Question 1

Which of the following statements is correct?

Accepted Answer

A)   If the maturity risk premium were zero and interest rates were expected to decrease in the future, then the yield curve for government securities would, other things held constant, have an upward slope.
B)   Liquidity premiums are generally higher on government than corporate bonds.
C)   Default risk premiums are generally lower on corporate than on government bonds.
D)   Reinvestment rate risk is lower, other things held constant, on long-term than on short- term bonds.E) None of the above
F) A) and B)

Question 2

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

Question 3

Five-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) All of the above
F) B) and C)

Question 4

For bonds, price sensitivity to a given change in interest rates is generally greater the longer before the bond matures.

Accepted Answer

A) True 
 B)False

Question 5

Wachowicz Corporation issued 15-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 14 years to maturity?

Accepted Answer

A)   $1,104.62
B)   $1,132.95
C)   $1,162.00
D)   $1,191.79E) None of the above
F) A) and C)

Question 6

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)   $469.72.E) A) and B)
F) B) and C)

Question 7

Bond X has an 8% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a 12% annual coupon. Each of the bonds has a maturity of 10 years and a yield to maturity of 10%. Which of the following statements best describes bonds?

Accepted Answer

A)   If the bonds' market interest rate remain at 10%, Bond Z's price will be lower 1 year from now than it is today.
B)   Bond X has the greatest reinvestment rate risk.
C)   If market interest rates remain at 10%, Bond Z's price will be 10% higher 1 year from today.
D)   If market interest rates increase, Bond X's price will increase, Bond Z's price will decline, and Bond Y's price will remain the same.E) A) and B)
F) B) and D)

Question 8

Niendorf Corporation's 5-year bonds yield 6.75%, and 5-year T-bonds yield 4.80%. The real risk-free rate is r* = 2.75%, the inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Niendorf's bonds is DRP = 1.20% versus zero for T-bonds, 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 liquidity premium (LP)  on Niendorf's bonds?

Accepted Answer

A)   0.49%
B)   0.55%
C)   0.68%
D)   0.75%E) B) and C)
F) A) and B)

Question 9

When interest rates fall, investors have more incentive to sell their retractable bonds back to the issuer.

Accepted Answer

A) True 
 B)False

Question 10

You have funds that you want to invest in bonds, and you just noticed in the financial pages of the local newspaper that you can buy a $1,000 par value bond for $800. The coupon rate is 10% (with annual payments), and there are 10 years before the bond will mature and pay off its $1,000 par value. You should buy the bond if your required return on bonds with this risk is 12%.

Accepted Answer

A) True 
 B)False

Question 11

Junk bonds are high-risk, high-yield debt instruments. They are often used to finance leveraged buyouts and mergers, and to provide financing to companies of questionable financial strength.

Accepted Answer

A) True 
 B)False

Question 12

A bond with a par value of $1,000 has annual interest payment of $85. The bond currently sells for $850 and has 8 years to maturity. Which of the following is true?

Accepted Answer

A)   The current yield on the bond must be 8.5%.
B)   The investor's required rate of return must be 8.5%.
C)   The coupon rate must be 8.5%.
D)   The yield-to-maturity must be 8.5%.E) B) and D)
F) B) and C)

Question 13

Assume that the current corporate bond yield curve is upward sloping. Under this condition, of what could we be sure?

Accepted Answer

A)   that inflation is expected to decline in the future
B)   that long-term bonds are a better buy than short-term bonds
C)   that maturity risk premiums could help to explain the yield curve's upward slope
D)   that long-term interest rates are more volatile than short-term ratesE) All of the above
F) A) and B)

Question 14

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 15

The Morrissey Company's bonds mature in 7 years, have a par value of $1,000, and make an annual coupon payment of $70. The market interest rate for the bonds is 8.5%. What is the bond's price?

Accepted Answer

A)   $923.22
B)   $946.30
C)   $969.96
D)   $994.21E) A) and B)
F) B) and C)

Question 16

Under normal conditions, which of the following 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 change the bond's rating from Baa to Aaa
D)   adding a sinking fundE) All of the above
F) None of the above

Question 17

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

Accepted Answer

A)   A 20-year zero coupon bond has more reinvestment rate risk than a 20-year coupon bond.
B)   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)   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.
D)   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.E) B) and C)
F) None of the above

Question 18

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?

Accepted Answer

A)   6.27%
B)   6.60%
C)   6.95%
D)   7.70%E) A) and B)
F) All of the above

Question 19

Which of the following statements best describes interest rate risk?

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

Question 20

Which of the following statements best describes bond yields?

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

Exam 6: Bonds, Bond Valuation, and Interest Rates

Correct Answer
verified

The Morrissey Company's bonds mature in 7 years, have a par value of $1,000, and make an annual coupon payment of $70. The market interest rate for the bonds is 8.5%. What is the bond's price?

Correct Answer
verified

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
verified

Five-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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A bond with a par value of $1,000 has annual interest payment of $85. The bond currently sells for $850 and has 8 years to maturity. Which of the following is true?

Correct Answer
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Which of the following statements best describes bond yields?

Correct Answer
verified

Under normal conditions, which of the following 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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Which of the following statements is correct?

Correct Answer
verified

Bond X has an 8% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a 12% annual coupon. Each of the bonds has a maturity of 10 years and a yield to maturity of 10%. Which of the following statements best describes bonds?

Correct Answer
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Correct Answer
verified

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?

Correct Answer
verified

Which of the following statements best describes interest rate risk?

Correct Answer
verified

For bonds, price sensitivity to a given change in interest rates is generally greater the longer before the bond matures.

Correct Answer
verified

Junk bonds are high-risk, high-yield debt instruments. They are often used to finance leveraged buyouts and mergers, and to provide financing to companies of questionable financial strength.

Correct Answer
verified

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
verified

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
verified

When interest rates fall, investors have more incentive to sell their retractable bonds back to the issuer.

Correct Answer
verified

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

Correct Answer
verified

Wachowicz Corporation issued 15-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 14 years to maturity?

Correct Answer
verified

Assume that the current corporate bond yield curve is upward sloping. Under this condition, of what could we be sure?

Correct Answer
verified

Exam 6: Bonds, Bond Valuation, and Interest Rates

Correct AnswerverifiedShow Answer

The Morrissey Company's bonds mature in 7 years, have a par value of $1,000, and make an annual coupon payment of $70. The market interest rate for the bonds is 8.5%. What is the bond's price?

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

Five-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

A bond with a par value of $1,000 has annual interest payment of $85. The bond currently sells for $850 and has 8 years to maturity. Which of the following is true?

Correct AnswerverifiedShow Answer

Which of the following statements best describes bond yields?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Bond X has an 8% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a 12% annual coupon. Each of the bonds has a maturity of 10 years and a yield to maturity of 10%. Which of the following statements best describes bonds?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Which of the following statements best describes interest rate risk?

Correct AnswerverifiedShow Answer

For bonds, price sensitivity to a given change in interest rates is generally greater the longer before the bond matures.

Correct AnswerverifiedShow Answer

Junk bonds are high-risk, high-yield debt instruments. They are often used to finance leveraged buyouts and mergers, and to provide financing to companies of questionable financial strength.

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

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

When interest rates fall, investors have more incentive to sell their retractable bonds back to the issuer.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Wachowicz Corporation issued 15-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 14 years to maturity?

Correct AnswerverifiedShow Answer

Assume that the current corporate bond yield curve is upward sloping. Under this condition, of what could we be sure?

Correct AnswerverifiedShow Answer

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