortgage bond 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. If debt is used to raise the million dollars, the cost of the debt would be lower if the debt is in the form of a fixed rate bond rather than a floating rate bond. The company would be especially anxious 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. If debt is used to raise the million dollars, the cost of the debt would be lower if the debt is in the form of a bond rather than a term loan. If two tiers of debt are used (with one senior and one subordinated debt class), the subordinated debt will carry a lower interest rate.
If debt is used to raise the million dollars, but $500,000 is raised as a first mortgage bond 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.
Assume that a 10-year Treasury bond has a 12% annual coupon, while a 15-year T-bond has an 8% annual coupon. The yield curve is flat, and all Treasury securities have a 10% yield to maturity. Which of the following statements is CORRECT? The 10-year bond would sell at par, while the 15-year bond would sell at a discount. If interest rates decline, the price of both bonds will increase, but the 15-year bond will have a larger percentage increase in price. The 10-year bond would sell at a premium, while the 15-year bond would sell at par. The 10-year bond would sell at a discount, while the 15-year bond would sell at a premium. If the yield to maturity on both bonds remains at 10% over the next year, the price of the 10-year bond will increase, but the price of the 15-year bond will fall.
If interest rates decline, the price of both bonds will increase, but the 15-year bond will have a larger percentage increase in price.
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 of the following statements is CORRECT? If market interest rates decline, all of the bonds will have an increase in price, and Bond Z will have the largest percentage increase in price. 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. If market interest rates remain at 10%, Bond Z's price will be 10% higher one year from today. Bond X has the greatest reinvestment rate risk. If market interest rates remain at 10%, Bond Z's price will be lower one year from now than it is today.
If market interest rates remain at 10%, Bond Z's price will be lower one year from now than it is today.
A Treasury bond has an 8% annual coupon and a 7.5% yield to maturity. Which of the following statements is CORRECT? The bond's required rate of return is less than 7.5%. If the yield to maturity remains constant, the price of the bond will decline over time. The bond has a current yield greater than 8%. The bond sells at a price below par. The bond sells at a discount
If the yield to maturity remains constant, the price of the bond will decline over time.
Which of the following statements is CORRECT? A firm with a sinking fund payment coming due would generally choose to buy back bonds in the open market if the price of the bond exceeds the sinking fund call price. Income bonds pay interest only when the company earns the amount of 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. One disadvantage of zero coupon bonds is that issuing firms cannot realize any tax savings from issuing debt until the bonds mature. Once a firm declares bankruptcy, it is liquidated by the trustee, who uses the proceeds to pay bondholders, unpaid wages, taxes, and lawyer fees. Other things held constant, a callable bond should have a lower yield to maturity than a noncallable bond.
Income bonds pay interest only when the company earns the amount of 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.
Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds? . Inflation increases significantly. Market interest rates decline sharply. The company's bonds are downgraded. The company's financial situation deteriorates significantly. Market interest rates rise sharply.
Market interest rates decline sharply
Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds? Inflation increases significantly. The company's bonds are downgraded. The company's financial situation deteriorates significantly. Market interest rates rise sharply. Market interest rates decline sharply.
Market interest rates decline sharply.
Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds? The company's financial situation deteriorates significantly. The company's bonds are downgraded. Market interest rates decline sharply. Market interest rates rise sharply. Inflation increases significantly.
Market interest rates decline sharply.
An investor is considering buying one of two 10-year, $1,000 face value bonds: Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon. Both bonds have a yield to maturity of 8%, which is expected to remain constant for the next 10 years. Which of the following statements is CORRECT? Both bonds have the same price today, and the price of each bond is expected to remain constant until the bonds mature. One year from now, Bond A's price will be higher than it is today. Bond A's current yield is greater than 8%. Bond B has a higher price than Bond A today, but one year from now the bonds will have the same price as each other. Bond A has a higher price than Bond B today, but one year from now the bonds will have the same price as each other.
One year from now, Bond A's price will be higher than it is today.
Which of the following statements is CORRECT? Long-term bonds have less interest rate price risk and also less reinvestment rate risk than short-term bonds. Long-term bonds have less interest rate price risk but more reinvestment rate risk than short-term bonds. If interest rates increase, all bond prices will increase, but the increase will be greater for bonds that have less interest rate risk. Relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more interest rate risk but less reinvestment rate risk. 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.
Relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more interest rate risk but less reinvestment rate risk.
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 yield to maturity is 9%. The bond's capital gains yield is positive. If the bond's yield to maturity remains constant, the bond's price will remain at par. The bond's current yield exceeds its capital gains yield. The bond's current yield is 9%.
The bond's 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? If the yield to maturity stays constant until the bond matures, the bond's price will remain at $850. The bond's coupon rate exceeds its current yield. The bond's current yield exceeds its yield to maturity. The bond's current yield is equal to its coupon rate. The bond's yield to maturity is greater than its coupon rate.
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, which is expected to remain constant. Which of the following statements is CORRECT? The prices of both bonds will increase by 7% per year. The prices of both bonds will increase over time, but the price of Bond A will increase by more. The price of Bond A will decrease over time, but the price of Bond B will increase over time. The prices of both bonds will remain unchanged. The price of Bond B will decrease over time, but the price of Bond A will increase over time.
The price of Bond A will decrease over time, but the price of Bond B will increase over time.
Which of the following statements is CORRECT? 10-year, zero coupon bonds have higher reinvestment rate risk than 10-year, 10% coupon bonds. The price of a 20-year, 10% bond is less sensitive to changes in interest rates than the price of a 5-year, 10% bond. A $1,000 bond with $100 annual interest payments with five years to maturity (not expected to default) would sell for a discount if interest rates were below 9% and would sell for a premium if interest rates were greater than 11%. A 10-year, 10% coupon bond has less reinvestment rate risk than a 10-year, 5% coupon bond (assuming all else equal). The total return on a bond for a given year arises from both the coupon interest payments received for the year and the change in the value of the bond from the beginning to the end of the year.
The total return on a bond for a given year arises from both the coupon interest payments received for the year and the change in the value of the bond from the beginning to the end of the year.
