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Bond spread is the premium in interest rate that must be paid on a security that carries some risk that the issuer may not be able to meet all of its debt servicing obligations.

A) True
B) False

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Quigley Inc.'s bonds currently sell for $1,080 and have a par value of $1,000. They pay a $100 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,125. What is their yield to maturity (YTM) ?


A) 8.56%
B) 9.01%
C) 9.46%
D) 9.93%

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

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Suppose a new company decides to raise a total of $200 million, with $100 million as common equity and $100 million as long-term debt. The debt can be mortgage bonds or debentures, but by an ironclad provision in its charter, the company can never raise any additional debt beyond the original $100 million. Given these conditions, which of the following statements is correct?


A) The higher the percentage of debt represented by mortgage bonds, the riskier both types of bonds will be and, consequently, the higher the firm's total dollar interest charges will be.
B) If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds, we could be certain that the firm's total interest expense would be lower than if the debt were raised by issuing $100 million of debentures.
C) In this situation, we cannot tell for sure how, or whether, the firm's total interest expense on the $100 million of debt would be affected by the mix of debentures versus first mortgage bonds. The interest rate on each of the two types of bonds would increase as the percentage of mortgage bonds used was increased, but the result might well be such that the firm's total interest charges would not be affected materially by the mix between the two.
D) The higher the percentage of debentures, the greater the risk borne by each debenture, and thus the higher the required rate of return on the debentures.

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

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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) None of the above
F) C) and D)

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Which statement regarding bonds is true?


A) The total yield on a bond is derived from dividends plus changes in the price of the bond.
B) Bonds are riskier than common stocks and therefore have higher required returns.
C) Bonds issued by larger companies always have lower yields to maturity (less risk) than bonds issued by smaller companies.
D) The market value of a bond will always approach its par value as its maturity date approaches, provided the bond's required return remains constant.

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

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

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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.)

A) True
B) False

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Which statement regarding interest rate risk is true?


A) If the market interest rate for a bond is less than the bond's coupon rate, the bond will sell at a premium.
B) If the market interest rate for a bond is greater than the bond's coupon rate, the bond will sell at a premium.
C) If the market interest rate for a bond is less than the bond's coupon rate, the bond will sell at a discount.
D) If the market interest rate for a bond is greater than the bond's coupon rate, the bond will sell at a discount.

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

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A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which statement about this bond is correct?


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

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With no interim interest payment, zero bonds are not a good investment kept in the RRSP account.

A) True
B) False

Correct Answer

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Which of the following statements is correct?


A) All else being equal, senior debt generally has a lower yield to maturity than subordinated debt.
B) The expected return on a corporate bond will generally exceed the bond's yield to maturity.
C) If a bond's coupon rate exceeds its yield to maturity, then its expected return to investors exceeds the yield to maturity.
D) Under our bankruptcy laws, any firm that is in financial distress will be forced to declare bankruptcy and then be liquidated.

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

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Taussig Corp.'s bonds currently sell for $1,150. They have a 6.75% annual coupon rate and a 15-year maturity, but they can be called in 6 years at $1,067.50. 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, the YTC or the YTM?


A) 4.12%
B) 4.34%
C) 4.57%
D) 4.81%

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

Correct Answer

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Keenan Industries has a bond outstanding with 15 years to maturity, an 8.75% coupon paid semiannually, and a $1,000 par value. The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,050. What is the bond's nominal yield to call?


A) 5.01%
B) 5.27%
C) 5.54%
D) 5.81%

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

Correct Answer

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O'Brien Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 25 years. Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $850. What is the bond's nominal (annual) coupon interest rate?


A) 6.27%
B) 6.60%
C) 6.95%
D) 7.70%

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

Correct Answer

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D. J. Masson Inc. recently issued noncallable bonds that mature in 10 years. They have a par value of $1,000 and an annual coupon of 5.5%. If the current market interest rate is 7.0%, at what price should the bonds sell?


A) $829.21
B) $850.47
C) $872.28
D) $894.65

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

Correct Answer

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A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon. Both bonds have the same yield to maturity. If the yield to maturity of both bonds increases by the same amount, which of the following statements would be correct?


A) The prices of both bonds will decrease by the same amount.
B) Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price.
C) The prices of both bonds would increase by the same amount.
D) One bond's price would increase, while the other bond's price would decrease.

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

Correct Answer

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Which statement regarding bond yields is true?


A) The yield to maturity for a coupon bond that sells at a premium consists entirely of a positive capital gains yield; it has a zero current interest yield.
B) The market value of a bond will always approach its par value as its maturity date approaches. This holds true even if the firm has filed for bankruptcy.
C) Rising inflation makes the actual yield to maturity on a bond greater than a quoted yield to maturity that is based on market prices.
D) The yield to maturity on a coupon bond that sells at its par value consists entirely of a current interest yield; it has a zero expected capital gains yield.

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

Correct Answer

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Which statement regarding bond yields is true?


A) If a coupon bond is selling at a premium, then the bond's current yield is zero.
B) If a bond is selling at a discount, the yield to call is a better measure of the expected return than the yield to maturity.
C) 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.
D) If a coupon bond is selling at par, its current yield equals its yield to maturity.

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 bond would have the greatest percentage increase in value if all interest rates fall by 1%?


A) 10-year, zero coupon bond
B) 20-year, 10% coupon bond
C) 20-year, 5% coupon bond
D) 20-year, zero coupon bond

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

Correct Answer

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