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) C) and E)
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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) C) and D)
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A
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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) All of the above
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A
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A) The bond's expected capital gains yield is zero.
B) The bond's yield to maturity is above 9%.
C) The bond's current yield is above 9%.
D) If the bond's yield to maturity declines,the bond will sell at a discount.
E) The bond's current yield is less than its expected capital gains yield.
G) A) and D)
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A) 5.51%
B) 6.72%
C) 6.52%
D) 5.98%
E) 7.46%
G) A) and B)
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B) False
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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 E)
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A
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A) All else equal,senior debt generally has a lower yield to maturity than subordinated debt.
B) An indenture is a bond that is less risky than a mortgage bond.
C) The expected return on a corporate bond will generally exceed the bond's yield to maturity.
D) If a bond's coupon rate exceeds its yield to maturity,then its expected return to investors will also exceed its yield to maturity.
E) Under our bankruptcy laws,any firm that is in financial distress will be forced to declare bankruptcy and then be liquidated.
G) All of the above
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B) False
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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 price risk but more reinvestment 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 price risk.
D) Relative to a coupon-bearing bond with the same maturity,a zero coupon bond has more price risk but less reinvestment risk.
E) Long-term bonds have less price risk and also less reinvestment risk than short-term bonds.
G) All of the above
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A) 6.37%
B) 8.76%
C) 7.96%
D) 6.05%
E) 6.69%
G) None of the above
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A) If two bonds have the same maturity,the same yield to maturity,and the same level of risk,the bonds should sell for the same price regardless of their coupon rates.
B) All else equal,an increase in interest rates will have a greater effect on the prices of short-term than long-term bonds.
C) All else equal,an increase in interest rates will have a greater effect on higher-coupon bonds than it will have on lower-coupon bonds.
D) If a bond's yield to maturity exceeds its coupon rate,the bond's price must be less than its maturity value.
E) If a bond's yield to maturity exceeds its coupon rate,the bond's current yield must be less than its coupon rate.
G) B) and D)
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A) A zero coupon bond of any maturity will have more price risk than any coupon bond,even a perpetuity.
B) If their maturities and other characteristics were the same,a 5% coupon bond would have more price risk than a 10% coupon bond.
C) A 10-year coupon bond would have more reinvestment risk than a 5-year coupon bond,but all 10-year coupon bonds have the same amount of reinvestment risk.
D) A 10-year coupon bond would have more price risk than a 5-year coupon bond,but all 10-year coupon bonds have the same amount of price risk.
E) If their maturities and other characteristics were the same,a 5% coupon bond would have less price risk than a 10% coupon bond.
G) A) and E)
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B) False
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A) The bond sells at a price below par.
B) The bond has a current yield greater than 8%.
C) The bond sells at a discount.
D) The bond's required rate of return is less than 7.5%.
E) If the yield to maturity remains constant,the price of the bond will decline over time.
G) A) and E)
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B) False
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A) The company would be especially eager to have a call provision included in the indenture if its management thinks that interest rates are almost certain to rise in the foreseeable future.
B) If debt is used to raise the million dollars,but $500,000 is raised as first mortgage bonds on the new plant and $500,000 as debentures,the interest rate on the first mortgage bonds would be lower than it would be if the entire $1 million were raised by selling first mortgage bonds.
C) If two classes of debt are used (with one senior and the other subordinated to all other debt) ,the subordinated debt will carry a lower interest rate.
D) If debt is used to raise the million dollars,the cost of the debt would be lower if the debt were in the form of a fixed-rate bond rather than a floating-rate bond.
E) If debt is used to raise the million dollars,the cost of the debt would be higher if the debt were in the form of a mortgage bond rather than an unsecured term loan.
G) D) and E)
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A) 8.02%
B) 9.71%
C) 6.66%
D) 7.38%
E) 8.66%
G) A) and C)
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A) All else equal,secured debt is more risky than unsecured debt.
B) The expected return on a corporate bond must be greater than its promised return if the probability of default is greater than zero.
C) All else equal,senior debt has more default risk than subordinated debt.
D) A company's bond rating is affected by its financial ratios but not by provisions in its indenture.
E) Under Chapter 7 of the Bankruptcy Act,the assets of a firm that declares bankruptcy must be liquidated,and the sale proceeds must be used to pay off claims against it according to the priority of the claims as spelled out in the Act.
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) B) and E)
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