Exam 5: Bonds, Bond Valuation, and Interest Rates

A) An indenture is a bond that is less risky than a mortgage bond.
B) The expected return on a corporate bond will generally exceed the bond's yield to maturity.
C) If a bond's coupon rate exceeds its yield to maturity, then its expected return to investors exceeds the yield to maturity.
D) Under our bankruptcy laws, any firm that is in financial distress will be forced to declare bankruptcy and then be liquidated.
E) All else equal, senior debt generally has a lower yield to maturity than subordinated debt.

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A) A 10-year, $1,000 face value, zero coupon bond.
B) A 10-year, $1,000 face value, 10% coupon bond with annual interest payments.
C) All 10-year bonds have the same price risk since they have the same maturity.
D) A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments.

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A) 6.27%
B) 6.60%
C) 6.95%
D) 7.32%
E) 7.70%

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A) The bond is selling below its par value.
B) The bond is selling at a discount.
C) If the yield to maturity remains constant, the bond's price one year from now will be lower than its current price.
D) The bond's current yield is greater than 9%.
E) If the yield to maturity remains constant, the bond's price one year from now will be higher than its current price.

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A) If a coupon bond is selling at a discount, then the bond's expected capital gains yield is negative.
B) If a bond is selling at a discount, the yield to call is a better measure of the expected return than the yield to maturity.
C) 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.
D) If a coupon bond is selling at par, its current yield equals its yield to maturity.
E) If a coupon bond is selling at a premium, then the bond's current yield is zero.

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A) If a bond's yield to maturity exceeds its coupon rate, the bond will sell at par.
B) All else equal, if a bond's yield to maturity increases, its price will fall.
C) If a bond's yield to maturity exceeds its coupon rate, the bond will sell at a premium over par.
D) All else equal, if a bond's yield to maturity increases, its current yield will fall.
E) A zero coupon bond's current yield is equal to its yield to maturity.

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A) Market interest rates rise sharply.
B) Market interest rates decline sharply.
C) The company's financial situation deteriorates significantly.
D) Inflation increases significantly.
E) The company's bonds are downgraded.

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A) 20-year, 10% coupon bond.
B) 20-year, 5% coupon bond.
C) 1-year, 10% coupon bond.
D) 20-year, zero coupon bond.
E) 10-year, zero coupon bond.

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A) The prices of both bonds will remain unchanged.
B) The price of Bond A will decrease over time, but the price of Bond B will increase over time.
C) The prices of both bonds will increase by 7% per year.
D) The prices of both bonds will increase over time, but the price of Bond A will increase by more.
E) The price of Bond B will decrease over time, but the price of Bond A will increase over time.

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A) 0.49%
B) 0.55%
C) 0.61%
D) 0.68%
E) 0.75%

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A) A 1-year bond with a 15% coupon.
B) A 3-year bond with a 10% coupon.
C) A 10-year zero coupon bond.
D) A 10-year bond with a 10% coupon.
E) An 8-year bond with a 9% coupon.

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A) If a coupon bond is selling at a discount, its price will continue to decline until it reaches its par value at maturity.
B) If interest rates increase, the price of a 10-year coupon bond will decline by a greater percentage than the price of a 10-year zero coupon bond.
C) If a bond's yield to maturity exceeds its annual coupon, then the bond will trade at a premium.
D) If a coupon bond is selling at a premium, its current yield equals its yield to maturity.
E) If a coupon bond is selling at par, its current yield equals its yield to maturity.

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A) The most likely explanation for an inverted yield curve is that investors expect inflation to increase.
B) The most likely explanation for an inverted yield curve is that investors expect inflation to decrease.
C) If the yield curve is inverted, short-term bonds have lower yields than long-term bonds.
D) Inverted yield curves can exist for Treasury bonds, but because of default premiums, the corporate yield curve can never be inverted.
E) The higher the maturity risk premium, the higher the probability that the yield curve will be inverted.

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A) 0.99%
B) 1.10%
C) 1.21%
D) 1.33%
E) 1.46%

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A) All else equal, bonds with longer maturities have more interest rate (price) risk than bonds with shorter maturities.
B) If a bond is selling at its par value, its current yield equals its yield to maturity.
C) If a bond is selling at a premium, its current yield will be greater than its yield to maturity.
D) All else equal, bonds with larger coupons have greater interest rate (price) risk than bonds with smaller coupons.
E) If a bond is selling at a discount to par, its current yield will be less than its yield to maturity.

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A) If the yield to maturity remains at 8%, then the bond's price will decline over the next year.
B) The bond's coupon rate is less than 8%.
C) If the yield to maturity increases, then the bond's price will increase.
D) If the yield to maturity remains at 8%, then the bond's price will remain constant over the next year.
E) The bond's current yield is less than 8%.

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