Question 1

Which of the following statements best describes bond yields?

Accepted Answer

A)   If a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity.
B)   On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss.
C)   If a coupon bond is selling at par, its current yield equals its yield to maturity.
D)   The current yield on Bond A exceeds the current yield on Bond B; therefore, Bond A must have a higher yield to maturity than Bond B.E) C) and D)
F) A) and D)

Question 2

A government bond has an 8% annual coupon and a 7.5% yield to maturity. Which of the following statements is correct?

Accepted Answer

A)   The bond sells at a price below par.
B)   The bond has a current yield greater than 8%.
C)   The bond's required rate of return is less than 7.5%.
D)   If the yield to maturity remains constant, the price of the bond will decline over time.E) All of the above
F) C) and D)

Question 3

Listed below are some provisions that are often contained in bond indentures. Which of these provisions, viewed alone, would tend to REDUCE the yield to maturity that investors would otherwise require on a newly issued bond? 1. Fixed assets are used as security for a bond.
2)  A given bond is subordinated to other classes of debt.
3)  The bond can be converted into the firm's common stock.
4)  The bond has a sinking fund.
5)  The bond has a call provision.
6)  The indenture contains covenants that prevent the use of additional debt.

Accepted Answer

A)   1, 3, 4, 6
B)   1, 4, 6
C)   1, 2, 3, 4, 6
D)   1, 3, 4, 5, 6E) B) and D)
F) B) and C)

Question 4

A company is planning to raise $1 million to finance a new plant. Which of the following best describes the cost of debt?

Accepted Answer

A)   The company would be especially eager 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.
B)   If debt is used to raise the $1 million, with $500,000 as first mortgage bonds on the new plant and $500,000 as debentures, the interest rate would be lower than it would be if the entire $1 million were raised by selling first mortgage bonds.
C)   If two tiers of debt are used (with one senior and one subordinated debt class) , the subordinated debt will carry a lower interest rate.
D)   If debt is used to raise the $1 million, the cost of the debt would be lower if the debt were in the form of a fixed-rate bond rather than a floating-rate bond.E) None of the above
F) A) and B)

Question 5

Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, generally be subject to much more interest rate price risk if you purchased a 30-day bond than if you bought a 30-year bond.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following statements best describes bonds?

Accepted Answer

A)   If a coupon bond is selling at par, its current yield equals its yield to maturity.
B)   If rates fall after its issue, a zero coupon bond could trade at a price above its par value.
C)   If rates fall rapidly, a zero coupon bond's expected appreciation could become negative.
D)   If a firm moves from a position of strength toward financial distress, its bonds' yield to maturity would probably decline.E) None of the above
F) A) and C)

Question 7

Garvin Enterprises' bonds currently sell for $1,150. They have a 6-year maturity, an annual coupon of $85, and a par value of $1,000. What is their current yield?

Accepted Answer

A)   7.39%
B)   7.76%
C)   8.15%
D)   8.56%E) None of the above
F) A) and B)

Question 8

As a general rule, a company's debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured.

Accepted Answer

A) True 
 B)False

Question 9

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements best describes bonds?

Accepted Answer

A)   The bond is selling below its par value.
B)   The bond is selling at a discount.
C)   If the yield to maturity remains constant, the bond's price 1 year from now will be lower than its current price.
D)   The bond's current yield is greater than 9%.E) A) and D)
F) All of the above

Question 10

Which of the following statements best describes interest rates?

Accepted Answer

A)   You hold two bonds. One is a 10-year, zero coupon, issue and the other is a 10-year bond that pays 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.
B)   The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.
C)   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.
D)   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.E) None of the above
F) A) and D)

Question 11

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

Accepted Answer

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) A) and B)
F) None of the above

Question 12

Assume that you are considering the purchase of a 15-year bond with an annual coupon rate of 9.5%. The bond has face value of $1,000 and makes semiannual interest payments. If you require an 11.0% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

Accepted Answer

A)   $891.00
B)   $913.27
C)   $936.10
D)   $959.51E) C) and D)
F) A) and C)

Question 13

Bonds A, B, and C all have a maturity of 10 years and a yield to maturity of 7%. Bond A's price exceeds its par value, Bond B's price equals its par value, and Bond C's price is less than its par value. Which of the following statements best describes bonds?

Accepted Answer

A)   If the yield to maturity on each bond decreases to 6%, Bond A will have the largest percentage increase in its price.
B)   Bond A has the most interest rate risk.
C)   If the yield to maturity on the three bonds remains constant, the prices of the three bonds will remain the same over the next year.
D)   If the yield to maturity on each bond increases to 8%, the prices of all three bonds will decline.E) B) and C)
F) All of the above

Question 14

Which of the following statements best describes rate risk?

