Question 1

Which of the following statements is most correct?

Accepted Answer

A)   If a bond's yield to maturity exceeds its annual coupon, then the bond will be trading at a premium.
B)   If interest rates increase, the relative price change of a 10-year coupon bond will be greater than the relative price change of a 10-year zero coupon bond.
C)   If a coupon bond is selling at par, its current yield equals its yield to maturity.
D)   Both a and c are correct.
E)   None of the answers above is correct.F) B) and E)
G) A) and E)

Question 2

Which of the following statements is most correct?

Accepted Answer

A)   Junk bonds typically have a lower yield to maturity relative to investment grade bonds.
B)   A debenture is a secured bond which is backed by some or all of the firm's fixed assets.
C)   Subordinated debt has less default risk than senior debt.
D)   All of the statements above are correct.
E)   None of the statements above is correct.F) B) and C)
G) B) and D) E

Question 3

Which of the following statements is most correct?

Accepted Answer

A)   A firm with a sinking fund payment coming due would generally choose to buy back bonds in the open market, if the price of the bond exceeds the sinking fund call price.
B)   Income bonds pay interest only when the amount of the interest is actually earned by the company. Thus, these securities cannot bankrupt a company and this makes them safer to investors than regular bonds.
C)   One disadvantage of zero coupon bonds is that issuing firms cannot realize the tax savings from issuing debt until the bonds mature.
D)   Other things held constant, callable bonds should have a lower yield to maturity than noncallable bonds.
E)   All of the above statements are false.F) A) and E)
G) D) and E)

Question 4

Which of the following statements is correct?

Accepted Answer

A)   If a company is retiring bonds for sinking fund purposes it will buy back bonds on the open market when the coupon rate is less than the market interest rate.
B)   A bond sinking fund would be good for investors if interest rates have declined after issuance and the investor's bonds get called.
C)   Mortgage bonds have less default risk than debentures.
D)   Both a and c are correct.
E)   All of the statements above are correct.F) B) and E)
G) B) and D)

Question 5

Palmer Products has outstanding bonds with an annual 8 percent coupon. The bonds have a par value of $1,000 and a price of $865. The bonds will mature in 11 years. What is the yield to maturity on the bonds?

Accepted Answer

A)   10.09%
B)   11.13%
C)   9.25%
D)   8.00%
E)   9.89%F) C) and D)
G) B) and D)

Question 6

Which of the following statements is most correct?

Accepted Answer

A)   Sinking fund provisions do not require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time.
B)   Sinking fund provisions sometimes work to the detriment of bondholders - particularly if interest rates have declined over time.
C)   If interest rates have increased since the time a company issues bonds with a sinking fund provision, the company is more likely to retire the bonds by buying them back in the open market, as opposed to calling them in at the sinking fund call price.
D)   Statements a and b are correct.
E)   Statements b and c are correct.F) All of the above
G) A) and E)

Question 7

You have just noticed in the financial pages of the local newspaper that you can buy a $1,000 par value bond for $800. If the coupon rate is 10 percent, with annual interest payments, and there are 10 years to maturity, you should make the purchase if your re¬quired return on investments of this type is 12 percent.

Accepted Answer

A) True 
 B)False  True

Question 8

Assume that McDonald's and Burger King have similar $1,000 par value bond issues outstanding. The bonds are equally risky. The Burger King bond has an annual coupon rate of 8 percent and matures 20 years from today. The McDonald's bond has a coupon rate of 8 percent, with interest paid semiannually, and it also matures in 20 years. If the nominal required rate of return, rd, is 12 percent, semiannual basis, for both bonds, what is the difference in current market prices of the two bonds?

Accepted Answer

A)   No difference.
B)   $ 2.20
C)   $ 3.77
D)   $17.53
E)   $ 6.28F) B) and E)
G) A) and B)

Question 9

A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

Accepted Answer

A) True 
 B)False

Question 10

JRJ Corporation recently issued 10-year bonds at a price of $1,000. These bonds pay $60 in interest each six months. Their price has remained stable since they were issued, i.e., they still sell for $1,000. Due to additional financing needs, the firm wishes to issue new bonds that would have a maturity of 10 years, a par value of $1,000, and pay $40 in interest every six months. If both bonds have the same yield, how many new bonds must JRJ issue to raise $2,000,000 cash?

