Question 1

Zumwalt Corporation's Class S bonds have a 12-year maturity, $1,000 par value, and a 5.75% coupon paid semiannually (2.875% each 6 months) , and those bonds sell at their par value. Zumwalt's Class A bonds have the same risk, maturity, and par value, but the A bonds pay a 5.75% annual coupon. Neither bond is callable. At what price should the annual payment bond sell?

Accepted Answer

A)   $943.98
B)   $968.18
C)   $993.01
D)   $1,017.83E) C) and D)
F) B) and C)

Question 2

Which bond has the greatest interest rate price risk?

Accepted Answer

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) None of the above
F) All of the above

Question 3

Short Corp. just issued bonds that will mature in 10 years, and Long Corp. issued bonds that will mature in 20 years. Both bonds promise to pay a semiannual coupon, they are not callable or convertible, and they are equally liquid. Further, assume that the yield curve is based only on expectations about future inflation, i.e., that the maturity risk premium is zero for government bonds. Under these conditions, which of the following statements is correct?

Accepted Answer

A)   If the yield curve is upward sloping and Short has less default risk than Long, then Short's bonds must have the lower yield under all conditions.
B)   If the yield curve is downward sloping, Long's bonds must have the lower yield under all conditions.
C)   If the yield curve is flat, Short's bond must have the same yield as Long's bonds under all conditions.
D)   If Long's and Short's bonds have the same default risk, their yields must be equal under all conditions.E) B) and C)
F) A) and D)

Question 4

Tucker Corporation is planning to issue new 20-year bonds. Initially, the plan was to make the bonds non-callable. If the bonds were made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

Accepted Answer

A)   Because of the call premium, the required rate of return would decline.
B)   There is no reason to expect a change in the required rate of return.
C)   The required rate of return would decline because the bond would then be less risky to a bondholder.
D)   The required rate of return would increase because the bond would then be more risky to a bondholder.E) A) and B)
F) A) and C)

Question 5

Assuming all else is constant, which of the following statements is correct?

Accepted Answer

A)   A 20-year zero coupon bond has more reinvestment rate risk than a 20-year coupon bond.
B)   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.
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) C) and D)
F) B) and C)

Question 6

A bond with a par value of $1,000 has an annual interest payment of $85. The bond currently sells for $850 and has 8 years to maturity. Which of the following is true?

Accepted Answer

A)   The current yield on the bond must be 8.5%.
B)   The investor's required rate of return must be 8.5%.
C)   The coupon rate must be 8.5%.
D)   The yield to maturity must be 8.5%.E) C) and D)
F) A) and B)

Question 7

Which of the following statements best describes interest rates?

Accepted Answer

A)   You hold two bonds. One is a 10-year, zero coupon issue, 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 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)   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.
D)   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.E) A) and B)
F) A) and C)

Question 8

If its yield to maturity declined by 1%, which bond would have the largest percentage increase in value?

Accepted Answer

A)   a 1-year zero coupon bond
B)   a 1-year bond with an 8% coupon
C)   a 10-year bond with an 8% coupon
D)   a 10-year zero coupon bondE) All of the above
F) A) and D)

Question 9

Moerdyk Corporation's bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd)  is 4.75%, based on semiannual compounding. What is the bond's price?

Accepted Answer

A)   1,063.09
B)   1,090.35
C)   1,118.31
D)   1,146.27E) A) and D)
F) C) and D)

Question 10

The risk in bond prices due to fluctuations in interest rates is called reinvestment risk.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements regarding bond current yields is NOT true?

Accepted Answer

A)   If a bond is selling at a discount to par, then its current yield will be less than its yield to maturity.
B)   If a bond is selling at its par value, then its current yield equals its yield to maturity.
C)   If a bond is selling at a premium, then its current yield will be greater than its yield to maturity.
D)   A bond's current yield will remain unchanged as the bond's term to maturity changes.E) C) and D)
F) A) and C)

Question 12

Three $1,000 face value bonds that mature in 10 years have the same level of risk, hence their YTMs are equal. Bond A has an 8% annual coupon, Bond B has a 10% annual coupon, and Bond C has a 12% annual coupon. Bond B sells at par. Assuming interest rates remain constant for the next 10 years, which statement about these bonds is true?

Accepted Answer

A)   Bond A's current yield will increase each year.
B)   Bond C sells at a premium (its price is greater than par) , and its price is expected to increase over the next year.
C)   Bond A sells at a discount (its price is less than par) , and its price is expected to increase over the next year.
D)   Over the next year, prices of Bond A, B, and C are expected to decrease, stay the same, and increase, respectively.E) A) and B)
F) C) and D)

Question 13

The Canada call feature stops a bond being called prior to its maturity because a higher buyback price is involved.

Accepted Answer

A) True 
 B)False

Question 14

You have funds that you want to invest in bonds, and you just noticed in the financial pages of the local newspaper that you can buy a $1,000 par value bond for $800. The coupon rate is 10% (with annual payments), and there are 10 years before the bond will mature and pay off its $1,000 par value. You should buy the bond if your required return on bonds with this risk is 12%.

Accepted Answer

A) True 
 B)False

Question 15

The Morrissey Company's bonds mature in 7 years, have a par value of $1,000, and make an annual coupon payment of $70. The market interest rate for the bonds is 8.5%. What is the bond's price?

Accepted Answer

A)   $923.22
B)   $946.30
C)   $969.96
D)   $994.21E) B) and C)
F) A) and C)

Question 16

Which statement regarding types of debt is true?

