Question 1

Reinegar Corporation is planning two new issues of 25-year bonds.Bond Par will be sold at its $1,000 par value, and it will have a 10% semiannual coupon.Bond OID will be an Original Issue Discount bond, and it will also have a 25-year maturity and a $1,000 par value, but its semiannual coupon will be only 6.25%.If both bonds are to provide investors with the same effective yield, how many of the OID bonds must Reinegar issue to raise $3,000,000? Disregard flotation costs, and round your final answer up to a whole number of bonds.

Accepted Answer

A)   4,228
B)   4,337
C)   4,448
D)   4,562
E)   4,676F) A) and E)
G) B) and E)

Question 2

You are considering three different bonds for your portfolio.Each bond has a 10-year maturity and a yield to maturity of 10%.Bond X has an 8% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a 12% annual coupon.Which of the following statements is CORRECT?

Accepted Answer

A)   Bond X has the greatest reinvestment rate risk.
B)   If market interest rates decline, all of the bonds will have an increase in price, and Bond Z will have the largest percentage increase in price.
C)   If market interest rates remain at 10%, Bond Z's price will be 10% higher one year from today.
D)   If market interest rates increase, Bond X's price will increase, Bond Z's price will decline, and Bond Y's price will remain the same.
E)   If the bonds' market interest rates remain at 10%, Bond Z's price will be lower one year from now than it is today.F) B) and C)
G) C) and D)

Question 3

Bond A has a 9% annual coupon, while Bond B has a 7% annual coupon.Both bonds have the same maturity, a face value of $1,000, and an 8% yield to maturity.Which of the following statements is CORRECT?

Accepted Answer

A)   Bond A trades at a discount, whereas Bond B trades at a premium.
B)   If the yield to maturity for both bonds remains at 8%, Bond A's price one year from now will be higher than it is today, but Bond B's price one year from now will be lower than it is today.
C)   If the yield to maturity for both bonds immediately decreases to 6%, Bond A's bond will have a larger percentage increase in value.
D)   Bond A's current yield is greater than that of Bond B.
E)   Bond A's capital gains yield is greater than Bond B's capital gains yield.F) B) and E)
G) B) and D)

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)   Most sinking funds require the issuer to provide funds to a trustee, who saves the money so that it will be available to pay off bondholders when the bonds mature.
B)   A sinking fund provision makes a bond more risky to investors at the time of issuance.
C)   Sinking fund provisions never require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time.
D)   If interest rates have increased since a company issued bonds with a sinking fund, the company is less likely to retire the bonds by buying them back in the open market, as opposed to calling them in at the sinking fund call price.
E)   Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest rates decline after the bond has been issued.F) C) and D)
G) B) and C) E

Question 5

Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, generally be subject to much more interest rate price risk if you purchased a 30-day bond than if you bought a 30-year bond.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)   A 10-year, 10% coupon bond has less reinvestment rate risk than a 10-year, 5% coupon bond (assuming all else equal) .
B)   The total return on a bond during a given year is the sum of the coupon interest payments received during the year and the change in the value of the bond from the beginning to the end of the year.
C)   The price of a 20-year, 10% bond is less sensitive to changes in interest rates than the price of a 5-year, 10% bond.
D)   A $1,000 bond with $100 annual interest payments that has 5 years to maturity and is not expected to default would sell at a discount if interest rates were below 9% and at a premium if interest rates were greater than 11%.
E)   10-year, zero coupon bonds have higher reinvestment rate risk than 10-year, 10% coupon bonds.F) C) and D)
G) C) and E)

Question 7

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 10-year bond would have a larger percentage increase in price.
B)   The 10-year bond would sell at a discount, while the 15-year bond would sell at a premium.
C)   The 10-year bond would sell at a premium, while the 15-year bond would sell at par.
D)   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.
E)   If interest rates decline, the prices of both bonds will increase, but the 15-year bond would have a larger percentage increase in price.F) A) and D)
G) B) and E)

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)   The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.
B)   You hold two bonds.One is a 10-year, zero coupon, bond 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 smaller percentage decline.
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)   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.F) None of the above
G) C) and D)

Question 9

The Gergen Group's 5-year bonds yield 6.85%, and 5-year T-bonds yield 4.75%.The real risk-free rate is r* = 2.80%, the default risk premium for Gergen's bonds is DRP = 0.85% versus zero for T-bonds, the liquidity premium on Gergen's bonds is LP = 1.25%, 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 inflation premium (IP)  on 5-year bonds?

Accepted Answer

A)   1.40%
B)   1.55%
C)   1.71%
D)   1.88%
E)   2.06%F) B) and C)
G) A) and D)

Question 10

Noncallable bonds that mature in 10 years were recently issued by Sternglass Inc.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
E)   $917.01F) C) and E)
G) A) and B) D

Question 11

Which of the following statements is CORRECT?

