Question 1

Crockett Corporation's 5-year bonds yield 6.85%, and 5-year T-bonds yield 4.75%. The real risk-free rate is r* = 2.80%, the default risk premium for Crockett's bonds is DRP = 0.85% versus zero for T-bonds, the liquidity premium on Crockett's bonds is LP = 1.25%, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1)  * 0.1%, where t = number of years to maturity. What is the inflation premium (IP)  on 5-year bonds?

Accepted Answer

A)   1.40%
B)   1.55%
C)   1.71%
D)   1.88%
E)   2.06%F) B) and E)
G) C) and E)

Question 2

The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)   If a 10-year, $1,000 par, zero coupon bond were issued at a price that gave investors a 10% yield to maturity, and if interest ratesThen dropped to the point where rd = YTM = 5%, the bond would sell at a premium over its $1,000 par value.
B)   If a 10-year, $1,000 par, 10% coupon bond were issued at par, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond would sell at a premium above its $1,000 par Value.
C)   Other things held constant, a corporation would rather issue noncallable bonds than callable bonds.
D)   Other things held constant, a callable bond would have a lowerRequired rate of return than a noncallable bond.
E)   Reinvestment rate risk is worse from an investor's standpoint than interest rate price risk if the investor has a short investment time horizon.F) B) and D)
G) A) and B)

Question 4

Three $1,000 face value bonds that mature in 10 years have the same level of risk, hence their YTMs are equal. Bond A has an 8% annual coupon, Bond B has a 10% annual coupon, and Bond C has a 12% annual coupon. Bond B sells at par. Assuming interest rates remain constant
For the next 10 years, which of the following statements is CORRECT?

Accepted Answer

A)   Bond A's current yield will increase each year.
B)   Since the bonds have the same YTM, they should all have the same price, and since interest rates are not expected to change, theirPrices should all remain at their current levels until maturity.
C)   Bond C sells at a premium (its price is greater than par) , and itsPrice is expected to increase over the next year.
D)   Bond A sells at a discount (its price is less than par) , and itsPrice is expected to increase over the next year.
E)   Over the next year, Bond A's price is expected to decrease, Bond B's price is expected to stay the same, and Bond C's price isExpected to increase.F) A) and D)
G) C) and D)

Question 5

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

Question 6

There is an inverse relationship between bonds' quality ratings and their required rates of return. Thus, the required return is lowest for AAA-rated bonds, and required returns increase as the ratings get lower.

Accepted Answer

A) True 
 B)False

Question 7

Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase
In price?

Accepted Answer

A)  An 8-year bond with a 9% coupon.
B)   A 1-year bond with a 15% coupon.
C)   A 3-year bond with a 10% coupon.
D)   A 10-year zero coupon bond.
E)   A 10-year bond with a 10% coupon.F) B) and C)
G) A) and E)

Question 8

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 9

Which of the following statements is CORRECT?

Accepted Answer

A)   If inflation is expected to increase in the future, and if the maturity risk premium (MRP)  is greater than zero, then the yieldCurve will have an upward slope.
B)   If the maturity risk premium (MRP)  is greater than zero, then theYield curve must have an upward slope.
C)   Because long-term bonds are riskier than short-term bonds, yields on long-term Treasury bonds will always be higher than yields onShort-term T-bonds.
D)   If the maturity risk premium (MRP)  equals zero, the yield curveMust be flat.
E)   The yield curve can never be downward sloping.F) A) and B)
G) C) and E)

Question 10

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 of the following statements is CORRECT?

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 oneYear from now will be lower than it is today.
D)   The bond should currently be selling at its par value.
E)   If market interest rates remain unchanged, the bond's price one year from now will be higher than it is today.F) A) and E)
G) D) and E)

Question 11

An investor is considering buying one of two 10-year, $1,000 face value bonds: Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon. Both bonds have a yield to maturity of 8%, which is expected to remain constant for the next 10 years. Which of the following statements is CORRECT?

Accepted Answer

A)   Bond B has a higher price than Bond A today, but one year from now the bonds will have the same price.
B)   One year from now, Bond A's price will be higher than it is today.
C)   Bond A's current yield is greater than 8%.
D)   Bond A has a higher price than Bond B today, but one year from nowThe bonds will have the same price.
E)   Both bonds have the same price today, and the price of each bond is expected to remain constant until the bonds mature.F) A) and E)
G) C) and D)

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, and an 8% yield to maturity. 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 BondB's price one year from now will be lower than it is today.
D)   If the yield to maturity for both bonds immediately decreases to6%, 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) B) and C)
G) B) and D)

Question 13

A 25-year, $1,000 par value bond has an 8.5% annual coupon. The bond currently sells for $875. If the yield to maturity remains at its current rate, what will the price be 5 years from now?

Accepted Answer

A)   $839.31
B)   $860.83
C)   $882.90
D)   $904.97
E)   $927.60F) A) and D)
G) D) and E)

Question 14

Ezzell Enterprises' noncallable bonds currently sell for $1,165. They have a 15-year maturity, an annual coupon of $95, and a par value of
$1,000. What is their yield to maturity?

Accepted Answer

A)   6.20%
B)   6.53%
C)   6.87%
D)   7.24%
E)   7.62%F) B) and E)
G) A) and B)

Question 15

Which of the following statements is NOT CORRECT?

Accepted Answer

A)   All else equal, secured debt is less risky than unsecured debt.
B)   The expected return on a corporate bond must be less than itsPromised return if the probability of default is greater than zero.
C)   All else equal, senior debt has less default risk than subordinatedDebt.
D)   A company's bond rating is affected by its financial ratios andProvisions in its indenture.
E)   Under Chapter 11 of the Bankruptcy Act, the assets of a firm that declares bankruptcy must be liquidated, and the sale proceeds must be used to pay off its debt according to the seniority of the debtAs spelled out in the Act.Medium/Hard:F) B) and C)
G) A) and B)

Question 16

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

Accepted Answer

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

Question 17

5-year Treasury bonds yield 5.5%. The inflation premium (IP)  is 1.9%, and the maturity risk premium (MRP)  on 5-year bonds is 0.4%. What is the real risk-free rate, r*?

Accepted Answer

A)   2.59%
B)   2.88%
C)   3.20%
D)   3.52%
E)   3.87%F) A) and D)
G) B) and E)

Question 18

Sadik Inc.'s bonds currently sell for $1,280 and have a par value of
$1,000. They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050. What is their yield to call (YTC) ?

Accepted Answer

A)   6.39%
B)   6.72%
C)   7.08%
D)   7.45%
E)   7.82%F) A) and D)
G) All of the above

Question 19

In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures to a market value basis.
KJM Corporation's balance sheet as of today is as follows: 
The bonds have a 4.0% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 12%, so the bonds now sell below par. What is the current market value of the firm's debt?

Accepted Answer

A)   $5,276,731
B)   $5,412,032
C)   $5,547,332
D)   $7,706,000
E)   $7,898,650F) A) and B)
G) C) and D)

Question 20

The desire for floating-rate bonds, and consequently their increased usage, arose out of the experience of the early 1980s, when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.

Accepted Answer

A) True 
 B)False

Exam 5: Bonds, Bond Valuation, and Interest Rates

5-year Treasury bonds yield 5.5%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year bonds is 0.4%. What is the real risk-free rate, r*?

Correct Answer
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The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.

Correct Answer
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Sadik Inc.'s bonds currently sell for $1,280 and have a par value of $1,000. They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050. What is their yield to call (YTC) ?

Correct Answer
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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, and an 8% yield to maturity. Which of the following statements is CORRECT?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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A 25-year, $1,000 par value bond has an 8.5% annual coupon. The bond currently sells for $875. If the yield to maturity remains at its current rate, what will the price be 5 years from now?

Correct Answer
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There is an inverse relationship between bonds' quality ratings and their required rates of return. Thus, the required return is lowest for AAA-rated bonds, and required returns increase as the ratings get lower.

Correct Answer
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Correct Answer
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An investor is considering buying one of two 10-year, $1,000 face value bonds: Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon. Both bonds have a yield to maturity of 8%, which is expected to remain constant for the next 10 years. Which of the following statements is CORRECT?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Ezzell Enterprises' noncallable bonds currently sell for $1,165. They have a 15-year maturity, an annual coupon of $95, and a par value of $1,000. What is their yield to maturity?

Correct Answer
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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.)

Correct Answer
verified

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
verified

Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase In price?

Correct Answer
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Correct Answer
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Which of the following statements is NOT CORRECT?

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 of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

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

Correct Answer
verified

The desire for floating-rate bonds, and consequently their increased usage, arose out of the experience of the early 1980s, when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.

Correct Answer
verified

Exam 5: Bonds, Bond Valuation, and Interest Rates

5-year Treasury bonds yield 5.5%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year bonds is 0.4%. What is the real risk-free rate, r*?

Correct AnswerverifiedShow Answer

The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.

Correct AnswerverifiedShow Answer

Sadik Inc.'s bonds currently sell for $1,280 and have a par value of $1,000. They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050. 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, and an 8% yield to maturity. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

A 25-year, $1,000 par value bond has an 8.5% annual coupon. The bond currently sells for $875. If the yield to maturity remains at its current rate, what will the price be 5 years from now?

Correct AnswerverifiedShow Answer

There is an inverse relationship between bonds' quality ratings and their required rates of return. Thus, the required return is lowest for AAA-rated bonds, and required returns increase as the ratings get lower.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

An investor is considering buying one of two 10-year, $1,000 face value bonds: Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon. Both bonds have a yield to maturity of 8%, which is expected to remain constant for the next 10 years. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Ezzell Enterprises' noncallable bonds currently sell for $1,165. They have a 15-year maturity, an annual coupon of $95, and a par value of $1,000. What is their yield to maturity?

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 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

Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase In price?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is NOT CORRECT?

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 of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The desire for floating-rate bonds, and consequently their increased usage, arose out of the experience of the early 1980s, when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.

Correct AnswerverifiedShow Answer

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