Question 1

Which of the following best describes zero coupon bonds?

Accepted Answer

A)  bonds that are issued with no coupon payment and whose price is generally above the bond's par value
B)  bonds that are issued with a coupon payment and whose price is generally above the bond's par value
C)  bonds that are issued with no coupon payment and whose price fluctuates above and below its par value
D)  bonds that are no longer issued because the Government of Canada requires that interest earned on bonds be paid out to investorsE) B) and C)
F) A) and D)

Question 2

Which statement regarding bonds is true?

Accepted Answer

A)  If a coupon bond is selling at par, its current yield equals its yield to maturity.
B)  If rates fall after its issue, a zero coupon bond could trade at a price above its par value.
C)  If rates fall rapidly, a zero coupon bond's expected appreciation could become negative.
D)  If a firm moves from a position of strength toward financial distress, its bonds' yield to maturity would probably decline.E) None of the above
F) A) and D)

Question 3

A bond with a par value of $1,000 has an 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) All of the above
F) A) and B)

Question 4

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)  6.53%
B)  6.87%
C)  7.24%
D)  7.62%E) None of the above
F) A) and B)

Question 5

Which of the following best describes a convertible bond issue?

Accepted Answer

A)  a bond that offers a fixed rate coupon that can be converted into a variable rate coupon
B)  a bond that offers the investor the option of converting his or her bond into a fixed number of common shares within a predetermined period of time
C)  a bond that offers investors a perpetual dividend in the event that the firm performs better than expected
D)  a bond that can be converted into a currency other than the one it was issued inE) None of the above
F) All of the above

Question 6

Which of the following is an example of reinvestment risk when investing in the bond market?

Accepted Answer

A)  The coupon rate on a bond is 10% and interest rates on similar bonds have risen by 2%.
B)  The coupon rate on a bond is 10% and interest rates on similar bonds have fallen by 3%
C)  The coupon rate on a bond is 10% and interest rates on similar bonds are also 10%.
D)  Reinvestment risk is not a factor in bond investing because bonds offer investors a risk free investment.E) B) and C)
F) A) and D)

Question 7

Which statement regarding bonds is FALSE?

Accepted Answer

A)  Any maturity is legally permissible.
B)  The longest term of maturity for corporate bonds is 50 years.
C)  Real return bonds protect investors from inflation.
D)  Perpetual bonds do not have a specified maturity date.E) A) and C)
F) None of the above

Question 8

Company A has a bond outstanding that pays a 7% coupon.The interest is paid annually,and the bond matures in 10 years.If the market rate of interest on bonds of similar risk is 8%,what should company A's bond be selling for,approximately?

Accepted Answer

A)  $932.05
B)  $932.90
C)  $1,000.00
D)  $1,070.24E) All of the above
F) A) and B)

Question 9

Which of the following statements regarding bond current yields is NOT true?

Accepted Answer

A)  If a bond is selling at a discount to par, then its current yield will be less than its yield to maturity.
B)  If a bond is selling at its par value, then its current yield equals its yield to maturity.
C)  If a bond is selling at a premium, then its current yield will be greater than its yield to maturity.
D)  A bond's current yield will remain unchanged as the bond's term to maturity changes.E) B) and C)
F) None of the above

Question 10

Maple bonds are issued by the government of Canada in Canadian dollars but sold to only foreign investors.

Accepted Answer

A) True 
 B)False

Question 11

A 10-year corporate bond has an annual coupon of 9%.The bond is currently selling at par ($1,000) .Which of the following statements is NOT correct?

Accepted Answer

A)  The bond's expected capital gains yield is positive.
B)  The bond's yield to maturity is 9%.
C)  The bond's current yield is 9%.
D)  The bond's current yield exceeds its capital gains yield.E) None of the above
F) B) and D)

Question 12

Suppose a Chinese company in Canada issues a bond that is denominated in Canadian dollars.What is this an example of?

