Question 1

Which of the following statements is correct?

Accepted Answer

A)   All else equal, senior debt generally has a lower yield to maturity than subordinated debt.
B)   The expected return on a corporate bond will generally exceed the bond's yield to maturity.
C)   If a bond's coupon rate exceeds its yield to maturity, then its expected return to investors exceeds the yield to maturity.
D)   Under our bankruptcy laws, any firm that is in financial distress will be forced to declare bankruptcy and then be liquidated.

Question 2

Issued by the government of Canada, real return bonds are free from default risk. However, they are still subject to interest rate risk.

Accepted Answer

A) True 
 B)False

Question 3

What does the yield-to-maturity on bonds refer to?

Accepted Answer

A)   the number of years before the bond's maturity
B)   the amount of interest income received by investors each year
C)   the promised rate of return on the bonds if purchased at current price and held to maturity
D)   the capital gain that investors can get in relation to the average industry price of the bonds

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

D. J. Masson Inc. recently issued noncallable bonds that mature in 10 years. They have a par value of $1,000 and an annual coupon of 5.5%. If the current market interest rate is 7.0%, at what price should the bonds sell?

Accepted Answer

A)   $829.21
B)   $850.47
C)   $872.28
D)   $894.65

Question 6

ABC Inc. issued at par value a 15-year 6% semi-annual coupon bond with a par value of $1,000. At the end of 2 years the market interest increases to 7%. One year later, the market interest is 8%. If an investor purchases the bond at the end of year 2 and sold it 1 year later, how much is the capital gain or loss?

Accepted Answer

A)   -$68.02
B)   -$84.75
C)   -$91.56
D)   +$10.00

Question 7

Which of the following statements best describes bonds?

Accepted Answer

A)   The total yield on a bond is derived from dividends plus changes in the price of the bond.
B)   Bonds are riskier than common stocks and therefore have higher required returns.
C)   Bonds issued by larger companies always have lower yields to maturity (less risk)  than bonds issued by smaller companies.
D)   The market value of a bond will always approach its par value as its maturity date approaches, provided the bond's required return remains constant.

Question 8

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%

Question 9

Which of the following statements is correct?

Accepted Answer

A)   If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price regardless of the bond's coupon rates.
B)   All else equal, an increase in interest rates will have a greater effect on the prices of short- term than long-term bonds.
C)   All else equal, an increase in interest rates will have a greater effect on higher-coupon bonds than it will have on lower-coupon bonds.
D)   If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value.

Question 10

Maple bonds are issued by the government of Canada in Canadian dollars but only sold to foreign investors.

Accepted Answer

A) True 
 B)False

Question 11

Keys Corporation's 5-year bonds yield 7.00%, and 5-year T-bonds yield 5.15%. The real risk-free rate is r* = 3.0%, the inflation premium for 5-year bonds is IP = 1.75%, the liquidity premium for Keys' bonds is LP = 0.75% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1)  × 0.1%, where t = number of years to maturity. What is the default risk premium (DRP)  on Keys' bonds?

Accepted Answer

A)   0.99%
B)   1.10%
C)   1.21%
D)   1.33%

Question 12

An investor is considering buying one of two 10-year, $1,000 face value bonds: Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon. Both bonds have a yield to maturity of 8%, which is expected to remain constant for the next 10 years. Which of the following statements best describes bonds?

Accepted Answer

A)   Bond B has a higher price than Bond A today, but 1 year from now the bonds will have the same price.
B)   One year from now, Bond A's price will be higher than it is today.
C)   Bond A's current yield is greater than 8%.
D)   Bond A has a higher price than Bond B today, but 1 year from now the bonds will have the same price.

Question 13

What is the semi-annual coupon payment for a 12% bond with a $1,000 par?

Accepted Answer

A)   $60
B)   $120
C)   $600
D)   $1,200

Question 14

A 25-year, $1,000 par value bond has an 8.5% annual coupon. The bond currently sells for $875. If the yield to maturity remains at its current rate, what will the price be 5 years from now?

Accepted Answer

A)   $839.31
B)   $860.83
C)   $882.90
D)   $904.97

Question 15

Which of the following statements best describes the yield curve?

Accepted Answer

A)   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.
B)   If the maturity risk premium (MRP)  is greater than zero, then the yield curve must have an upward slope.
C)   If the maturity risk premium (MRP)  equals zero, the yield curve must be flat.
D)   The yield curve can never be downward sloping.

Question 16

Which of the following statements is correct?

Accepted Answer

A)   The total return on a bond during a given year consists only of the coupon interest payments received.
B)   The price of a discount bond will increase over time, assuming that the bond's yield to maturity remains constant.
C)   For a given firm, its debentures are likely to have a lower yield to maturity than its mortgage bonds.
D)   When large firms are in financial distress, they are almost always liquidated, whereas smaller firms are generally reorganized.

Question 17

Which of the following statements is FALSE?

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)   All else equal, bonds with larger coupons have greater interest rate (price)  risk than bonds with smaller coupons.

Question 18

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

Accepted Answer

A)   The company's bonds are downgraded.
B)   Market interest rates decline sharply.
C)   The company's financial situation deteriorates significantly.
D)   Inflation increases significantly.

Question 19

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 20

Suppose you are considering two 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

Exam 6: Bonds, Bond Valuation, and Interest Rates

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

Correct Answer
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D. J. Masson Inc. recently issued noncallable bonds that mature in 10 years. They have a par value of $1,000 and an annual coupon of 5.5%. If the current market interest rate is 7.0%, at what price should the bonds sell?

Correct Answer
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What does the yield-to-maturity on bonds refer to?

Correct Answer
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Which of the following statements is FALSE?

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

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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Maple bonds are issued by the government of Canada in Canadian dollars but only sold to foreign investors.

Correct Answer
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Issued by the government of Canada, real return bonds are free from default risk. However, they are still subject to interest rate risk.

Correct Answer
verified

A 25-year, $1,000 par value bond has an 8.5% annual coupon. The bond currently sells for $875. If the yield to maturity remains at its current rate, what will the price be 5 years from now?

Correct Answer
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What is the semi-annual coupon payment for a 12% bond with a $1,000 par?

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

Correct Answer
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Which of the following statements best describes bonds?

Correct Answer
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Correct Answer
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Correct Answer
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Which of the following statements best describes the yield curve?

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

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

Correct AnswerverifiedShow Answer

D. J. Masson Inc. recently issued noncallable bonds that mature in 10 years. They have a par value of $1,000 and an annual coupon of 5.5%. If the current market interest rate is 7.0%, at what price should the bonds sell?

Correct AnswerverifiedShow Answer

What does the yield-to-maturity on bonds refer to?

Correct AnswerverifiedShow Answer

Which of the following statements is FALSE?

Correct AnswerverifiedShow Answer

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

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

Maple bonds are issued by the government of Canada in Canadian dollars but only sold to foreign investors.

Correct AnswerverifiedShow Answer

Issued by the government of Canada, real return bonds are free from default risk. However, they are still subject to interest rate risk.

Correct AnswerverifiedShow Answer

A 25-year, $1,000 par value bond has an 8.5% annual coupon. The bond currently sells for $875. If the yield to maturity remains at its current rate, what will the price be 5 years from now?

Correct AnswerverifiedShow Answer

What is the semi-annual coupon payment for a 12% bond with a $1,000 par?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Which of the following statements best describes bonds?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements best describes the yield curve?

Correct AnswerverifiedShow Answer

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