A) If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price regardless of their coupon rates.
B) All else equal, an increase in interest rates will have a greater effect on the prices of short-term than long-term bonds.
C) All else equal, an increase in interest rates will have a greater effect on higher-coupon bonds than it will have on lower-coupon bonds.
D) If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value.
E) If a bond's yield to maturity exceeds its coupon rate, the bond's current yield must be less than its coupon rate.
G) D) and E)
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A) If inflation is expected to increase in the future, and if the maturity risk premium (MRP) is greater than zero, then the Treasury yield curve will have an upward slope.
B) If the maturity risk premium (MRP) is greater than zero, then the yield curve must have an upward slope.
C) Because long-term bonds are riskier than short-term bonds, yields on long-term Treasury bonds will always be higher than yields on short-term T-bonds.
D) If the maturity risk premium (MRP) equals zero, the yield curve must be flat.
E) The yield curve can never be downward sloping.
G) C) and D)
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A) If the bonds' market interest rate remains at 10%, Bond Z's price will be lower one year from now than it is today.
B) Bond X has the greatest reinvestment rate risk.
C) If market interest rates decline, the prices of all three bonds will increase, but Z's price will have the largest percentage increase.
D) If market interest rates remain at 10%, Bond Z's price will be 10% higher one year from today.
E) 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.
G) C) and E)
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B) False
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B) False
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B) False
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A) The bond sells at a price below par.
B) The bond has a current yield greater than 8%.
C) The bond sells at a discount.
D) The bond's required rate of return is less than 7.5%.
E) If the yield to maturity remains constant, the price of the bond will decline over time.
G) C) and D)
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A) All else equal, senior debt generally has a lower yield to maturity than subordinated debt.
B) An indenture is a bond that is less risky than a mortgage bond.
C) The expected return on a corporate bond will generally exceed the bond's yield to maturity.
D) If a bond's coupon rate exceeds its yield to maturity, then its expected return to investors will also exceed its yield to maturity.
E) Under our bankruptcy laws, any firm that is in financial distress will be forced to declare bankruptcy and then be liquidated.
G) A) and D)
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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%.
G) B) and C)
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B) False
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A) One disadvantage of zero coupon bonds is that the issuing firm cannot realize any tax savings from the use of debt until the bonds mature.
B) Other things held constant, a callable bond should have a lower yield to maturity than a noncallable bond.
C) Once a firm declares bankruptcy, it must be liquidated by the trustee, who uses the proceeds to pay bondholders, unpaid wages, taxes, and legal fees.
D) Income bonds must pay interest only if the company earns 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.
E) A firm with a sinking fund that gives it the choice of calling the required bonds at par or buying the bonds in the open market would generally choose the open market purchase if the coupon rate exceeded the going interest rate.
G) C) and D)
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B) False
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A) If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices.
B) The total yield on a bond is derived from dividends plus changes in the price of the bond.
C) Bonds are generally regarded as being riskier than common stocks, and therefore bonds have higher required returns.
D) Bonds issued by larger companies always have lower yields to maturity (due to less risk) than bonds issued by smaller companies.
E) The market price of a bond will always approach its par value as its maturity date approaches, provided the bond's required return remains constant.
G) B) and E)
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B) False
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B) False
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B) False
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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.
G) A) and B)
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A) Bond A's capital gains yield is greater than Bond B's capital gains yield.
B) Bond A trades at a discount, whereas Bond B trades at a premium.
C) 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.
D) If the yield to maturity for both bonds immediately decreases to 6%, Bond A's bond will have a larger percentage increase in value.
E) Bond A's current yield is greater than that of Bond B.
G) A) and E)
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A) 5.78%
B) 6.09%
C) 6.39%
D) 6.71%
E) 7.05%
G) B) and E)
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B) False
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