Accepted Answer

A)   2,400
B)   2,596
C)   3,000
D)   5,000
E)   4,275F) B) and D)
G) A) and E) B

Question 11

A corporate bond which matures in 12 years, pays a 9 percent annual coupon, has a face value of $1,000, and a yield to maturity of 7.5 percent. The bond can first be called four years from now. The call price is $1,050. What is the bond's yield to call?

Accepted Answer

A)   6.73%
B)   7.10%
C)   7.50%
D)   11.86%
E)   13.45%F) A) and E)
G) A) and C)

Question 12

The current price of a 10-year, $1,000 par value bond is $1,158.91. Interest on this bond is paid every six months, and the nominal annual yield is 14 percent. Given these facts, what is the annual coupon rate on this bond?

Accepted Answer

A)   10%
B)   12%
C)   14%
D)   17%
E)   21%F) A) and E)
G) A) and D)

Question 13

Floating rate debt is advantageous to investors because the interest rate moves up if market rates rise. Floating rate debt shifts interest rate risk to companies and thus has no advantages for issuers.

Accepted Answer

A) True 
 B)False

Question 14

A 20-year bond with a par value of $1,000 has a 9 percent annual coupon. The bond currently sells for $925. If the bond's yield to maturity remains at its current rate, what will be the price of the bond 5 years from now?

Accepted Answer

A)   $ 966.79
B)   $ 831.35
C)   $1,090.00
D)   $ 933.09
E)   $ 925.00F) C) and D)
G) A) and C)

Question 15

You just purchased a 10-year corporate bond that has an annual coupon of 10 percent. The bond sells at a premium above par. Which of the following statements is most correct?

Accepted Answer

A)   The bond's yield to maturity is less than 10 percent.
B)   The bond's current yield is greater than 10 percent.
C)   If the bond's yield to maturity stays constant, the bond's price will be the same one year from now.
D)   Statements a and c are correct.
E)   None of the answers above is correct.F) B) and D)
G) A) and C)

Question 16

Which of the following statements is most correct?

Accepted Answer

A)   A 10-year 10 percent coupon bond has less reinvestment rate risk than a 10-year 5 percent coupon bond (assuming all else equal) .
B)   The total return on a bond for a given year arises from both the coupon interest payments received for the year and the change in the value of the bond from the beginning to the end of the year.
C)   The price of a 20-year 10 percent bond is less sensitive to changes in interest rates (i.e., has lower interest rate price risk)  than the price of a 5-year 10 percent bond.
D)   A $1,000 bond with $100 annual interest payments with five years to maturity (not expected to default)  would sell for a discount if interest rates were below 9 percent and would sell for a premium if interest rates were greater than 11 percent.
E)   Answers a, b, and c are correct statements.F) A) and B)
G) A) and C)

Question 17

Other things equal, a firm will have to pay a higher coupon rate on a subordinated debenture than on a second mortgage bond.

Accepted Answer

A) True 
 B)False

Question 18

Meade Corporation bonds mature in 6 years and have a yield to maturity of 8.5 percent. The par value of the bonds is $1,000. The bonds have a 10 percent coupon rate and pay interest on a semiannual basis. What are the current yield and capital gains yield on the bonds for this year? (Assume that interest rates do not change over the course of the year) .

Accepted Answer

A)   Current yield = 8.50%, capital gains yield = 1.50%
B)   Current yield = 9.35%, capital gains yield = 0.65%
C)   Current yield = 9.35%, capital gains yield = -0.85%
D)   Current yield = 10.00%, capital gains yield = 0.00%
E)   None of the answers above is correct.F) A) and D)
G) A) and C)

Question 19

Restrictive covenants are designed so as to protect both the bondholder and the issuer even though they may constrain the actions of the firm's managers. Such covenants are contained in the bond's indenture.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following statements is most correct?

Accepted Answer

A)   All else equal, a bond that has a coupon rate of 10 percent will sell at a discount if the required return for a bond of similar risk is 8 percent.
B)   Debentures generally have a higher yield to maturity relative to mortgage bonds.
C)   If there are two bonds with equal maturity and credit risk, the bond which is callable will have a higher yield to maturity than the bond which is noncallable.
D)   Answers a and c are correct.
E)   Answers b and c are correct.F) A) and C)
G) A) and E)

Exam 4: Bond Valuation

Which of the following statements is most correct?