Accepted Answer

A)   A zero coupon bond of any maturity will have more interest rate price risk than any coupon bond, even a perpetuity.
B)   If their maturities and other characteristics were the same, a 5% coupon bond would have more interest rate price risk than a 10% coupon bond.
C)   A 10-year coupon bond would have more reinvestment rate risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of reinvestment rate risk.
D)   If their maturities and other characteristics were the same, a 5% coupon bond would have less interest rate price risk than a 10% coupon bond.E) A) and D)
F) B) and C)

Question 15

A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements best describes bond yields?

Accepted Answer

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 remains at 8%, then the bond's price will remain constant over the next year.E) B) and C)
F) A) and B)

Question 16

Which of the following statements best describes bond yields?

Accepted Answer

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) None of the above
F) All of the above

Question 17

Which of the following is more likely to occur a a 100 basis point drop in yield occurs?

Accepted Answer

A)   It creates a larger impact on bond prices when yields are high.
B)   It creates a larger impact on bond prices when yields are low.
C)   It will have the same impact on bond prices regardless whether yields are high or low.
D)   It will cause bond prices to fall in general.E) None of the above
F) B) and C)

Question 18

A bond that is callable has a chance of being retired earlier than its stated term to maturity. Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

Accepted Answer

A) True 
 B)False

Question 19

A bond that had a 20-year original maturity with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity. (Assume that the bonds have equal default risk and equal coupon rates, and they cannot be called.)

Accepted Answer

A) True 
 B)False

Exam 6: Bonds, Bond Valuation, and Interest Rates

A bond that is callable has a chance of being retired earlier than its stated term to maturity. Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

Correct Answer
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Garvin Enterprises' bonds currently sell for $1,150. They have a 6-year maturity, an annual coupon of $85, and a par value of $1,000. What is their current yield?

Correct Answer
verified

A company is planning to raise $1 million to finance a new plant. Which of the following best describes the cost of debt?

Correct Answer
verified

Which of the following statements best describes bonds?

Correct Answer
verified

As a general rule, a company's debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured.

Correct Answer
verified

Correct Answer
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Which of the following statements best describes interest rates?

Correct Answer
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Which of the following statements best describes rate risk?

Correct Answer
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A government bond has an 8% annual coupon and a 7.5% yield to maturity. Which of the following statements is correct?

Correct Answer
verified

Which of the following is more likely to occur a a 100 basis point drop in yield occurs?

Correct Answer
verified

Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, generally be subject to much more interest rate price risk if you purchased a 30-day bond than if you bought a 30-year bond.

Correct Answer
verified

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

Correct Answer
verified

Which of the following statements best describes bond yields?

Correct Answer
verified

A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements best describes bond yields?

Correct Answer
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Bonds A, B, and C all have a maturity of 10 years and a yield to maturity of 7%. Bond A's price exceeds its par value, Bond B's price equals its par value, and Bond C's price is less than its par value. Which of the following statements best describes bonds?

Correct Answer
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Which of the following statements best describes bond yields?

Correct Answer
verified

A bond that had a 20-year original maturity with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity. (Assume that the bonds have equal default risk and equal coupon rates, and they cannot be called.)

Correct Answer
verified

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements best describes bonds?

Correct Answer
verified

Correct Answer
verified

Exam 6: Bonds, Bond Valuation, and Interest Rates

A bond that is callable has a chance of being retired earlier than its stated term to maturity. Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

Correct AnswerverifiedShow Answer

Garvin Enterprises' bonds currently sell for $1,150. They have a 6-year maturity, an annual coupon of $85, and a par value of $1,000. What is their current yield?

Correct AnswerverifiedShow Answer

A company is planning to raise $1 million to finance a new plant. Which of the following best describes the cost of debt?

Correct AnswerverifiedShow Answer

Which of the following statements best describes bonds?

Correct AnswerverifiedShow Answer

As a general rule, a company's debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements best describes interest rates?

Correct AnswerverifiedShow Answer

Which of the following statements best describes rate risk?

Correct AnswerverifiedShow Answer

A government bond has an 8% annual coupon and a 7.5% yield to maturity. Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Which of the following is more likely to occur a a 100 basis point drop in yield occurs?

Correct AnswerverifiedShow Answer

Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, generally be subject to much more interest rate price risk if you purchased a 30-day bond than if you bought a 30-year bond.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements best describes bond yields?

Correct AnswerverifiedShow Answer

A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements best describes bond yields?

Correct AnswerverifiedShow Answer

Bonds A, B, and C all have a maturity of 10 years and a yield to maturity of 7%. Bond A's price exceeds its par value, Bond B's price equals its par value, and Bond C's price is less than its par value. Which of the following statements best describes bonds?

Correct AnswerverifiedShow Answer

Which of the following statements best describes bond yields?

Correct AnswerverifiedShow Answer

A bond that had a 20-year original maturity with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity. (Assume that the bonds have equal default risk and equal coupon rates, and they cannot be called.)

Correct AnswerverifiedShow Answer

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements best describes bonds?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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