A) Liquidity premiums are generally higher on Treasury than corporate bonds.
B) 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.
C) Default risk premiums are generally lower on corporate than on Treasury bonds.
D) Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds.
E) 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.
G) All of the above
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B) False
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B) False
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A) For any given maturity, a 1.0 percentage point decrease in the market interest rate would cause a smaller dollar capital gain than the capital loss stemming from a 1.0 percentage point increase in the interest rate.
B) From a corporate borrower's point of view, interest paid on bonds is not tax-deductible.
C) Price sensitivity as measured by the percentage change in price due to a given change in the required rate of return decreases as a bond's maturity increases.
D) For a bond of any maturity, a 1.0 percentage point increase in the market interest rate (rd) causes a larger dollar capital loss than the capital gain stemming from a 1.0 percentage point decrease in the interest rate.
E) A 20-year zero coupon bond has more reinvestment rate risk than a 20-year coupon bond.
G) None of the above
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A) The expected return on a corporate bond must be less than its promised return if the probability of default is greater than zero.
B) All else equal, senior debt has less default risk than subordinated debt.
C) A company's bond rating is affected by its financial ratios and provisions in its indenture.
D) Under Chapter 11 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 its debt according to the seniority of the debt as spelled out in the Act.
E) All else equal, secured debt is less risky than unsecured debt.
G) A) and B)
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A) 1, 4, 6
B) 1, 2, 3, 4, 6
C) 1, 2, 3, 4, 5, 6
D) 1, 3, 4, 5, 6
E) 1, 3, 4, 6
G) A) and B)
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A) 6.20%
B) 6.53%
C) 6.87%
D) 7.24%
E) 7.62%
G) None of the above
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A) If the maturity risk premium (MRP) is greater than zero, then the yield curve must have an upward slope.
B) Because long-term bonds are riskier than short-term bonds, yields on long-term Treasury bonds will always be higher than yields on short-term T-bonds.
C) If the maturity risk premium (MRP) equals zero, the yield curve must be flat.
D) The yield curve can never be downward sloping.
E) If inflation is expected to increase in the future, and if the maturity risk premium (MRP) is greater than zero, then the yield curve will have an upward slope.
G) A) and E)
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A) If rates fall after its issue, a zero coupon bond could trade at a price above its par value.
B) If rates fall rapidly, a zero coupon bond's expected appreciation could become negative.
C) If a firm moves from a position of strength toward financial distress, its bonds' yield to maturity would probably decline.
D) If a bond is selling at a premium, this implies that its yield to maturity exceeds its coupon rate.
E) If a coupon bond is selling at par, its current yield equals its yield to maturity.
G) All of the above
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B) False
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A) $839.31
B) $860.83
C) $882.90
D) $904.97
E) $927.60
G) None of the above
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B) False
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B) False
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A) 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.
B) 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.
C) If a coupon bond is selling at par, its current yield equals its yield to maturity.
D) 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.
E) If a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity.
G) A) and D)
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A) If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds, we could be certain that the firm's total interest expense would be lower than if the debt were raised by issuing $100 million of debentures.
B) In this situation, we cannot tell for sure how, or whether, the firm's total interest expense on the $100 million of debt would be affected by the mix of debentures versus first mortgage bonds. The interest rate on each of the two types of bonds would increase as the percentage of mortgage bonds used was increased, but the result might well be such that the firm's total interest charges would not be affected materially by the mix between the two.
C) The higher the percentage of debentures, the greater the risk borne by each debenture, and thus the higher the required rate of return on the debentures.
D) If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds, we could be certain that the firm's total interest expense would be lower than if the debt were raised by issuing $100 million of first mortgage bonds.
E) The higher the percentage of debt represented by mortgage bonds, the riskier both types of bonds will be and, consequently, the higher the firm's total dollar interest charges will be.
G) C) and D)
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B) False
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B) False
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A) The bond is currently selling at a price below its par value.
B) If market interest rates remain unchanged, the bond's price one year from now will be lower than it is today.
C) The bond should currently be selling at its par value.
D) If market interest rates remain unchanged, the bond's price one year from now will be higher than it is today.
E) If market interest rates decline, the price of the bond will also decline.
G) B) and D)
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A) 1.90%
B) 2.09%
C) 2.30%
D) 2.53%
E) 2.78%
G) A) and E)
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A) Long-term bonds have less interest rate price risk but more reinvestment rate risk than short-term bonds.
B) If interest rates increase, all bond prices will increase, but the increase will be greater for bonds that have less interest rate risk.
C) Relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more interest rate price risk but less reinvestment rate risk.
D) Long-term bonds have less interest rate price risk and also less reinvestment rate risk than short-term bonds.
E) 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.
G) A) and E)
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