Correct Answer
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Which of the following statements is most correct?

Correct Answer
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E

Which of the following statements is most correct?

Correct Answer
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Which of the following statements is correct?

Correct Answer
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Palmer Products has outstanding bonds with an annual 8 percent coupon. The bonds have a par value of $1,000 and a price of $865. The bonds will mature in 11 years. What is the yield to maturity on the bonds?

Correct Answer
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Which of the following statements is most correct?

Correct Answer
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Correct Answer
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True

Correct Answer
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A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

Correct Answer
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Correct Answer
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B

A corporate bond which matures in 12 years, pays a 9 percent annual coupon, has a face value of $1,000, and a yield to maturity of 7.5 percent. The bond can first be called four years from now. The call price is $1,050. What is the bond's yield to call?

Correct Answer
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The current price of a 10-year, $1,000 par value bond is $1,158.91. Interest on this bond is paid every six months, and the nominal annual yield is 14 percent. Given these facts, what is the annual coupon rate on this bond?

Correct Answer
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Floating rate debt is advantageous to investors because the interest rate moves up if market rates rise. Floating rate debt shifts interest rate risk to companies and thus has no advantages for issuers.

Correct Answer
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A 20-year bond with a par value of $1,000 has a 9 percent annual coupon. The bond currently sells for $925. If the bond's yield to maturity remains at its current rate, what will be the price of the bond 5 years from now?

Correct Answer
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You just purchased a 10-year corporate bond that has an annual coupon of 10 percent. The bond sells at a premium above par. Which of the following statements is most correct?

Correct Answer
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Which of the following statements is most correct?

Correct Answer
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Other things equal, a firm will have to pay a higher coupon rate on a subordinated debenture than on a second mortgage bond.

Correct Answer
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Correct Answer
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Restrictive covenants are designed so as to protect both the bondholder and the issuer even though they may constrain the actions of the firm's managers. Such covenants are contained in the bond's indenture.

Correct Answer
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Which of the following statements is most correct?

Correct Answer
verified

Exam 4: Bond Valuation

Which of the following statements is most correct?

Correct AnswerverifiedShow Answer

Which of the following statements is most correct?

Correct AnswerverifiedE

Which of the following statements is most correct?

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Palmer Products has outstanding bonds with an annual 8 percent coupon. The bonds have a par value of $1,000 and a price of $865. The bonds will mature in 11 years. What is the yield to maturity on the bonds?

Correct AnswerverifiedShow Answer

Which of the following statements is most correct?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedTrue

Correct AnswerverifiedShow Answer

A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedB

A corporate bond which matures in 12 years, pays a 9 percent annual coupon, has a face value of $1,000, and a yield to maturity of 7.5 percent. The bond can first be called four years from now. The call price is $1,050. What is the bond's yield to call?

Correct AnswerverifiedShow Answer

The current price of a 10-year, $1,000 par value bond is $1,158.91. Interest on this bond is paid every six months, and the nominal annual yield is 14 percent. Given these facts, what is the annual coupon rate on this bond?

Correct AnswerverifiedShow Answer

Floating rate debt is advantageous to investors because the interest rate moves up if market rates rise. Floating rate debt shifts interest rate risk to companies and thus has no advantages for issuers.

Correct AnswerverifiedShow Answer

A 20-year bond with a par value of $1,000 has a 9 percent annual coupon. The bond currently sells for $925. If the bond's yield to maturity remains at its current rate, what will be the price of the bond 5 years from now?

Correct AnswerverifiedShow Answer

You just purchased a 10-year corporate bond that has an annual coupon of 10 percent. The bond sells at a premium above par. Which of the following statements is most correct?

Correct AnswerverifiedShow Answer

Which of the following statements is most correct?

Correct AnswerverifiedShow Answer

Other things equal, a firm will have to pay a higher coupon rate on a subordinated debenture than on a second mortgage bond.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Restrictive covenants are designed so as to protect both the bondholder and the issuer even though they may constrain the actions of the firm's managers. Such covenants are contained in the bond's indenture.

Correct AnswerverifiedShow Answer

Which of the following statements is most correct?

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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E

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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True

Correct Answer
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Correct Answer
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Correct Answer
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B

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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