Question 1

Ryngaert Inc. recently issued noncallable bonds that mature in 15 years. They have a par value of $1,000 and an annual coupon of 5.7%. If the current market interest rate is 7.0%, at what price should the bonds sell?

Accepted Answer

A)   $817.12
B)   $838.07
C)   $859.56
D)   $881.60
E)   $903.64F) C) and D)
G) A) and D)

Question 2

Which of the following bonds would have the greatest percentage increase in value if all interest rates in the economy fall by 1%?

Accepted Answer

A)   10-year, zero coupon bond.
B)   20-year, 10% coupon bond.
C)   20-year, 5% coupon bond.
D)   1-year, 10% coupon bond.
E)   20-year, zero coupon bond.F) A) and D)
G) C) and D)

Question 3

Which of the following statements is CORRECT?

Accepted Answer

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)   The expected capital gains yield on a bond will always be zero or positive because no investor would purchase a bond with an expected capital loss.F) B) and C)
G) None of the above

Question 4

A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if market interest rates are below 10% and at a discount if interest rates are greater than 10%.

Accepted Answer

A) True 
 B)False

Question 5

Moerdyk Corporation's bonds have a 15-year maturity, a 7.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd)  is 6.20%, based on semiannual compounding. What is the bond's price?

Accepted Answer

A)   $1,047.19
B)   $1,074.05
C)   $1,101.58
D)   $1,129.12
E)   $1,157.35F) None of the above
G) A) and C)

Question 6

A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, companies call bonds if interest rates rise and do not call them if interest rates decline.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)   Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest rates decline after the bond was issued.
B)   Most sinking funds require the issuer to provide funds to a trustee, who holds 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)   If interest rates increase after a company has issued bonds with a sinking fund, the company will be less likely to buy bonds on the open market to meet its sinking fund obligation and more likely to call them in at the sinking fund call price.F) A) and B)
G) All of the above

Question 8

Sadik Inc.'s bonds currently sell for $1,180 and have a par value of $1,000. They pay a $105 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to call (YTC) ?

Accepted Answer

A)   6.63%
B)   6.98%
C)   7.35%
D)   7.74%
E)   8.12%F) None of the above
G) A) and B)

Question 9

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. None of the bonds can be called. Which of the following statements is CORRECT?

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 price 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)   Bond C sells at a premium over its par value.F) A) and D)
G) A) and E)

Question 10

Income bonds pay interest only if the issuing company actually earns the indicated interest. Thus, these securities cannot bankrupt a company, and this makes them safer from an investor's perspective than regular bonds.

Accepted Answer

A) True 
 B)False

Question 11

A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon. Neither is callable, and both 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?

Accepted Answer

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)   The prices of the two bonds would remain constant.F) B) and D)
G) B) and E)

Question 12

Bond A has a 9% annual coupon, while Bond B has a 7% annual coupon. Both bonds have the same maturity, a face value of $1,000, an 8% yield to maturity, and are noncallable. Which of the following statements is CORRECT?

Accepted Answer

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.F) All of the above
G) A) and E)

Question 13

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 price risk if you purchased a 30-day bond than if you bought a 30-year bond.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

Assume that you are considering the purchase of a 20-year, noncallable bond with an annual coupon rate of 9.5%. The bond has a face value of $1,000, and it makes semiannual interest payments. If you require an 8.4% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

Accepted Answer

A)   $1,105.69
B)   $1,133.34
C)   $1,161.67
D)   $1,190.71
E)   $1,220.48F) A) and D)
G) A) and C)

Question 16

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 17

Assuming all else is constant, which of the following statements is CORRECT?

Accepted Answer

A)   Other things held constant, a 20-year zero coupon bond has more reinvestment risk than a 20-year coupon bond.
B)   Other things held constant, for any given maturity, a 1.0 percentage point decrease in the market interest rate would cause a smaller dollar capital gain than the capital loss stemming from a 1.0 percentage point increase in the interest rate.
C)   From a corporate borrower's point of view, interest paid on bonds is not tax-deductible.
D)   Other things held constant, price sensitivity as measured by the percentage change in price due to a given change in the required rate of return decreases as a bond's maturity increases.
E)   For a bond of any maturity, a 1.0 percentage point increase in the market interest rate (rd)  causes a larger dollar capital loss than the capital gain stemming from a 1.0 percentage point decrease in the interest rate.F) B) and D)
G) A) and E)

Question 18

You are considering 2 bonds that will be issued tomorrow. Both are rated triple B (BBB, the lowest investment- grade rating), both mature in 20 years, both have a 10% coupon, neither can be called except for sinking fund purposes, and both are offered to you at their $1,000 par values. However, Bond SF has a sinking fund while Bond NSF does not. Under the sinking fund, the company must call and pay off 5% of the bonds at par each year. The yield curve at the time is upward sloping. The bond's prices, being equal, are probably not in equilibrium, as Bond SF, which has the sinking fund, would generally be expected to have a higher yield than Bond NSF.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following statements is CORRECT?

