Question 1

Which of the following statements is CORRECT?

Accepted Answer

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.F) A) and E)
G) A) and B)

Question 2

Which of the following events would make it more likely that a company would call its outstanding callable bonds?

Accepted Answer

A)   The company's bonds are downgraded.
B)   Market interest rates rise sharply.
C)   Market interest rates decline sharply.
D)   The company's financial situation deteriorates significantly.
E)   Inflation increases significantly.F) A) and B)
G) All of the above

Question 3

Keenan Industries has a bond outstanding with 15 years to maturity,an 8.25% nominal coupon,semiannual payments,and a $1,000 par value.The bond has a 6.50% nominal yield to maturity,but it can be called in 6 years at a price of $1,045.What is the bond's nominal yield to call?

Accepted Answer

A)   6.77%
B)   5.09%
C)   4.42%
D)   5.54%
E)   5.59%F) All of the above
G) A) and E)

Question 4

Malko Enterprises' bonds currently sell for $1,020.They have a 6-year maturity,an annual coupon of $75,and a par value of $1,000.What is their current yield?

Accepted Answer

A)   6.91%
B)   6.62%
C)   8.46%
D)   6.40%
E)   7.35%F) A) and C)
G) All of the above

Question 5

Sadik Inc.'s bonds currently sell for $1,300 and have a par value of $1,000.They pay a $105 annual coupon and have a 15-year maturity,but they can be called in 5 years at $1,100.What is their yield to call (YTC) ?

Accepted Answer

A)   5.10%
B)   5.31%
C)   4.94%
D)   6.00%
E)   4.30%F) A) and B)
G) A) and C)

Question 6

Grossnickle Corporation issued 20-year,noncallable,7.4% annual coupon bonds at their par value of $1,000 one year ago.Today,the market interest rate on these bonds is 5.5%.What is the current price of the bonds,given that they now have 19 years to maturity?

Accepted Answer

A)   $1,281.57
B)   $1,000.85
C)   $1,013.05
D)   $1,220.55
E)   $1,196.13F) None of the above
G) A) and C)

Question 7

Under normal conditions,which of the following would be most likely to increase the coupon rate required for a bond to be issued at par?

Accepted Answer

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.F) All of the above
G) A) and E)

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)   If a coupon bond is selling at par,its current yield equals its yield to maturity.
B)   If a coupon bond is selling at a discount,its price will continue to decline until it reaches its par value at maturity.
C)   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.
D)   If a bond's yield to maturity exceeds its annual coupon,then the bond will trade at a premium.
E)   If a coupon bond is selling at a premium,its current yield equals its yield to maturity.F) D) and E)
G) A) and B)

Question 9

In order to accurately assess the capital structure of a firm,it is necessary to convert its balance sheet figures from historical book values to market values.KJM Corporation's balance sheet (book values) as of today is as follows:   Long-term debt (bonds, at par)  $23,500,000 Preferred stock 2,000,000 Common stock ( $10 par)  10,000,000 Retained earnings 4,000,000 Total debt and equity $39,500,000\begin{array}{lr}	ext { Long-term debt (bonds, at par)  } & \$ 23,500,000 \	ext { Preferred stock } & 2,000,000 \	ext { Common stock ( } \$ 10 	ext { par)  } & 10,000,000 \	ext { Retained earnings } & 4,000,000 \\hline	ext { Total debt and equity }&\$39,500,000\end{array} Long-term debt (bonds, at par)   Preferred stock  Common stock ( $10 par)   Retained earnings  Total debt and equity ​$23,500,0002,000,00010,000,0004,000,000$39,500,000​​ 
?
The bonds have a 8.3% coupon rate,payable semiannually,and a par value of $1,000.They mature exactly 10 years from today.The yield to maturity is 11%,so the bonds now sell below par.What is the current market value of the firm's debt?

Accepted Answer

A)   $19,708,741
B)   $22,073,790
C)   $24,241,752
D)   $21,679,615
E)   $15,569,906 F) B) and E)
G) A) and B)

Question 10

Ryngaert Inc.recently issued noncallable bonds that mature in 15 years.They have a par value of $1,000 and an annual coupon of 5.7%.If the current market interest rate is 7.0%,at what price should the bonds sell?

