Question 1

There is an inverse relationship between bonds' quality ratings and their required rates of return.

Accepted Answer

A) True 
 B)False

Question 2

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.)

Accepted Answer

A) True 
 B)False

Question 3

A 15-year corporate bond was issued 10 years ago. What is it today?

Accepted Answer

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

Question 4

A 12-year bond has an annual coupon rate of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which statement regarding the bond's price is true?

Accepted Answer

A)   If market interest rates decline, the price of the bond will also decline.
B)   The bond is currently selling at a price below its par value.
C)   If market interest rates remain unchanged, the bond's price one year from now will be lower than it is today.
D)   The bond should currently be selling at its par value.E) None of the above
F) A) and B)

Question 5

Which of the following is NOT an action or consequence of the activities of bond rating agencies?

Accepted Answer

A)   In assessing the rating, the agency examines financial ratios, contract terms (restrictive covenants) , and important qualitative factors.
B)   When a material change is identified in any of the factors used to measure a bond's default risk, the agency will immediately announce a change in the rating.
C)   With respect to qualitative factors, the agency will pay particular attention to ratios, measuring return on assets, interest coverage, and operating profit margins.
D)   While it is the mandate of the agency to report on the credit worthiness of securities held by bondholders, their findings are also relevant to the firm's shareholders.E) A) and B)
F) B) and C)

Question 6

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 7

Which statement regarding interest rate risk is true?

Accepted Answer

A)   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.
B)   Long-term bonds have less interest rate price risk but more reinvestment rate risk than short-term bonds.
C)   If interest rates increase, all bond prices will increase, but the increase will be greater for bonds that have less interest rate risk.
D)   Relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more interest rate price risk but less reinvestment rate risk.E) C) and D)
F) B) and D)

Question 8

If the yield to maturity is 5.5%, what is the price of a 15-year, zero-coupon bond with a par value of $1,000?

Accepted Answer

A)   $413.35
B)   $429.48
C)   $447.93
D)   $469.72E) All of the above
F) B) and C)

Question 9

Under normal conditions, which action would be most likely to increase the coupon rate required to enable a bond to be issued at par?

Accepted Answer

A)   adding additional restrictive covenants that limit management's actions
B)   adding a call provision
C)   the rating agencies changing the bond's rating from Baa to Aaa
D)   adding a sinking fundE) A) and D)
F) B) and D) B

Question 10

Maple bonds are issued by the government of Canada in Canadian dollars but only sold to foreign investors.

Accepted Answer

A) True 
 B)False

Question 11

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

Question 12

Which statement regarding sinking funds is true?

Accepted Answer

A)   Sinking fund provisions sometimes adversely affect bondholders, and this is most likely to occur if interest rates decline after the bond has been issued.
B)   Most sinking funds require the issuer to provide funds to a trustee, which saves the money so that it will be available to pay off bondholders when the bonds mature.
C)   A sinking fund provision makes a bond more risky to investors at the time of issuance.
D)   Sinking fund provisions never require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time.E) B) and C)
F) A) and C)

Question 13

The market value of any financial asset may be estimated by determining future cash flows and then discounting them back to the present.

Accepted Answer

A) True 
 B)False  True

Question 14

What does the yield to maturity on bonds refer to?

Accepted Answer

A)   the number of years before the bond's maturity
B)   the amount of interest income received by investors each year
C)   the promised rate of return on the bonds if purchased at current price and held to maturity
D)   the capital gain that investors can get in relation to the average industry price of the bondsE) C) and D)
F) A) and B)

Question 15

A zero coupon bond is a bond that pays no interest and is offered (and subsequently sells initially) at par. These bonds provide compensation to investors in the form of capital appreciation.

Accepted Answer

A) True 
 B)False

Question 16

Which statement regarding bonds is true?

Accepted Answer

A)   10-year, zero coupon bonds have higher reinvestment rate risk than 10-year, 10% coupon bonds.
B)   A 10-year, 10% coupon bond has less reinvestment rate risk than a 10-year, 5% coupon bond (assuming all else is equal) .
C)   The total return on a bond during a given year is the sum of the coupon interest payments received during the year and the change in the value of the bond from the beginning to the end of the year.
D)   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.E) A) and D)
F) B) and C)

Question 17

Suppose a Chinese company in Canada issues a bond that is denominated in Canadian dollars. What is this an example of?

Accepted Answer

A)   a domestic bond
B)   a global bond
C)   a foreign bond
D)   a EurobondE) A) and B)
F) B) and C)

Question 18

If 10-year T-bonds have a yield of 6.2%, 10-year corporate bonds yield 8.5%, the maturity risk premium on all 10-year bonds is 1.3%, and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond?