Accepted Answer

A)  a domestic bond
B)  a global bond
C)  a foreign bond
D)  a EurobondE) A) and B)
F) A) and C)

Question 13

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 14

Which of the following statements about bond yields is true?

Accepted Answer

A)  If a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity.
B)  On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss.
C)  If a coupon bond is selling at par, its current yield equals its 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) A) and B)
F) B) and C)

Question 15

There is an inverse relationship between bonds' quality ratings and their required rates of return.

Accepted Answer

A) True 
 B)False

Question 16

Which statement regarding types of debt is true?

Accepted Answer

A)  Junior debt is debt that has been more recently issued, and in bankruptcy it is paid off after senior debt because the senior debt was issued first.
B)  Subordinated debt has less default risk than senior debt.
C)  Convertible bonds have lower coupon rates than non-convertible bonds of similar default risk because they offer the possibility of capital gains.
D)  Junk bonds typically provide a lower yield to maturity than investment-grade bonds.E) None of the above
F) B) and C)

Question 17

A bond rating agency will rely exclusively on quantitative data to determine the risk that a firm may default on its debt servicing obligations.

Accepted Answer

A) True 
 B)False

Question 18

Which statement regarding interest rate risk is true?

Accepted Answer

A)  If the market interest rate for a bond is less than the bond's coupon rate, the bond will sell at a premium.
B)  If the market interest rate for a bond is greater than the bond's coupon rate, the bond will sell at a premium.
C)  If the market interest rate for a bond is less than the bond's coupon rate, the bond will sell at a discount.
D)  If the market interest rate for a bond is greater than the bond's coupon rate, the bond will sell at a discount.E) None of the above
F) C) and D)

Question 19

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 20

Assume that a 10-year Treasury bond has a 12% annual coupon,while a 15-year T-bond has an 8% annual coupon.Assume also that the yield curve is flat,and all Treasury securities have a 10% yield to maturity.Which of the following statements is correct?

Accepted Answer

A)  If interest rates decline, the prices of both bonds will increase, but the 15-year bond would have a larger percentage increase in price.
B)  If interest rates decline, the prices of both bonds will increase, but the 10-year bond would have a larger percentage increase in price.
C)  The 10-year bond would sell at a discount, while the 15-year bond would sell at a premium.
D)  The 10-year bond would sell at a premium, while the 15-year bond would sell at par.E) B) and D)
F) A) and D)

Exam 6: Bonds, Bond Valuation, and Interest Rates

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.

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Which of the following best describes zero coupon bonds?

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A bond rating agency will rely exclusively on quantitative data to determine the risk that a firm may default on its debt servicing obligations.

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Which statement regarding types of debt is true?

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Which statement regarding interest rate risk is true?

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Which statement regarding bonds is true?

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Which of the following best describes a convertible bond issue?

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Which of the following statements about bond yields is true?

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Which statement regarding bonds is FALSE?

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A 10-year corporate bond has an annual coupon of 9%.The bond is currently selling at par ($1,000) .Which of the following statements is NOT correct?

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There is an inverse relationship between bonds' quality ratings and their required rates of return.

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

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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.)

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Company A has a bond outstanding that pays a 7% coupon.The interest is paid annually,and the bond matures in 10 years.If the market rate of interest on bonds of similar risk is 8%,what should company A's bond be selling for,approximately?

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Assume that a 10-year Treasury bond has a 12% annual coupon,while a 15-year T-bond has an 8% annual coupon.Assume also that the yield curve is flat,and all Treasury securities have a 10% yield to maturity.Which of the following statements is correct?

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Which of the following is an example of reinvestment risk when investing in the bond market?

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Maple bonds are issued by the government of Canada in Canadian dollars but sold to only foreign investors.

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Which of the following statements regarding bond current yields is NOT true?

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Suppose a Chinese company in Canada issues a bond that is denominated in Canadian dollars.What is this an example of?

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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?

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