Accepted Answer

A)   $1,040.28
B)   $802.25
C)   $1,013.84
D)   $775.81
E)   $881.60F) A) and E)
G) C) and E)

Question 11

Assume that a noncallable 10-year T-bond has a 12% annual coupon,while a 15-year noncallable 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 would increase,but the 15-year bond would have a larger percentage increase in price.
B)   If interest rates decline,the prices of both bonds would 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)   If the yield to maturity on both bonds remains at 10% over the next year,the price of the 10-year bond would increase,but the price of the 15-year bond would fall.F) A) and C)
G) C) and E)

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A)   One disadvantage of zero coupon bonds is that the issuing firm cannot realize any tax savings from the use of debt until the bonds mature.
B)   Other things held constant,a callable bond should have a lower yield to maturity than a noncallable bond.
C)   Once a firm declares bankruptcy,it must be liquidated by the trustee,who uses the proceeds to pay bondholders,unpaid wages,taxes,and legal fees.
D)   Income bonds must pay interest only if the company earns the interest.Thus,these securities cannot bankrupt a company prior to their maturity,and this makes them safer to the issuing corporation than "regular" bonds.
E)   A firm with a sinking fund that gives it the choice of calling the required bonds at par or buying the bonds in the open market would generally choose the open market purchase if the coupon rate exceeded the going interest rate.F) A) and D)
G) None of the above

Exam 7: Bonds and Their Valuation

Correct Answer
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Under normal conditions,which of the following would be most likely to increase the coupon rate required for a bond to be issued at par?

Correct Answer
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Malko Enterprises' bonds currently sell for $1,020.They have a 6-year maturity,an annual coupon of $75,and a par value of $1,000.What is their current yield?

Correct Answer
verified

Sadik Inc.'s bonds currently sell for $1,300 and have a par value of $1,000.They pay a $105 annual coupon and have a 15-year maturity,but they can be called in 5 years at $1,100.What is their yield to call (YTC) ?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
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Ryngaert Inc.recently issued noncallable bonds that mature in 15 years.They have a par value of $1,000 and an annual coupon of 5.7%.If the current market interest rate is 7.0%,at what price should the bonds sell?

Correct Answer
verified

Assume that a noncallable 10-year T-bond has a 12% annual coupon,while a 15-year noncallable 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?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following events would make it more likely that a company would call its outstanding callable bonds?

Correct Answer
verified

Keenan Industries has a bond outstanding with 15 years to maturity,an 8.25% nominal coupon,semiannual payments,and a $1,000 par value.The bond has a 6.50% nominal yield to maturity,but it can be called in 6 years at a price of $1,045.What is the bond's nominal yield to call?

Correct Answer
verified

Grossnickle Corporation issued 20-year,noncallable,7.4% annual coupon bonds at their par value of $1,000 one year ago.Today,the market interest rate on these bonds is 5.5%.What is the current price of the bonds,given that they now have 19 years to maturity?

Correct Answer
verified

Exam 7: Bonds and Their Valuation

Correct AnswerverifiedShow Answer

Under normal conditions,which of the following would be most likely to increase the coupon rate required for a bond to be issued at par?

Correct AnswerverifiedShow Answer

Malko Enterprises' bonds currently sell for $1,020.They have a 6-year maturity,an annual coupon of $75,and a par value of $1,000.What is their current yield?

Correct AnswerverifiedShow Answer

Sadik Inc.'s bonds currently sell for $1,300 and have a par value of $1,000.They pay a $105 annual coupon and have a 15-year maturity,but they can be called in 5 years at $1,100.What is their yield to call (YTC) ?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Ryngaert Inc.recently issued noncallable bonds that mature in 15 years.They have a par value of $1,000 and an annual coupon of 5.7%.If the current market interest rate is 7.0%,at what price should the bonds sell?

Correct AnswerverifiedShow Answer

Assume that a noncallable 10-year T-bond has a 12% annual coupon,while a 15-year noncallable 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?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following events would make it more likely that a company would call its outstanding callable bonds?

Correct AnswerverifiedShow Answer

Keenan Industries has a bond outstanding with 15 years to maturity,an 8.25% nominal coupon,semiannual payments,and a $1,000 par value.The bond has a 6.50% nominal yield to maturity,but it can be called in 6 years at a price of $1,045.What is the bond's nominal yield to call?

Correct AnswerverifiedShow Answer

Grossnickle Corporation issued 20-year,noncallable,7.4% annual coupon bonds at their par value of $1,000 one year ago.Today,the market interest rate on these bonds is 5.5%.What is the current price of the bonds,given that they now have 19 years to maturity?

Correct AnswerverifiedShow Answer

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