Accepted Answer

A)   1.90%
B)   2.09%
C)   2.30%
D)   2.53%E) All of the above
F) None of the above A

Question 19

Other things being equal, a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

Accepted Answer

A) True 
 B)False

Question 20

Which event would make it more likely that a company would choose to call its outstanding callable bonds?

Accepted Answer

A)   The company's bonds are downgraded.
B)   Market interest rates decline sharply.
C)   The company's financial situation deteriorates significantly.
D)   Inflation increases significantly.E) A) and B)
F) A) and D)

Exam 6: Bonds, Bond Valuation, and Interest Rates

There is an inverse relationship between bonds' quality ratings and their required rates of return.

Correct Answer
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Correct Answer
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A 15-year corporate bond was issued 10 years ago. What is it today?

Correct Answer
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A 12-year bond has an annual coupon rate of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which statement regarding the bond's price is true?

Correct Answer
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Which of the following is NOT an action or consequence of the activities of bond rating agencies?

Correct Answer
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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
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Which statement regarding interest rate risk is true?

Correct Answer
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If the yield to maturity is 5.5%, what is the price of a 15-year, zero-coupon bond with a par value of $1,000?

Correct Answer
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Under normal conditions, which action would be most likely to increase the coupon rate required to enable a bond to be issued at par?

Correct Answer
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B

Maple bonds are issued by the government of Canada in Canadian dollars but only sold to foreign investors.

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
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Which statement regarding sinking funds is true?

Correct Answer
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The market value of any financial asset may be estimated by determining future cash flows and then discounting them back to the present.

Correct Answer
verified
True

What does the yield to maturity on bonds refer to?

Correct Answer
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A zero coupon bond is a bond that pays no interest and is offered (and subsequently sells initially) at par. These bonds provide compensation to investors in the form of capital appreciation.

Correct Answer
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Which statement regarding bonds is true?

Correct Answer
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Suppose a Chinese company in Canada issues a bond that is denominated in Canadian dollars. What is this an example of?

Correct Answer
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If 10-year T-bonds have a yield of 6.2%, 10-year corporate bonds yield 8.5%, the maturity risk premium on all 10-year bonds is 1.3%, and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond?

Correct Answer
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A

Other things being equal, a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

Correct Answer
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Which event would make it more likely that a company would choose to call its outstanding callable bonds?

Correct Answer
verified

Exam 6: Bonds, Bond Valuation, and Interest Rates

There is an inverse relationship between bonds' quality ratings and their required rates of return.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A 15-year corporate bond was issued 10 years ago. What is it today?

Correct AnswerverifiedShow Answer

A 12-year bond has an annual coupon rate of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which statement regarding the bond's price is true?

Correct AnswerverifiedShow Answer

Which of the following is NOT an action or consequence of the activities of bond rating agencies?

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

Which statement regarding interest rate risk is true?

Correct AnswerverifiedShow Answer

If the yield to maturity is 5.5%, what is the price of a 15-year, zero-coupon bond with a par value of $1,000?

Correct AnswerverifiedShow Answer

Under normal conditions, which action would be most likely to increase the coupon rate required to enable a bond to be issued at par?

Correct AnswerverifiedB

Maple bonds are issued by the government of Canada in Canadian dollars but only sold to foreign investors.

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

Which statement regarding sinking funds is true?

Correct AnswerverifiedShow Answer

The market value of any financial asset may be estimated by determining future cash flows and then discounting them back to the present.

Correct AnswerverifiedTrue

What does the yield to maturity on bonds refer to?

Correct AnswerverifiedShow Answer

A zero coupon bond is a bond that pays no interest and is offered (and subsequently sells initially) at par. These bonds provide compensation to investors in the form of capital appreciation.

Correct AnswerverifiedShow Answer

Which statement regarding bonds is true?

Correct AnswerverifiedShow Answer

Suppose a Chinese company in Canada issues a bond that is denominated in Canadian dollars. What is this an example of?

Correct AnswerverifiedShow Answer

If 10-year T-bonds have a yield of 6.2%, 10-year corporate bonds yield 8.5%, the maturity risk premium on all 10-year bonds is 1.3%, and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond?

Correct AnswerverifiedA

Other things being equal, a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

Correct AnswerverifiedShow Answer

Which event would make it more likely that a company would choose to call its outstanding callable bonds?

Correct AnswerverifiedShow Answer

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B

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True

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A

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