Accepted Answer

A)   If a coupon bond is selling at a premium, then the bond's current yield is zero.
B)   If a coupon bond is selling at a discount, then the bond's expected capital gains yield is negative.
C)   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.
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)   If a coupon bond is selling at par, its current yield equals its yield to maturity.F) A) and B)
G) A) and C)

Question 20

A company is planning to raise $1,000,000 to finance a new plant. Which of the following statements is CORRECT?

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 million dollars, but $500,000 is raised as first mortgage bonds on the new plant and $500,000 as debentures, the interest rate on the first mortgage bonds would be lower than it would be if the entire $1 million were raised by selling first mortgage bonds.
C)   If two classes of debt are used (with one senior and the other subordinated to all other debt) , the subordinated debt will carry a lower interest rate.
D)   If debt is used to raise the million dollars, 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)   If debt is used to raise the million dollars, the cost of the debt would be higher if the debt were in the form of a mortgage bond rather than an unsecured term loan.F) A) and E)
G) None of the above

Exam 7: Bonds and Their Valuation

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 price risk if you purchased a 30-day bond than if you bought a 30-year bond.

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, companies call bonds if interest rates rise and do not call them if interest rates decline.

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Income bonds pay interest only if the issuing company actually earns the indicated interest. Thus, these securities cannot bankrupt a company, and this makes them safer from an investor's perspective than regular bonds.

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. None of the bonds can be called. Which of the following statements is CORRECT?

Correct Answer
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A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if market interest rates are below 10% and at a discount if interest rates are greater than 10%.

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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Assuming all else is constant, which of the following statements is CORRECT?

Correct Answer
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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. Neither is callable, and both 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?

Correct Answer
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Correct Answer
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Which of the following bonds would have the greatest percentage increase in value if all interest rates in the economy fall by 1%?

Correct Answer
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Sadik Inc.'s bonds currently sell for $1,180 and have a par value of $1,000. They pay a $105 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to call (YTC) ?

Correct Answer
verified

Bond A has a 9% annual coupon, while Bond B has a 7% annual coupon. Both bonds have the same maturity, a face value of $1,000, an 8% yield to maturity, and are noncallable. Which of the following statements is CORRECT?

Correct Answer
verified

Ryngaert Inc. recently issued noncallable bonds that mature in 15 years. They have a par value of $1,000 and an annual coupon of 5.7%. If the current market interest rate is 7.0%, at what price should the bonds sell?

Correct Answer
verified

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

Correct Answer
verified

Moerdyk Corporation's bonds have a 15-year maturity, a 7.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 6.20%, based on semiannual compounding. What is the bond's price?

Correct Answer
verified

A company is planning to raise $1,000,000 to finance a new plant. Which of the following statements is CORRECT?

Correct Answer
verified

Exam 7: Bonds and Their Valuation

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 price risk if you purchased a 30-day bond than if you bought a 30-year bond.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, companies call bonds if interest rates rise and do not call them if interest rates decline.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Income bonds pay interest only if the issuing company actually earns the indicated interest. Thus, these securities cannot bankrupt a company, and this makes them safer from an investor's perspective than regular bonds.

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. None of the bonds can be called. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if market interest rates are below 10% and at a discount if interest rates are greater than 10%.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Assuming all else is constant, which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon. Neither is callable, and both 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?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following bonds would have the greatest percentage increase in value if all interest rates in the economy fall by 1%?

Correct AnswerverifiedShow Answer

Sadik Inc.'s bonds currently sell for $1,180 and have a par value of $1,000. They pay a $105 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to call (YTC) ?

Correct AnswerverifiedShow Answer

Bond A has a 9% annual coupon, while Bond B has a 7% annual coupon. Both bonds have the same maturity, a face value of $1,000, an 8% yield to maturity, and are noncallable. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Ryngaert Inc. recently issued noncallable bonds that mature in 15 years. They have a par value of $1,000 and an annual coupon of 5.7%. If the current market interest rate is 7.0%, at what price should the bonds sell?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Moerdyk Corporation's bonds have a 15-year maturity, a 7.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 6.20%, based on semiannual compounding. What is the bond's price?

Correct AnswerverifiedShow Answer

A company is planning to raise $1,000,000 to finance a new plant. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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