Exam 7: Bonds and Their Valuation

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.

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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.

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E

A) Bond 8's current yield will increase each year.
B) Since the bonds have the same YTM, they should all have the same price, and since interest rates are not expected to change, their prices should all remain at their current levels until maturity.
C) Bond 12 sells at a premium (its price is greater than par) , and its price is expected to increase over the next year.
D) Bond 8 sells at a discount (its price is less than par) , and its price is expected to increase over the next year.
E) Over the next year, Bond 8's price is expected to decrease, Bond 10's price is expected to stay the same, and Bond 12's price is expected to increase.

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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.

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

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A) If a 10-year, $1,000 par, zero coupon bond were issued at a price that gave investors a 10% yield to maturity, and if interest rates then dropped to the point where rd = YTM = 5%, the bond would sell at a premium over its $1,000 par value.
B) If a 10-year, $1,000 par, 10% coupon bond were issued at par, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond would sell at a premium above its $1,000 par value.
C) Other things held constant, including the coupon rate, a corporation would rather issue noncallable bonds than callable bonds.
D) Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond because it would have a shorter expected life.
E) Bonds are exposed to both reinvestment risk and price risk. Longer-term low-coupon bonds, relative to shorter-term high-coupon bonds, are generally more exposed to reinvestment risk than price risk.

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

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True

A) $1,113.48
B) $1,142.03
C) $1,171.32
D) $1,201.35
E) $1,232.15

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A) 5.78%
B) 6.09%
C) 6.39%
D) 6.71%
E) 7.05%

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A) Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is below the coupon rate than if it is above the coupon rate.
B) A callable 10-year, 10% bond should sell at a higher price than an otherwise similar noncallable bond.
C) Corporate treasurers dislike issuing callable bonds because these bonds may require the company to raise additional funds earlier than would be true if noncallable bonds with the same maturity were used.
D) Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is above the coupon rate than if it is below the coupon rate.
E) The actual life of a callable bond will always be equal to or less than the actual life of a noncallable bond with the same maturity. Therefore, if the yield curve is upward sloping, the required rate of return will be lower on the callable bond.

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A) If a bond is selling at a discount, the yield to call is a better measure of return than is 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) On an expected yield basis, the expected current yield will always be positive because an investor would not purchase a bond that is not expected to pay any cash coupon interest.
D) If a coupon bond is selling at par, its current yield equals its yield to maturity, and its expected capital gains yield is zero.
E) 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.

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A) $903.04
B) $925.62
C) $948.76
D) $972.48
E) $996.79

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A) A 10-year $100 annuity.
B) A 10-year, $1,000 face value, zero coupon bond.
C) A 10-year, $1,000 face value, 10% coupon bond with annual interest payments.
D) All 10-year bonds have the same price risk since they have the same maturity.
E) A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments.

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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.

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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.

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