Question 1

Junk bonds are high risk, high yield debt instruments. They are often used to finance leveraged buyouts and mergers, and to provide financing to companies of questionable financial strength.

Accepted Answer

A) True 
 B)False

Question 2

Assume that a 10-year Treasury bond has a 12% annual coupon, while a 15- year 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 will increase, but the 15-year bond would have a larger percentage increase inPrice.
B)   If interest rates decline, the prices of both bonds will increase, but the 10-year bond would have a larger percentage increase inPrice.
C)   The 10-year bond would sell at a discount, while the 15-year bondWould sell at a premium.
D)   The 10-year bond would sell at a premium, while the 15-year bondWould 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) B) and C)
G) B) and E)

Question 3

Consider some bonds with one annual coupon payment of 7.25%. The bonds have a par value of $1,000, a current price of $1,125, and they will mature in 13 years. What is the yield to maturity on these bonds?

Accepted Answer

A)   5.56%
B)   5.85%
C)   6.14%
D)   6.45%
E)   6.77%F) A) and E)
G) A) and B)

Question 4

The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds, other things held constant.

Accepted Answer

A) True 
 B)False  True

Question 5

Assume that the current corporate bond yield curve is upward sloping. Under this condition, then we could be sure that

Accepted Answer

A)   Inflation is expected to decline in the future.
B)   The economy is not in a recession.
C)   Long-term bonds are a better buy than short-term bonds.
D)   Maturity risk premiums could help to explain the yield curve'sUpward slope.
E)   Long-term interest rates are more volatile than short-term rates.F) A) and D)
G) A) and C)

Question 6

A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT?

Accepted Answer

A)   The bond's current yield is less than 8%.
B)   If the yield to maturity remains at 8%, then the bond's price willDecline 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 willIncrease.
E)   If the yield to maturity remains at 8%, then the bond's price willRemain constant over the next year.F) C) and D)
G) C) and E)

Question 7

Listed below are some provisions that are often contained in bond indentures. Which of these provisions, viewed alone, would tend to reduce the yield to maturity that investors would otherwise require on a newly issued bond?
1) Fixed assets are used as security for a bond.
2) A given bond is subordinated to other classes of debt.
3) The bond can be converted into the firm's common stock.
4) The bond has a sinking fund.
5) The bond has a call provision.
6) The indenture contains covenants that prevent the use of additional debt.

Accepted Answer

A)   1, 3, 4, 6
B)   1, 4, 6
C)   1, 2, 3, 4, 6
D)   1, 2, 3, 4, 5, 6
E)   1, 3, 4, 5, 6F) D) and E)
G) A) and E)

Question 8

A company is planning to raise $1,000,000 to finance a new plant. Which of the following statements is CORRECT?

Accepted Answer

A)   The company would be especially eager to have a call provision included in the indenture if its management thinks that interestRates 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 bySelling first mortgage bonds.
C)   If two tiers of debt are used (with one senior and one subordinated debt class) , the subordinated debt will carry a lower interestRate.
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 bondRather 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.F) A) and D)
G) C) and E)

Question 9

You are considering 2 bonds that will be issued tomorrow. Both are rated triple B (BBB, the lowest investment-grade rating), both mature in
20 years, both have a 10% coupon, neither can be called except for sinking fund purposes, and both are offered to you at their $1,000 par values. However, Bond SF has a sinking fund while Bond NSF does not. Under the sinking fund, the company must call and pay off 5% of the bonds at par each year. The yield curve at the time is upward sloping. The bond's prices, being equal, are probably not in equilibrium, as Bond SF, which has the sinking fund, would generally be expected to have a higher yield than Bond NSF.

Accepted Answer

A) True 
 B)False

Question 10

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 continueTo 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 zeroCoupon bond.
D)   If a bond's yield to maturity exceeds its annual coupon, then theBond will trade at a premium.
E)   If a coupon bond is selling at a premium, its current yield equalsIts yield to maturity.F) C) and E)
G) B) and D)

Question 11

A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

Accepted Answer

A) True 
 B)False

Question 12

Other things equal, a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

Accepted Answer

A) True 
 B)False

Question 13

Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows:

The differences in rates among these issues were most probably caused primarily by:

Accepted Answer

A)   Real risk-free rate differences.
B)   Tax effects.
C)   Default risk differences.
D)   Maturity risk differences.
E)   Inflation differences.F) All of the above
G) None of the above C

Question 14

Taussig Corp.'s bonds currently sell for $1,150. They have a 6.75% annual coupon rate and a 15-year maturity, but they can be called in 6 years at $1,067.50. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. Under these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds, the YTC or the YTM?

Accepted Answer

A)   3.92%
B)   4.12%
C)   4.34%
D)   4.57%
E)   4.81%F) B) and E)
G) B) and D)

Question 15

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 parValue.
C)   Even if a bond's YTC exceeds its YTM, an investor with an investment horizon longer than the bond's maturity would be worseOff if the bond were called.
D)   A bond is likely to be called if its market price is equal to itsPar value.
E)   A bond is likely to be called if it sells at a discount below par.Hard:F) A) and B)
G) C) and D)

Question 16

Sinking funds are devices used to force companies to retire bonds on a scheduled basis prior to their maturity. Many bond indentures allow the company to acquire bonds for a sinking fund by either purchasing bonds in the market or selecting the bonds to be acquired by a lottery administered by the trustee through a call at face value.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements is CORRECT?

Accepted Answer

A)   If a bond is selling at a discount, the yield to call is a better measure of return than 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 bondWith 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 isNot expected to pay any cash coupon interest.
D)   If a coupon bond is selling at par, its current yield equals itsYield to maturity.
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.F) D) and E)
G) A) and C)

Question 18

Keenan Industries has a bond outstanding with 15 years to maturity, an 8.75% coupon paid semiannually, 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 $1,050. What is the bond's nominal yield to call?

Accepted Answer

A)   5.01%
B)   5.27%
C)   5.54%
D)   5.81%
E)   6.10%F) B) and E)
G) A) and B) B

Question 19

As a general rule, a company's debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following statements is CORRECT?

Accepted Answer

A)   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 anUpward slope.
B)   Liquidity premiums are generally higher on Treasury than corporateBonds.
C)   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.
D)   Default risk premiums are generally lower on corporate than onTreasury bonds.
E)   Reinvestment rate risk is lower, other things long-term than on short-term bonds.Held constant,OnF) D) and E)
G) A) and E)

Exam 5: Bonds, Bond Valuation, and Interest Rates

Junk bonds are high risk, high yield debt instruments. They are often used to finance leveraged buyouts and mergers, and to provide financing to companies of questionable financial strength.

Correct Answer
verified

Assume that a 10-year Treasury bond has a 12% annual coupon, while a 15- year 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
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Consider some bonds with one annual coupon payment of 7.25%. The bonds have a par value of $1,000, a current price of $1,125, and they will mature in 13 years. What is the yield to maturity on these bonds?

Correct Answer
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The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds, other things held constant.

Correct Answer
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True

Assume that the current corporate bond yield curve is upward sloping. Under this condition, then we could be sure that

Correct Answer
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A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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A company is planning to raise $1,000,000 to finance a new plant. Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

Correct Answer
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Other things equal, a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

Correct Answer
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Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows: The differences in rates among these issues were most probably caused primarily by:

Correct Answer
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C

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Keenan Industries has a bond outstanding with 15 years to maturity, an 8.75% coupon paid semiannually, 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 $1,050. What is the bond's nominal yield to call?

Correct Answer
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B

As a general rule, a company's debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured.

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Exam 5: Bonds, Bond Valuation, and Interest Rates

Junk bonds are high risk, high yield debt instruments. They are often used to finance leveraged buyouts and mergers, and to provide financing to companies of questionable financial strength.

Correct AnswerverifiedShow Answer

Assume that a 10-year Treasury bond has a 12% annual coupon, while a 15- year 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

Consider some bonds with one annual coupon payment of 7.25%. The bonds have a par value of $1,000, a current price of $1,125, and they will mature in 13 years. What is the yield to maturity on these bonds?

Correct AnswerverifiedShow Answer

The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds, other things held constant.

Correct AnswerverifiedTrue

Assume that the current corporate bond yield curve is upward sloping. Under this condition, then we could be sure that

Correct AnswerverifiedShow Answer

A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A company is planning to raise $1,000,000 to finance a new plant. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

Correct AnswerverifiedShow Answer

Other things equal, a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

Correct AnswerverifiedShow Answer

Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows: The differences in rates among these issues were most probably caused primarily by:

Correct AnswerverifiedC

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Keenan Industries has a bond outstanding with 15 years to maturity, an 8.75% coupon paid semiannually, 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 $1,050. What is the bond's nominal yield to call?

Correct AnswerverifiedB

As a general rule, a company's debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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True

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C

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B

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