Accepted Answer

A)   A bond is likely to be called if its market price is below its par value.
B)   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.
C)   A bond is likely to be called if its market price is equal to its par value.
D)   A bond is likely to be called if it sells at a discount below par.
E)   A bond is likely to be called if its coupon rate is below its YTM.F) B) and D)
G) B) and C)

Question 12

Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise.Since floating-rate debt shifts interest rate risk to companies, it offers no advantages to issuers.

Accepted Answer

A) True 
 B)False

Question 13

McCurdy Co.'s Class Q 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.McCurdy's Class P bonds have the same risk, maturity, and par value, but the P 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)   $1,017.83
E)   $1,043.28F) D) and E)
G) A) and B) C

Question 14

A Treasury bond has an 8% annual coupon and a 7.5% yield to maturity.Which of the following statements is CORRECT?

Accepted Answer

A)   The bond has a current yield greater than 8%.
B)   The bond sells at a discount.
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)   The bond sells at a price below par.F) A) and C)
G) B) and D)

Question 15

Ranger Inc.would like 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)   There is no reason to expect a change in the required rate of return.
B)   The required rate of return would decline because the bond would then be less risky to a bondholder.
C)   The required rate of return would increase because the bond would then be more risky to a bondholder.
D)   It is impossible to say without more information.
E)   Because of the call premium, the required rate of return would decline.F) C) and D)
G) B) and C)

Question 16

A 15-year bond has an annual coupon rate of 8%.The coupon rate will remain fixed until the bond matures.The bond has a yield to maturity of 6%.Which of the following statements is CORRECT?

Accepted Answer

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.F) C) and E)
G) A) and C)

Question 17

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 18

5-year Treasury bonds yield 5.5%.The inflation premium (IP)  is 1.9%, and the maturity risk premium (MRP)  on 5-year bonds is 0.4%.What is the real risk-free rate, r*?

Accepted Answer

A)   2.59%
B)   2.88%
C)   3.20%
D)   3.52%
E)   3.87%F) All of the above
G) B) and C)

Question 19

Which of the following statements is CORRECT?

Accepted Answer

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.F) B) and E)
G) A) and C)

Question 20

Which of the following statements is NOT CORRECT?

Accepted Answer

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.F) A) and E)
G) All of the above

Exam 5: Bonds, Bond Valuation, and Interest Rates

Correct Answer
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You are considering three different bonds for your portfolio.Each bond has a 10-year maturity and a yield to maturity of 10%.Bond X has an 8% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a 12% annual coupon.Which of the following statements is CORRECT?

Correct Answer
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Bond A has a 9% annual coupon, while Bond B has a 7% annual coupon.Both bonds have the same maturity, a face value of $1,000, and an 8% yield to maturity.Which of the following statements is CORRECT?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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E

Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, generally be subject to much more interest rate price risk if you purchased a 30-day bond than if you bought a 30-year bond.

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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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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Which of the following statements is CORRECT?

Correct Answer
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Noncallable bonds that mature in 10 years were recently issued by Sternglass Inc.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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D

Which of the following statements is CORRECT?

Correct Answer
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Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise.Since floating-rate debt shifts interest rate risk to companies, it offers no advantages to issuers.

Correct Answer
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Correct Answer
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C

A Treasury bond has an 8% annual coupon and a 7.5% yield to maturity.Which of the following statements is CORRECT?

Correct Answer
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Ranger Inc.would like 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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A 15-year bond has an annual coupon rate of 8%.The coupon rate will remain fixed until the bond matures.The bond has a yield to maturity of 6%.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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5-year Treasury bonds yield 5.5%.The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year bonds is 0.4%.What is the real risk-free rate, r*?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Which of the following statements is NOT CORRECT?

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

Correct AnswerverifiedShow Answer

You are considering three different bonds for your portfolio.Each bond has a 10-year maturity and a yield to maturity of 10%.Bond X has an 8% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a 12% annual coupon.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Bond A has a 9% annual coupon, while Bond B has a 7% annual coupon.Both bonds have the same maturity, a face value of $1,000, and an 8% yield to maturity.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedE

Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, generally be subject to much more interest rate price risk if you purchased a 30-day bond than if you bought a 30-year bond.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Noncallable bonds that mature in 10 years were recently issued by Sternglass Inc.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 AnswerverifiedD

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise.Since floating-rate debt shifts interest rate risk to companies, it offers no advantages to issuers.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedC

A Treasury bond has an 8% annual coupon and a 7.5% yield to maturity.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Ranger Inc.would like 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

A 15-year bond has an annual coupon rate of 8%.The coupon rate will remain fixed until the bond matures.The bond has a yield to maturity of 6%.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

5-year Treasury bonds yield 5.5%.The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year bonds is 0.4%.What is the real risk-free rate, r*?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is NOT CORRECT?

Correct AnswerverifiedShow Answer

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E

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D

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C

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