Question 1

Rogoff Co.'s 15-year bonds have an annual coupon rate of 9.5%. Each bond has face value of $1,000 and makes semiannual interest payments. If you require an 11.0% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

Accepted Answer

A)   $891.00
B)   $913.27
C)   $936.10
D)   $959.51
E)   $983.49F) All of the above
G) B) and C)

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)   The most likely explanation for an inverted yield curve is that investors expect inflation to increase.
B)   The most likely explanation for an inverted yield curve is that investors expect inflation to decrease.
C)   If the yield curve is inverted, short-term bonds have lower yields than long-term bonds.
D)   Inverted yield curves can exist for Treasury bonds, but because of default premiums, the corporate yield curve can never be inverted.
E)   The higher the maturity risk premium, the higher the probability that the yield curve will be inverted.F) A) and C)
G) C) and D)

Question 3

Squire Inc.'s 5-year bonds yield 6.75%, and 5-year T-bonds yield 4.80%. The real risk-free rate is r* = 2.75%, the inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Squire's bonds is DRP = 1.20% 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 liquidity premium (LP)  on Squire's bonds?

Accepted Answer

A)   0.49%
B)   0.55%
C)   0.61%
D)   0.68%
E)   0.75%F) A) and B)
G) None of the above

Question 4

Haswell Enterprises' 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)   1,146.27
E)   1,174.93F) A) and B)
G) A) and C)

Question 5

Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?

Accepted Answer

A)   20-year, 10% coupon bond.
B)   20-year, 5% coupon bond.
C)   1-year, 10% coupon bond.
D)   20-year, zero coupon bond.
E)   10-year, zero coupon bond.F) B) and D)
G) B) and C)

Question 6

An 8-year Treasury bond has a 10% coupon, and a 10-year Treasury bond has an 8% coupon. Both bonds have the same yield to maturity. If the yield to maturity of both bonds increases by the same amount, which of the following statements would be CORRECT?

Accepted Answer

A)   Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price.
B)   The prices of both bonds would increase by the same amount.
C)   One bond's price would increase, while the other bond's price would decrease.
D)   The prices of the two bonds would remain constant.
E)   The prices of both bonds will decrease by the same amount.F) B) and D)
G) B) and C)

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)   The market value of a bond will always approach its par value as its maturity date approaches. This holds true even if the firm has filed for bankruptcy.
B)   Rising inflation makes the actual yield to maturity on a bond greater than a quoted yield to maturity that is based on market prices.
C)   The yield to maturity on a coupon bond that sells at its par value consists entirely of a current interest yield; it has a zero expected capital gains yield.
D)   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.
E)   The yield to maturity for a coupon bond that sells at a premium consists entirely of a positive capital gains yield; it has a zero current interest yield.F) A) and C)
G) A) and D)

Question 8

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) A) and B)
G) B) and E)

Question 9

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?

Accepted Answer

A)   The bond is selling below its par value.
B)   The bond is selling at a discount.
C)   If the yield to maturity remains constant, the bond's price one year from now will be lower than its current price.
D)   The bond's current yield is greater than 9%.
E)   If the yield to maturity remains constant, the bond's price one year from now will be higher than its current price.F) C) and D)
G) A) and B)

Question 10

Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT?

Accepted Answer

A)   The prices of both bonds will remain unchanged.
B)   The price of Bond A will decrease over time, but the price of Bond B will increase over time.
C)   The prices of both bonds will increase by 7% per year.
D)   The prices of both bonds will increase over time, but the price of Bond A will increase by more.
E)   The price of Bond B will decrease over time, but the price of Bond A will increase over time.F) B) and C)
G) A) and E)

Question 11

Field Industries' outstanding bonds have a 25-year maturity and $1,000 par value. Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $850. What is the bond's nominal (annual)  coupon interest rate?

Accepted Answer

A)   6.27%
B)   6.60%
C)   6.95%
D)   7.32%
E)   7.70%F) A) and E)
G) A) and C)

Question 12

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) A) and B)
G) B) and D)

Question 13

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) D) and E)
G) None of the above

Question 14

The desire for floating-rate bonds, and consequently their increased usage, arose out of the experience of the early 1980s, when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.

Accepted Answer

A) True 
 B)False

Question 15

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 D)
G) None of the above

Question 16

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) A) and B)

Question 17

One year ago Lerner and Luckmann Co. issued 15-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000. 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)   $1,077.01
B)   $1,104.62
C)   $1,132.95
D)   $1,162.00
E)   $1,191.79F) B) and E)
G) A) and D)

Question 18

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 E)
G) C) and E)

Question 19

A bond that is callable has a chance of being retired earlier than its stated term to maturity. Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

Accepted Answer

A) True 
 B)False

Question 20

Income bonds pay interest only if the issuing company actually earns the indicated interest. Thus, these securities cannot bankrupt a company, and this makes them safer from an investor's perspective than regular bonds.

Accepted Answer

A) True 
 B)False

Exam 5: Bonds, Bond Valuation, and Interest Rates

Field Industries' outstanding bonds have a 25-year maturity and $1,000 par value. Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $850. What is the bond's nominal (annual) coupon interest rate?

Correct Answer
verified

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

The desire for floating-rate bonds, and consequently their increased usage, arose out of the experience of the early 1980s, when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.

Correct Answer
verified

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?

Correct Answer
verified

Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT?

Correct Answer
verified

An 8-year Treasury bond has a 10% coupon, and a 10-year Treasury bond has an 8% coupon. Both bonds have the same yield to maturity. If the yield to maturity of both bonds increases by the same amount, which of the following statements would be CORRECT?

Correct Answer
verified

Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?

Correct Answer
verified

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

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

A bond that is callable has a chance of being retired earlier than its stated term to maturity. Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

Correct Answer
verified

Income bonds pay interest only if the issuing company actually earns the indicated interest. Thus, these securities cannot bankrupt a company, and this makes them safer from an investor's perspective than regular bonds.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

Rogoff Co.'s 15-year bonds have an annual coupon rate of 9.5%. Each bond has face value of $1,000 and makes semiannual interest payments. If you require an 11.0% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Haswell Enterprises' 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
verified

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
verified

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
verified

One year ago Lerner and Luckmann Co. issued 15-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000. 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
verified

Exam 5: Bonds, Bond Valuation, and Interest Rates

Field Industries' outstanding bonds have a 25-year maturity and $1,000 par value. Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $850. What is the bond's nominal (annual) coupon interest rate?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The desire for floating-rate bonds, and consequently their increased usage, arose out of the experience of the early 1980s, when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.

Correct AnswerverifiedShow Answer

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

An 8-year Treasury bond has a 10% coupon, and a 10-year Treasury bond has an 8% coupon. Both bonds have the same yield to maturity. If the yield to maturity of both bonds increases by the same amount, which of the following statements would be CORRECT?

Correct AnswerverifiedShow Answer

Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?

Correct AnswerverifiedShow Answer

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

A bond that is callable has a chance of being retired earlier than its stated term to maturity. Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

Correct AnswerverifiedShow Answer

Income bonds pay interest only if the issuing company actually earns the indicated interest. Thus, these securities cannot bankrupt a company, and this makes them safer from an investor's perspective than regular bonds.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Rogoff Co.'s 15-year bonds have an annual coupon rate of 9.5%. Each bond has face value of $1,000 and makes semiannual interest payments. If you require an 11.0% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Haswell Enterprises' 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

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 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

One year ago Lerner and Luckmann Co. issued 15-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000. 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

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Haswell Enterprises' 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
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified