A) The total return on a bond during a given year is based only on the coupon interest payments received.
B) All else equal, a bond that has a coupon rate of 10% will sell at a discount if the required return for bonds of similar risk is 8%.
C) The price of a discount bond will increase over time, assuming that the bond's yield to maturity remains constant.
D) For a given firm, its debentures are likely to have a lower yield to maturity than its mortgage bonds.
E) When large firms are in financial distress, they are almost always liquidated, whereas smaller firms are generally reorganized.
G) B) and E)
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A) A 10-year $100 annuity.
B) A 10-year, $1,000 face value, zero coupon bond.
C) A 10-year, $1,000 face value, 10% coupon bond with annual interest payments.
D) All 10-year bonds have the same price risk since they have the same maturity.
E) A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments.
G) A) and B)
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A) $817.12
B) $838.07
C) $859.56
D) $881.60
E) $903.64
G) A) and B)
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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 now the 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.
G) A) and B)
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A) 6.20%
B) 6.53%
C) 6.85%
D) 7.20%
E) 7.55%
G) D) and E)
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A) 5.78%
B) 6.09%
C) 6.39%
D) 6.71%
E) 7.05%
G) C) and E)
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B) False
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A) A 1-year zero coupon bond.
B) A 1-year bond with an 8% coupon.
C) A 10-year bond with an 8% coupon.
D) A 10-year bond with a 12% coupon.
E) A 10-year zero coupon bond.
G) None of the above
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A) If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price regardless of their coupon rates.
B) All else equal, an increase in interest rates will have a greater effect on the prices of short-term than long-term bonds.
C) All else equal, an increase in interest rates will have a greater effect on higher-coupon bonds than it will have on lower-coupon bonds.
D) If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value.
E) If a bond's yield to maturity exceeds its coupon rate, the bond's current yield must be less than its coupon rate.
G) B) and E)
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A) A zero coupon bond of any maturity will have more price risk than any coupon bond, even a perpetuity.
B) If their maturities and other characteristics were the same, a 5% coupon bond would have more price risk than a 10% coupon bond.
C) A 10-year coupon bond would have more reinvestment risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of reinvestment risk.
D) A 10-year coupon bond would have more price risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of price risk.
E) If their maturities and other characteristics were the same, a 5% coupon bond would have less price risk than a 10% coupon bond.
G) B) and E)
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B) False
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A) One disadvantage of zero coupon bonds is that the issuing firm cannot realize any tax savings from the use of debt until the bonds mature.
B) Other things held constant, a callable bond should have a lower yield to maturity than a noncallable bond.
C) Once a firm declares bankruptcy, it must be liquidated by the trustee, who uses the proceeds to pay bondholders, unpaid wages, taxes, and legal fees.
D) Income bonds must pay interest only if the company earns the interest. Thus, these securities cannot bankrupt a company prior to their maturity, and this makes them safer to the issuing corporation than "regular" bonds.
E) A firm with a sinking fund that gives it the choice of calling the required bonds at par or buying the bonds in the open market would generally choose the open market purchase if the coupon rate exceeded the going interest rate.
G) C) and E)
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