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 maturity (or 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) If a bond is selling at a premium, this implies that its yield to maturity exceeds its coupon rate.
G) A) and E)
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A) If the Treasury yield curve is upward sloping and Short has less default risk than Long, then Short's bonds must under all conditions have the lower yield.
B) If the Treasury yield curve is downward sloping, Long's bonds must under all conditions have the lower yield.
C) If the yield curve for Treasury securities is upward sloping, Long's bonds must under all conditions have a higher yield than Short's bonds.
D) If the yield curve for Treasury securities is flat, Short's bond must under all conditions have the same yield as Long's bonds.
E) If Long's and Short's bonds have the same default risk, their yields must under all conditions be equal.
G) A) and C)
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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) Making the bond a first mortgage bond rather than a debenture.
E) Adding a sinking fund.
G) A) and C)
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A) Senior debt is debt that has been more recently issued, and in bankruptcy it is paid off after junior debt because the junior debt was issued first.
B) A company's subordinated debt has less default risk than its senior debt.
C) Convertible bonds generally 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) A debenture is a secured bond that is backed by some or all of the firm's fixed assets.
G) A) and B)
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A) $1,113.48
B) $1,142.03
C) $1,171.32
D) $1,201.35
E) $1,232.15
G) B) and C)
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A) 5.52%
B) 5.82%
C) 6.11%
D) 6.41%
E) 6.73%
G) A) and E)
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A) The bond's current yield is less than 8%.
B) If the yield to maturity remains at 8%, then the bond's price will decline over the next year.
C) The bond's coupon rate is less than 8%.
D) If the yield to maturity increases, then the bond's price will increase.
E) If the yield to maturity remains at 8%, then the bond's price will remain constant over the next year.
G) C) and E)
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A) Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest rates decline after the bond was issued.
B) Most sinking funds require the issuer to provide funds to a trustee, who holds the money so that it will be available to pay off bondholders when the bonds mature.
C) A sinking fund provision makes a bond more risky to investors at the time of issuance.
D) Sinking fund provisions never require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time.
E) If interest rates increase after a company has issued bonds with a sinking fund, the company will be less likely to buy bonds on the open market to meet its sinking fund obligation and more likely to call them in at the sinking fund call price.
G) A) and C)
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A) The coupon rate should be exactly equal to 6%.
B) The coupon rate could be less than, equal to, or greater than 6%, depending on the specific terms set, but in the real world the convertible feature would probably cause the coupon rate to be less than 6%.
C) The rate should be slightly greater than 6%.
D) The rate should be over 7%.
E) The rate should be over 8%.
G) All of the above
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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) A) and E)
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A) If the maturity risk premium were zero and interest rates were expected to decrease in the future, then the yield curve for U.S. Treasury securities would, other things held constant, have an upward slope.
B) Liquidity premiums are generally higher on Treasury than corporate bonds.
C) The maturity premiums embedded in the interest rates on U.S. Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-term bonds.
D) Default risk premiums are generally lower on corporate than on Treasury bonds.
E) Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds.
G) A) and E)
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A) Real risk-free rate differences.
B) Tax effects.
C) Default risk differences.
D) Maturity risk differences.
E) Inflation differences.
G) A) and D)
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A) 2.62%
B) 2.88%
C) 3.17%
D) 3.48%
E) 3.83%
G) A) and C)
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A) 10-year, zero coupon bonds have more reinvestment rate risk than 10-year, 10% coupon bonds.
B) A 10-year, 10% coupon bond has less reinvestment rate risk than a 10-year, 5% coupon bond (assuming all else equal) .
C) The total (rate of) return on a bond during a given year is the sum of the coupon interest payments received during the year and the change in the value of the bond from the beginning to the end of the year, divided by the bond's price at the beginning of the year.
D) The price of a 20-year, 10% bond is less sensitive to changes in interest rates than the price of a 5-year, 10% bond.
E) A $1,000 bond with $100 annual interest payments that has 5 years to maturity and is not expected to default would sell at a discount if interest rates were below 9% and at a premium if interest rates were greater than 11%.
G) B) and E)
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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) The expected capital gains yield on a bond will always be zero or positive because no investor would purchase a bond with an expected capital loss.
G) A) and D)
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A) All else equal, high-coupon bonds have less reinvestment rate risk than low-coupon bonds.
B) All else equal, long-term bonds have less interest rate price risk than short-term bonds.
C) All else equal, low-coupon bonds have less interest rate price risk than high-coupon bonds.
D) All else equal, short-term bonds have less reinvestment rate risk than long-term bonds.
E) All else equal, long-term bonds have less reinvestment rate risk than short-term bonds.
G) A) and E)
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B) False
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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 one year 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.
G) A) and E)
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B) False
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A) You hold two bonds, a 10-year, zero coupon, issue and a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from its current level, the zero coupon bond will experience the larger percentage decline.
B) The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.
C) You hold two bonds. One is a 10-year, zero coupon, bond and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline.
D) The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates, other things held constant.
E) The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates.
G) B) and E)
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