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Cosmic Communications Inc.is planning two new issues of 25-year bonds.Bond Par will be sold at its $1,000 par value,and it will have a 10% semiannual coupon.Bond OID will be an original issue discount bond,and it will also have a 25-year maturity and a $1,000 par value,but its semiannual coupon will be only 6.25%.If both bonds are to provide investors with the same effective yield,how many of the OID bonds must Cosmic issue to raise $3,000,000? Disregard flotation costs,and round your final answer up to a whole number of bonds.


A) 4,228
B) 4,337
C) 4,448
D) 4,562

E) B) and C)
F) A) and D)

Correct Answer

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Zumwalt Corporation's Class S bonds have a 12-year maturity,$1,000 par value,and a 5.75% coupon paid semiannually (2.875% each 6 months) ,and those bonds sell at their par value.Zumwalt's Class A bonds have the same risk,maturity,and par value,but the A bonds pay a 5.75% annual coupon.Neither bond is callable.At what price should the annual payment bond sell?


A) $943.98
B) $968.18
C) $993.01
D) $1,017.83

E) None of the above
F) B) and C)

Correct Answer

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Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise.Since floating-rate debt shifts interest rate risk to companies,it offers no advantages to issuers.

A) True
B) False

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Which statement regarding callable bonds is true?


A) Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is below the coupon rate than if it is above the coupon rate.
B) Corporate treasurers dislike issuing callable bonds because these bonds may require the company to raise additional funds earlier than would be true if noncallable bonds with the same maturity were used.
C) Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is above the coupon rate than if it is below the coupon rate.
D) The actual life of a callable bond will always be equal to or less than the actual life of a noncallable bond with the same maturity. Therefore, if the yield curve is upward sloping, the required rate of return will be lower on the callable bond.

E) None of the above
F) All of the above

Correct Answer

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Under no circumstances are bondholders allowed to turn in their holdings unless the bonds are retractable.

A) True
B) False

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If the required rate of return on a bond (rd) is greater than its coupon interest rate and will remain above that rate,then the market value of the bond will always be below its par value until the bond matures,at which time its market value will equal its par value.(Accrued interest between interest payment dates should not be considered when answering this question.)

A) True
B) False

Correct Answer

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Which of the following explains why debentures have higher required interest rates than mortgage bonds?


A) Mortgage bonds are backed by specific assets, in contrast to debentures that are unsecured.
B) Debentures pay higher coupon payments given their relative higher risk profile due to their unsecured nature.
C) Debentures have greater potential of loss due to a lack of collateral and thus offer higher coupon payments.
D) All of the above explain why debentures carry higher interest rates.

E) B) and D)
F) A) and B)

Correct Answer

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Which of the following statements is correct?


A) The total return on a bond during a given year consists only of the coupon interest payments received.
B) The price of a discount bond will increase over time, assuming that the bond's yield to maturity remains constant.
C) For a given firm, its debentures are likely to have a lower yield to maturity than its mortgage bonds.
D) When large firms are in financial distress, they are almost always liquidated, whereas smaller firms are generally reorganized.

E) A) and B)
F) A) and C)

Correct Answer

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What is a bond that offers investors a variable rate coupon payment?


A) coupon bond
B) floating rate bond
C) zero coupon bond
D) variable rate perpetuity

E) B) and C)
F) All of the above

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Company A has a bond outstanding that pays a 6% coupon.The interest is paid annually and the bond matures in 10 years.The market rate of interest on bonds of similar risk is 5% and the bond is selling for $1,077.32.One year from today,the bond is expected to be selling for $1,071.08.What is the rate of return for the bondholder?


A) -0.0579%
B) 5.0000%
C) 5.6018%
D) 6.0000%

E) A) and B)
F) All of the above

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?


A) 7.39%
B) 7.76%
C) 8.15%
D) 8.56%

E) A) and B)
F) A) and C)

Correct Answer

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The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds,other things held constant.

A) True
B) False

Correct Answer

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Which statement regarding bond maturity is true?


A) Any maturity is legally permissible.
B) The longest term of maturity for corporate bonds is 50 years.
C) Real return bonds have the shortest term of maturity.
D) Perpetuity bonds must have a specified maturity date.

E) C) and D)
F) B) and C)

Correct Answer

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A 10-year corporate bond was issued 5 years ago.What is it today?


A) a long-term bond with 5 years to maturity
B) a medium-term bond with 5 years to maturity
C) a long-term bond with 15 years to maturity
D) a medium-term bond with 15 years to maturity

E) B) and D)
F) A) and D)

Correct Answer

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Current yield is calculated by dividing a bond's coupon payment by which of the following?


A) yield to maturity
B) Its discounted price
C) Its coupon rate
D) Its market price

E) A) and D)
F) All of the above

Correct Answer

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A government bond has an 8% annual coupon and a 7.5% yield to maturity.Which statement regarding this bond is correct?


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) A) and C)
F) B) and D)

Correct Answer

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Which of the following statements is correct?


A) All else being equal, secured debt is more risky than unsecured debt.
B) The expected return on a corporate bond must be more than its promised return if the probability of default is greater than zero.
C) All else being equal, senior debt has more default risk than subordinated debt.
D) A company's bond rating is affected by its financial ratios and provisions in its indenture.

E) B) and C)
F) All of the above

Correct Answer

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WAn upward sloping yield curve is often referred to as a:


A) Abnormal curve
B) Flat curve
C) Normal curve
D) Liquidity curve

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

Correct Answer

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Which statement regarding yield is true?


A) A bond's current yield must always be either equal to its yield to maturity or between its yield to maturity and its coupon rate.
B) If a bond sells at par, then its current yield will be less than its yield to maturity.
C) If a bond sells for less than par, then its yield to maturity is less than its coupon rate.
D) A discount bond's price declines each year until it matures, when its value equals its par value.

E) A) and D)
F) None of the above

Correct Answer

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Which statement regarding reinvestment rate risk is true?


A) All else equal, high-coupon bonds have less reinvestment rate risk than low-coupon bonds.
B) All else equal, low-coupon bonds have less reinvestment rate risk than high-coupon bonds.
C) All else equal, short-term bonds have less reinvestment rate risk than long-term bonds.
D) All else equal, long-term bonds have less reinvestment rate risk than short-term bonds.

E) B) and C)
F) A) and D)

Correct Answer

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