Accepted Answer

A)   Junior debt is debt that has been more recently issued, and in bankruptcy it is paid off after senior debt because the senior debt was issued first.
B)   Subordinated debt has less default risk than senior debt.
C)   Convertible bonds 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) and B)
F) A) and C)

Question 17

Which of the following statements is correct?

Accepted Answer

A)   A bond is likely to be called if its coupon rate is below its YTM.
B)   A bond is likely to be called if its market price is below its par value.
C)   Even if a bond's YTC exceeds its YTM, an investor with an investment horizon longer than the bond's maturity would be worse off if the bond were called.
D)   A bond is likely to be called if its market price is equal to its par value.E) B) and C)
F) A) and B)

Question 18

If a firm raises capital by selling new bonds, it is called the "issuing firm," and the coupon rate is generally set equal to the required rate on bonds of equal risk.

Accepted Answer

A) True 
 B)False

Question 19

Wachowicz Corporation issued 15-year, noncallable, 7.5% 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 14 years to maturity?

Accepted Answer

A)   $1,104.62
B)   $1,132.95
C)   $1,162.00
D)   $1,191.79E) All of the above
F) None of the above

Question 20

A government bond has an 8% annual coupon and a 7.5% yield to maturity. Which statement regarding this bond is correct?

Accepted Answer

A)   The bond sells at a price below par.
B)   The bond has a current yield greater than 8%.
C)   The bond's required rate of return is less than 7.5%.
D)   If the yield to maturity remains constant, the price of the bond will decline over time.E) All of the above
F) B) and C)

Exam 6: Bonds, Bond Valuation, and Interest Rates

Which of the following statements regarding bond current yields is NOT true?

Correct Answer
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Correct Answer
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The risk in bond prices due to fluctuations in interest rates is called reinvestment risk.

Correct Answer
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If a firm raises capital by selling new bonds, it is called the "issuing firm," and the coupon rate is generally set equal to the required rate on bonds of equal risk.

Correct Answer
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Correct Answer
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A government bond has an 8% annual coupon and a 7.5% yield to maturity. Which statement regarding this bond is correct?

Correct Answer
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A bond with a par value of $1,000 has an annual interest payment of $85. The bond currently sells for $850 and has 8 years to maturity. Which of the following is true?

Correct Answer
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The Morrissey Company's bonds mature in 7 years, have a par value of $1,000, and make an annual coupon payment of $70. The market interest rate for the bonds is 8.5%. What is the bond's price?

Correct Answer
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Which bond has the greatest interest rate price risk?

Correct Answer
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Which of the following statements is correct?

Correct Answer
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Which statement regarding types of debt is true?

Correct Answer
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Wachowicz Corporation issued 15-year, noncallable, 7.5% 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 14 years to maturity?

Correct Answer
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The Canada call feature stops a bond being called prior to its maturity because a higher buyback price is involved.

Correct Answer
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Correct Answer
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Correct Answer
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Moerdyk Corporation's bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000. The going interest rate (r_d) is 4.75%, based on semiannual compounding. What is the bond's price?

Correct Answer
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Assuming all else is constant, which of the following statements is correct?

Correct Answer
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Tucker Corporation is planning to issue new 20-year bonds. Initially, the plan was to make the bonds non-callable. If the bonds were made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

Correct Answer
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If its yield to maturity declined by 1%, which bond would have the largest percentage increase in value?

Correct Answer
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Which of the following statements best describes interest rates?

Correct Answer
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Exam 6: Bonds, Bond Valuation, and Interest Rates

Which of the following statements regarding bond current yields is NOT true?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The risk in bond prices due to fluctuations in interest rates is called reinvestment risk.

Correct AnswerverifiedShow Answer

If a firm raises capital by selling new bonds, it is called the "issuing firm," and the coupon rate is generally set equal to the required rate on bonds of equal risk.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A government bond has an 8% annual coupon and a 7.5% yield to maturity. Which statement regarding this bond is correct?

Correct AnswerverifiedShow Answer

A bond with a par value of $1,000 has an annual interest payment of $85. The bond currently sells for $850 and has 8 years to maturity. Which of the following is true?

Correct AnswerverifiedShow Answer

The Morrissey Company's bonds mature in 7 years, have a par value of $1,000, and make an annual coupon payment of $70. The market interest rate for the bonds is 8.5%. What is the bond's price?

Correct AnswerverifiedShow Answer

Which bond has the greatest interest rate price risk?

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Which statement regarding types of debt is true?

Correct AnswerverifiedShow Answer

Wachowicz Corporation issued 15-year, noncallable, 7.5% 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 14 years to maturity?

Correct AnswerverifiedShow Answer

The Canada call feature stops a bond being called prior to its maturity because a higher buyback price is involved.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Moerdyk Corporation's bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 4.75%, based on semiannual compounding. What is the bond's price?

Correct AnswerverifiedShow Answer

Assuming all else is constant, which of the following statements is correct?

Correct AnswerverifiedShow Answer

Tucker Corporation is planning to issue new 20-year bonds. Initially, the plan was to make the bonds non-callable. If the bonds were made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

Correct AnswerverifiedShow Answer

If its yield to maturity declined by 1%, which bond would have the largest percentage increase in value?

Correct AnswerverifiedShow Answer

Which of the following statements best describes interest rates?

Correct AnswerverifiedShow Answer

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Moerdyk Corporation's bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000. The going interest rate (r_d) is 4.75%, based on semiannual compounding. What is the bond's price?

Correct Answer
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